2.5 Poverty See Table 2.5 here

Commentary
About the data
Definitions
Data sources

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International comparisons of poverty data entail both conceptual and practical problems. Different countries have different definitions of poverty, and consistent comparisons between countries can be difficult. Local poverty lines tend to have higher purchasing power in rich countries, where more generous standards are used than in poor countries.

Is it reasonable to treat two people with the same standard of living differently—in terms of their command over commodities—because one happens to live in a better-off country? It can be argued that to make consistent international comparisons, we should try to hold the real value of the poverty line constant, just as is typical when making comparisons over time.

The poverty measures given under the international poverty line attempt to do this. Here the poverty line is set for all countries at $1 a person per day, in 1985 international prices, and adjusted to local currency using exchange rates aimed at assuring purchasing power parity for consumption. The figure of $1 a day was chosen for the World Bank's World Development Report 1990: Poverty because it is typical of the poverty lines in low-income countries. Of course, by the same token, it is lower—often much lower—than the poverty lines found in middle- or high-income countries.

Currency conversions can be problematic, however. Using standard purchasing power parity (PPP) exchange rates, such as those from the Penn World Table, is clearly preferable to using official exchange rates, because many commodities are not traded internationally. But PPP rates were designed not for making international poverty comparisons, but for comparing aggregates from national accounts. It would be better to design special-purpose PPP rates for the poor. But with no such rates now available, the standard PPP rates for consumption appear to be the best option.

Just as there are problems in comparing a poverty measure for one country with that for another, there can also be problems in comparing poverty measures within countries. For example, the cost of living is typically higher in urban than in rural areas. (Food staples, for example, tend to be more expensive in urban areas.) So the urban poverty line should be higher than the rural poverty line. But it is not always clear that the difference between urban and rural poverty lines properly reflects the difference in the cost of living.

For some countries the urban poverty line in common use has a higher real value—meaning that it allows poor people to buy more commodities for consumption—than does the rural poverty line. Sometimes the difference has been so large as to imply that the incidence of poverty is greater in urban than in rural areas, even though the reverse is found when adjustments are made for differences in the cost of living. As with international comparisons, when the real value of the poverty line varies, it is not clear how meaningful such urban-rural comparisons are.

The problems of making poverty comparisons do not end there. Further issues arise in measuring household living standards. The choice between income and consumption as a welfare indicator is one issue. Incomes are generally more difficult to measure accurately, and it can also be argued that consumption accords better with the idea of the standard of living than does income, which can vary over time even if the standard of living does not. But consumption data are not always available, and when they are not there is little choice but to use income.

There are still other problems. In some countries an allowance is made for differences in household size and composition when determining who is poor, while in others no allowance is made. Household survey questionnaires can also differ widely, for example, in the number of distinct categories of consumer goods they identify and in the order in which questions are asked. Survey quality varies, and even similar surveys may not be strictly comparable.

Comparisons across countries at different levels of development also pose a potential problem, because of differences in the relative importance of consumption of nonmarket goods. The local market value of all consumption in kind (including consumption from own production, particularly important in underdeveloped rural economies) should be included in the measure of total consumption expenditure. Similarly, the imputed profit from production of nonmarket goods should be included in income. This is not always done, though such omissions were a far bigger problem in surveys before the 1980s. Survey data now routinely include valuations for consumption or income from own production. Nonetheless, the methods of valuation vary—for example, some surveys use the price at the nearest market, while others use the average farm-gate selling price.

Table 2.5a Poverty gap in various regions, 1987 and 1993
percent

Note: The aggregates were derived by adjusting estimates from national surveys closest to 1987 and 1993 by the growth rate of real private per capita consumption from national accounts. The sample of countries covered by the surveys was assumed to be representative of the region. This assumption is less robust for the Middle East and North Africa and Sub-Saharan Africa. For further details on data and methodology see Ravallion and Chen 1996.

Source: World Bank 1996f.

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It is impossible to create a data set on poverty and distribution that is strictly comparable across countries. But the poverty measures given under the international poverty line are designed to reduce the comparability problems in several ways. Nationally representative surveys have been used, surveys conducted either by national statistical offices or by private agencies under government or international agency supervision.

The poverty measures are based on the most recent purchasing power parity (PPP) estimates, from the latest version of the Penn World Table (PWT_5.6). These estimates include revisions to PPP exchange rates in the previous version of the table (PWT 5.0) to incorporate better data. The revisions resulted in significant changes, the most striking relating to China. Using the updated PPP exchange rates for consumption from PWT 5.6 produces an estimate of the percentage of China's population living on less than $1 a day (in international prices) in 1992 nearly triple that estimated using the PPP rates from PWT 5.0, with the same distribution data. For India, however, the revised PPP rates result in a lower estimate for this indicator. Such changes in the estimated incidence of poverty occur because a large change in the PPP for a country can produce dramatically different poverty lines in local currency.

Whenever possible, consumption has been used as the welfare indicator for deciding who is poor. A person is said to be poor if he or she lives in a household whose total consumption per person is less than the poverty line. The measure of consumption is generally comprehensive, including that from own production as well as all food and nonfood goods purchased. When only household incomes are available, the average level of income has been adjusted to accord with either a survey-based estimate of mean consumption (when available) or an estimate based on consumption data from national accounts. This procedure adjusts only the mean, however; nothing can be done to correct for the difference in Lorenz (income distribution) curves between consumption and income.

Empirical Lorenz curves were weighted by household size, so they are based on percentiles of population, not households. In all cases the measures of poverty have been calculated from primary data sources (tabulations or household data) rather than existing estimates. Estimation from tabulations requires an interpolation method; the method chosen was Lorenz curves with flexible functional forms, which have proved reliable in past work.

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• Survey year is the year in which the underlying data were collected.

• Rural poverty rate is the percentage of the rural population deemed poor.

• Urban poverty rate is the percentage of the urban population deemed poor.

• National poverty rate is the percentage of the population living below the poverty line deemed appropriate for the country by its authorities. National estimates are based on population-weighted subgroup estimates from household surveys.

• Population below $1 a day is the percentage of the population living on less than $1 a day at 1985 international prices, adjusted for purchasing power parity.

• Poverty gap is the mean shortfall below the poverty line (counting the nonpoor as having zero shortfall) expressed as a percentage of the poverty line. This measure reflects the depth of poverty as well as its incidence.

Poverty measures are prepared by the Poverty and Human Resources Division of the World Bank's Policy Research Department. National poverty lines are based on the World Bank's country poverty assessments. International poverty lines are based on primary household survey data obtained from government statistical agencies and World Bank country departments.

The World Bank has prepared an annual review of poverty trends since 1993. The most recent is Poverty Reduction and the World Bank (1996f).

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