A monumental change in global poverty took place earlier this month, but don’t be surprised if the world doesn’t look very different to you.
Earlier this month, the World Bank decided to raise its global poverty line from $1.25 per day (in Purchasing Power Parity or PPP terms) to $1.90, the first major overhaul in ten years. How the Bank essentially constructs its poverty line is by taking the average of the national poverty lines of 15 of the world’s poorest countries (chiefly sub-Saharan countries and Nepal since 2005) and then converts this average into an internationally comparable number. For this number, it takes a basket of goods and services and calculates how much it would cost to buy these in various countries - think of it like a global exchange rate, essentially. What happened last week is that the World Bank decided to update the prices in this basket to 2011 prices (plus a few other tweaks) since incomes in these countries had risen, and that raised the poverty line - what was $1.25 at 2005 prices became $1.90 at 2011 prices.
In aggregate numbers, this means that there were 897 million poor people globally in 2012 by the new poverty line. By the old poverty line, there were over 1 billion poor people as of 2011. (It seems strange that raising the poverty line still led to a lower number of poor people, but the fact is that incomes have grown considerably too.) In long-term trends, the updating changes really quite little.
Here’s how India, China, Bangladesh and the world’s poverty levels had changed over the years according to the old poverty line.
And here’s how it looks with the new poverty line.
Not terribly different, as you see.
What does this mean for India? Well whichever way you look at it, poverty’s declining fast in India. By the new poverty line, in fact, the two years between 2009 and 2011 saw the fastest ever decline in India’s poverty in history.
But the drawing and redrawing of poverty lines is a hugely fraught issue, and few have spoken more sharply and engagingly about it than Angus Deaton, the Scottish-born Princeton economist renowned for his work on consumption, poverty, nutrition and health - the irony of a major overhaul in global poverty lines just weeks before he was > awarded the Nobel Prize would not have been lost on him. Mr. Deaton, who has long criticised the World Bank’s ( > and India’s , for that matter) ways of drawing poverty lines and is on a new commission to examine ways to improve it, told the Financial Times about the shift to $1.90 last month: “You’ve got a line that no one knows where to put it, PPPs that change, and underlying data that is bad.. It is sort of a statistical problem from hell.”
The problems with the poverty line, as Mr. Deaton has frequently and eloquently pointed out, become sharply relevant for India. As President of the American Economic Association in 2010, Mr. Deaton gave a speech that is essential reading for anyone interested in poverty lines. In it, he pointed out that the graduation of India from the group of 15 poor countries the World Bank used to fix a poverty line in 2005 because it had now grown to middle income status perplexingly actually increased the number of poor in India. How on earth did that happen? India’s poverty line was so low that its graduation out of the group substantially raised the average poverty line - if you’ve been averaging 15 poor friends’ incomes, then when one of the poorest leaves the group, the group’s average income shoots up. Raising the global poverty line raised the number of those officially classified as poor everywhere - including in India. Mr. Deaton suggests a number of ways to improve poverty measurement, including self-reporting, of which he is a passionate advocate.
Where does that leave us? Poverty in India is undeniably declining fast - perhaps faster than ever before - but the world’s newest Nobel laureate reminds us that we still do a terrible job of measuring it.