The poverty line’s bat­tle lines

Financial Mirror (Cyprus) - - FRONT PAGE -

For a long time, as a col­lege pro­fes­sor and then as the chief eco­nomic ad­viser to the In­dian gov­ern­ment, I was a happy user of the World Bank’s data on global poverty, track­ing trends and analysing cross-coun­try pat­terns. I sel­dom paused to think about how those num­bers were com­puted. Then, three years ago, I joined the World Bank as its Chief Econ­o­mist. It was like a cus­tomer, hap­pily or­der­ing din­ner in a fa­vorite restau­rant, sud­denly be­ing asked to go into the kitchen and pre­pare the meal.

Be­ing in the busi­ness of mea­sur­ing poverty is a chal­lenge for the World Bank. If poverty de­clines, crit­ics ac­cuse us of try­ing to show­case our suc­cess. If it rises, they say we are en­sur­ing that we stay in busi­ness. And if it stays the same, they ac­cuse us of try­ing to avoid th­ese two charges.

For­tu­nately, there is some­thing lib­er­at­ing in know­ing that you will be crit­i­cised for any out­come. Still, as our team set about defin­ing the global poverty line this year (and thus the in­ci­dence of poverty), I was acutely aware of the note of cau­tion from An­gus Deaton, this year’s No­bel lau­re­ate in eco­nomics: “I am not sure it is wise for the World Bank to com­mit it­self so much to this project.”

I could see his point: This year’s poverty cal­cu­la­tion was par­tic­u­larly mo­men­tous. In 2011, new pur­chas­ing power par­i­ties (or PPPs, which es­sen­tially es­ti­mate how much $1 dol­lar buys in dif­fer­ent coun­tries) had been com­puted, and the data be­came avail­able in 2014. This was one rea­son to take stock of how we would ad­just the global poverty line, es­ti­mate new poverty num­bers, and pub­lish them in our Global Mon­i­tor­ing Re­port, which was re­leased in Oc­to­ber.

A sec­ond rea­son is that the UN has in­cluded the erad­i­ca­tion of chronic poverty in its new Sus­tain­able De­vel­op­ment Goals. This means that our de­ci­sion on where to draw the poverty line prob­a­bly will in­flu­ence not just the World Bank’s mis­sion but also the de­vel­op­ment agenda of the UN and all coun­tries around the world. Clearly, as we crunched the num­bers, we had a spe­cial, and daunt­ing, re­spon­si­bil­ity to ful­fill.

Our first task was to see how the global poverty line had been de­ter­mined ear­lier. In 2005, when the pre­vi­ous round of pur­chas­ing power par­i­ties was es­ti­mated, the method used was to take the na­tional poverty lines of the 15 poor­est coun­tries, com­pute their av­er­age, and treat that as the global line. This led to a global poverty line of $1.25. The idea was that a poor per­son was any­one whose PPP-ad­justed daily consumption fell short of $1.25.

The va­lid­ity of this method has been ques­tioned – and I have had my own reser­va­tions. But where the line is drawn in the ini­tial year is in some sense not that im­por­tant. Be­cause there is no unique def­i­ni­tion of poverty, what mat­ters is to draw a line at some rea­son­able place and then hold the line con­stant in real (in­fla­tion-ad­justed) terms so that we can track the per­for­mance of the world and in­di­vid­ual coun­tries over time.

Some crit­ics ar­gue that the 2005 poverty line of $1.25 was too low. But what should alarm them is that in 2011, some 14.5% of the world’s pop­u­la­tion – one in ev­ery seven peo­ple – lived be­low it. Given that we are al­ready com­mit­ted to the goal of end­ing ex­treme, chronic poverty by 2030, our first de­ci­sion was to hold the yard­stick for mea­sur­ing poverty con­stant.

Since there had been in­fla­tion be­tween the two rounds of the PPP com­pu­ta­tion, in 2005 and 2011, we would ob­vi­ously have to raise the nom­i­nal poverty line to keep the real line con­stant. How­ever, do­ing this for the world as a whole is far from easy. Which coun­tries’ in­fla­tion should we use?

We ran two ex­per­i­ments: one was to in­flate the poverty lines of the 15 coun­tries used in 2005, us­ing their re­spec­tive in­fla­tion rates and then tak­ing an av­er­age; the other was to do the same for 101 coun­tries for which we had the nec­es­sary data. Th­ese two meth­ods raised the line to $1.88 and $1.90, re­spec­tively.

How­ever, a third ap­proach was pos­si­ble: to raise the poverty line with the new PPP in­dices so that the in­ci­dence of global poverty re­mained un­changed (be­cause PPP ar­guably tells us about par­ity across coun­tries and should not change the ab­so­lute level of global poverty). This ex­er­cise – and it was be­gin­ning to look like a strange align­ment of the stars – re­sulted in a poverty line just above $1.90. In short, by keep­ing to one dec­i­mal place, all three meth­ods led to $1.9. And that is the line we adopted.

We will not al­ways have the good for­tune to be able to use dif­fer­ent meth­ods and still ar­rive at vir­tu­ally the same line. Fur­ther­more, poverty can and should be mea­sured by many met­rics other than money: life ex­pectancy, ed­u­ca­tional at­tain­ment, health, and var­i­ous other mea­sures of hu­man “func­tion­ings and ca­pa­bil­i­ties” (as Amartya Sen calls them) are all im­por­tant. To tackle th­ese prob­lems in the fu­ture and broaden the World Bank’s poverty re­search, we have es­tab­lished the 24-mem­ber Com­mis­sion on Global Poverty – chaired by Sir Tony Atkinson of the Lon­don School of Eco­nomics and Nuffield Col­lege, Ox­ford – which will sub­mit its re­port next spring.

Mea­sur­ing poverty at­tracts at­ten­tion from both politi­cians and aca­demic re­searchers – and we had an am­ple amount of both. We were at­ten­tive to the pol­i­tics of poverty, but we re­sisted po­lit­i­cal lob­by­ing. We took ac­count of the sug­ges­tions of re­searchers, but we used our judg­ment. One re­searcher was adamant that the poverty line should be $1.9149. I de­cided that those last three dig­its were a bit ex­ces­sive.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.