International Poverty Lines

The concept of poverty is a central one in development aid, as well as in the humanitarian arena. The first of the Millennium Development Goals (MDGs), for example, aims to halve the proportion of people in extreme poverty between 1990 and 2015. But how is international poverty measured and assessed?

Today the World Bank uses the $1.25 a day (in 2005 prices) as the international poverty line. It represents the mean of the poverty lines found in a reference group of countries defined as:

“those with consumption per capita at 2005 PPP (Purchasing Power Parity) below $60.00 per month”.

The reference group consists of 15 countries: Malawi, Mali, Ethiopia, Sierra Leone, Niger, Uganda, Gambia, Rwanda, Guinea-Bissau, Tanzania, Tajikistan, Mozambique, Chad, Nepal and Ghana.

The line therefore represents the poorest countries in terms of consumption per capita, which is why it is used as a benchmark for extreme poverty assessment internationally. However, in many official documents and publications other measures are used, aside from the $1.25 a day (mainly to enable a more representative set of results).

Why are those specific 15 countries used to gage the main international poverty line? The premise is that an individual’s own idea of what it means to be poor depends on that individuals own level of living; in the poorest countries poverty lines tend to be low and show no or little economic gradient. However above a critical level of mean consumption, the national poverty line tends to rise sharply with mean consumption, with an elasticity approaching unity in rich countries. In other words, the higher a country’s consumption rate, the higher the poverty line, if the consumption rate is higher than the threshold (this has therefore been set around, $60 because national poverty lines rise steadily with consumption above that value, as noticeable from the figure below).

It can thus be argued that absolute poverty is a more relevant concept in poor countries, while relative poverty is more salient in rich countries. It’s also important to remember that poverty is a socially-specific concept, whereby the consumption needs for escaping poverty in a given society depend on what people generally consume in that society.

This group of reference countries (the poorest ones) has not always been the same and as a consequence international poverty lines have changed over time. The set of available national poverty lines are updated in line with their status in the World Bank’s country-specific Poverty Assessments and Poverty Reduction Strategy Papers. Therefore, before the $1.25 dollar a day gage, two other international poverty lines have been used:

Another important question is why different results are obtained if we use different poverty lines? This happens because in the calculation of national poverty (both lines and headcount) two other factors have to be taken into account:

• Purchasing power parity (PPP) data from the International Comparison Program (ICP), to make prices comparable between countries,
• Consumer Price Indices (CPI), in order to build time series data[3].

When this data is updated (with differences with respect to past values), poverty estimates can deliver very different results. For example, the new calculations using the 2005 ICP and the new international poverty line of $1.25 a day imply that 25% of the population of the developing world (1.4 billion) were poor in 2005; this is 400 million more for that year 2005 than implied by our old international poverty line based on international lines for the 1980s and the 1993 ICP. There have then been upward revisions to our past estimates for all regions consistent with the higher cost of living in developing countries implied by the results of the 2005 ICP.

The new data suggests then that the developing world is poorer than we thought, but it has been no less successful in reducing the incidence of absolute poverty since the early 1980s. The trend rate of global poverty reduction of 1% point per year is higher than previous estimations, mainly due to the status of China’s economy (new estimates show higher poverty headcounts, but also higher poverty reduction rates). However the developing world outside China will not attain the MDGswithout a higher rate of poverty reduction than we saw between the years of 1981-2005.