Toward better global poverty measures

Martin Ravallion
2015

Summary

While much progress has been made over the last 25 years in measuring global poverty, a number of challenges remain. This paper discusses some current issues that are specific to global poverty monitoring. It argues that improving global poverty measures is important to public knowledge, and helps to inform the work of development agencies, in international policy making and poverty monitoring.

This paper discusses three sets of problems: (i) how to allow for social effects on welfare, recognising the identification issues involved; (ii) the need to monitor progress in raising the consumption floor above its biological level, in addition to counting the number of people living near the floor; and (iii) addressing the longstanding concerns about prevailing approaches to making inter-country comparisons of price levels facing poor people.

Key Findings

  • The identification problem: the extent to which higher lines of poverty found in richer countries reflect social effects on welfare, or more generous welfare standards for defining poverty, is not known. Poverty measures that use a constant real line do not account for people’s concerns about relative deprivation, shame and social exclusion; these can be termed social effects on welfare. Sociologists emphasise the idea of relative deprivation- the sufficiency of a person’s income must be judged relative to the society in which she lives. Substantial urban bias is still present, with rural prices not being collected for about half of the developing countries.
  • Monitoring: to assess whether the poorest are being left behind one needs a measure of the consumption floor. Here there is a severe data constraint, namely that a low observed consumption or income in a survey could be purely transient, and so unrepresentative. For various parameter values, the evidence suggests that the developing world has so far had very little success at raising the floor, despite the progress in reducing the number of people living near the floor.
  • Addressing the concern about PPP: the International Comparison Program (ICP) collects the price data and estimates the Purchasing Power Parity (PPP) exchange rates used in global poverty measures. There are puzzling changes in PPPs from one ICP round to the next and concerns about the appropriateness of the methods used. The PPP exchange rate differs systematically from the market exchange rate (MER). There is no obvious economic mechanism to assure price parity across borders for those commodities that are not internationally traded. Poorer countries tend to have lower wage rates and (hence) lower prices of these non-traded goods relative to traded ones.

Implications

  • The identification problem:
    • Two global poverty lines are needed—a familiar lower line with fixed purchasing power across countries and a new upper line accounting for the country’s level of average income, based on how national poverty lines vary across countries at a certain time. The true welfare-consistent absolute line lies somewhere between the two.
  • Monitoring:
    • A more reliable estimate of the consumption floor can be derived from existing measures of poverty under certain assumptions. This can be readily implemented from existing poverty data, and it provides a rather different vantage point on progress against poverty. While progress against poverty should not be judged solely by the level of the floor, it should not be ignored.
  • Addressing the concern about PPP:
    • There are options to using ICP prices, although further testing is needed on their performance.
    • Retrospective systematic adjustments are necessary for urban bias when using the PPPs for global poverty measurement.
    • The ICP needs to make its data public to re-estimate the PPPs in order to facilitate better price-level comparisons for the purpose of measuring poverty.

 

Source

Ravallion, M. (2015). Toward Better Global Poverty Measures. Working Paper 417. Washington DC: Center for Global Development.