RETHINKING GLOBAL POVERTY MEASUREMENT

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1 RETHINKING GLOBAL POVERTY MEASUREMENT Working Paper number 93 April, 2012 Khalid Abu-Ismail and Gihan Abou Taleb United Nations Development Programme, Regional Centre in Cairo (UNDP-RCC) Racha Ramadan Cairo University Faculty of Economics International Centre for Inclusive Growth

2 Copyright 2012 International Policy Centre for Inclusive Growth United Nations Development Programme International Policy Centre for Inclusive Growth (IPC - IG) Poverty Practice, Bureau for Development Policy, UNDP Esplanada dos Ministérios, Bloco O, 7º andar Brasilia, DF - Brazil Telephone: ipc@ipc-undp.org URL: The International Policy Centre for Inclusive Growth is jointly supported by the Poverty Practice, Bureau for Development Policy, UNDP and the Government of Brazil. Rights and Permissions All rights reserved. The text and data in this publication may be reproduced as long as the source is cited. Reproductions for commercial purposes are forbidden. The International Policy Centre for Inclusive Growth disseminates the findings of its work in progress to encourage the exchange of ideas about development issues. The papers are signed by the authors and should be cited accordingly. The findings, interpretations, and conclusions that they express are those of the authors and not necessarily those of the United Nations Development Programme or the Government of Brazil. Working Papers are available online at and subscriptions can be requested by to ipc@ipc-undp.org Print ISSN: X

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4 2 International Policy Centre for Inclusive Growth A poverty line can also be held constant over time and across countries, as has been the practice in the specialised literature dealing with global poverty comparisons conducted by the World Bank and the United Nations (e.g. the famous US$1 and US$2 per day per person purchasing power parity (PPP) poverty lines). As argued in this paper, if, for a variety of reasons, PPPs do not equate purchasing power, a more credible approach for international comparisons would allow the poverty line to be related to changes in the standard of living. 2 It can be inferred from this typology of poverty lines that poverty measurement lends itself to a wide range of definitions and measurement methodologies. These conceptual and measurement differences yield, in turn, a spectrum of results. Data weaknesses and limitations in developing countries also present an often insurmountable obstacle to poverty and inequality assessments. Hence, it should not come as a surprise that there is little agreement, even among global poverty experts, on the most basic questions such as: how many poor people are there in the world today? Have developing countries been successful in reducing poverty? Relative to other developing regions, have sub-saharan Africa and South Asia, the regions with lowest income per capita, performed well to reduce poverty and inequality and to grow per capita expenditure? What are the most common characteristics of the poor population in these most deprived regions? Which policies, programmes and interventions are most effective in reducing extreme poverty? Are there successful poverty reduction experiences that can be easily emulated? No doubt, these questions are difficult to address, let alone in a single paper. Still, we attempt to cover, to the extent possible, the first three questions with some analytical and empirical depth, relying on the most famous measure of poverty, namely the headcount ratio (which is the ratio of those with consumption expenditure below a specified poverty line to total population and is also known as the poverty rate ). The relevant stylised facts we aim to examine for developing countries in this paper are thus primarly related to the spread of money-metric poverty and its evolution over time. However, we will briefly discuss the growth of consumption expenditure and the degree of inequality in the distribution of this expenditure. Section 2 reviews the conventional storyline of global poverty based on the popular $1.25 poverty line. In Section 3, we examine national poverty lines, which we believe produce a more accurate picture for the majority of countries. However, national poverty lines have a serious comparability problem, since developing countries use a wide range of methodologies to define poverty. Furthermore, they are particularly problematic for the purpose of global comparison when countries with large demographic weight, such as China, are completely off mark. However, if we can prove that the vast majority of countries get their national poverty lines right, we can solve this problem by allowing the poverty line to vary with expenditure. Hence, in Section 4, using national poverty lines and per capita expenditure derived from household surveys, we estimate the appropriate poverty line for international comparisons for 59 developing countries based on a significant number of survey results (over 350 surveys) and report the poverty rates based on these new poverty lines. Section 5 makes use of the same dataset to briefly examine the main growth and inequality trends underlying these poverty results. We end this paper with a few concluding remarks that summarise our main findings.

5 Poverty rate $1.25 $2 $2.75 % Change from $1.25 to $2.00 % Change from $2.25 to $ AC EAP ECA LAC SAS SSA DR 50 % Change in poverty % 300% 200% 100% 0%

6 (A) AC EAP ECA LAC SAS SSA DR (B) AC EAP ECA LAC SAS SSA DR P0 (%) World East Asia & Pacific Europe & Central Asia 100 Latin America & Caribbean South Asia Sub-Saharan Africa Arab Countries

7 AC-B EAP-B ECA-B LAC-B SAS-B SSA-B DR-B P0 AC-L EAP-L ECA-L LAC-L SAS-L SSA-L DR-L Poverty Lines

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9 P % Change 55% % % % 14% % 5.5 % Change 60% 50% 40% % 27% % 10% 0 AC EAP ECA LAC SAS SSA DR 0%

10 China Tunisia Chile Brazil Costa Rica Morocco Russian Federation Bulgaria Turkey Sri Lanka Panama Jordan Belarus Ukraine Indonesia Ghana Peru Syria Romania Uganda Colombia El Salvador Venezuela RB Nicaragua Mexico India Egypt Kenya Dominican Bangladesh Bolivia Yemen Zambia Ethiopia Burundi Mongolia Tajikistan Mean Mean* 1.4 NPL/PCE Sub/PCE

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12 PL/PCE 120% PL/PCE Log pce 3 100% 80% TUN-00 MAR07 CHN-U05 CHN-R05 JOR06 COM04 SYR07 DZA95 IRQ07 EGY09 DJI02 YEM % % 1 20% 0.5 0% LOG PCE

13 PCE per month NPL per day RPL per day NPL/PCE RPL/PCE Low-Income Countries (average PCE below $60 per month) Lower Middle-Income Countries (average PCE from $60 to $100 per month) Middle-Income Countries (average PCE from $100 to $150 per month) Upper Middle-Income Countries (average PCE from $150 to $200 per month) High-Income Countries (average PCE above $200 per month)

14 PCE per month NPL per day RPL per day NPL/PCE RPL/PCE Sub-Saharan Africa (11) South Asia (6) East Asia & Pacific (9) Arab countries (8) Europe & Central Asia (9) Latin America & Caribbean (16) Developing region (59)

15 Region Estimates Based on World Bank Poverty Lines Authors Estimates $1.25 Rank $2 Rank $2.75 Rank NPL Rank RPL Rank Headcount Poverty Rate (%) in and rank Arab countries East Asia & Pacific Europe & Central Asia Latin America & Caribbean South Asia Sub-Saharan Africa Developing region Poverty Change (%) from Arab countries East Asia & Pacific Europe & Central Asia Latin America & Caribbean South Asia Sub-Saharan Africa Developing region

16 s s AC EAP ECA LAC SAS SSA DR

17 Region HCE HCE HCE* HCE* HCE/HCE* HCE/HCE* Gini HCE HCE* HCE*/ 1990s 2000s 1990s 2000s 1990s 2000s (%) (%) (%) HCE (%) AC EAP ECA LAC SAS SSA DR

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19 World Development Indicators POVCAL National Accounts, UNSD Poverty headcount ratio at national poverty line (% of population) GDP, PPP (constant 2005 international $) GDP per capita, PPP (constant 2005 international $) Population, total PPP, conversion factor, (private consumption) LCU per international $ Mean $ (PCE): the average monthly per capita income/consumption expenditure from survey in 2005 PPP (used as the explanatory variable) Poverty gap Gini index Poverty headcount ratio at $1.25 a day (PPP) (% of population) Poverty headcount ratio at $2 a day (PPP) (% of population) Household consumption expenditure (including non-profit institutions serving households) NPL c NPL UWU NPL RW R, Pop i W i Pop U Pop R

20 Country NPL PCE Gini Index Rural Urban Total Rural Urban Total Rural Urban Total China China India India Indonesia Indonesia Region Total Change Gini Total Change PCE Total Change Poverty Rate Least Developed Countries 11.37% 0.57% % Arab countries -1.43% 11.15% % East Asia & Pacific 10.38% 71.90% % Europe & Central Asia % 17.83% % Latin America & Caribbean -4.94% 27.09% % South Asia 6.20% 12.97% % Sub-Saharan Africa -1.81% 22.56% % Developing region -2.54% 32.31% %

21 ln(npl) PCE PCE

22 160% PCE (A) PL/PCE (B) 140% 120% % 80% % 40% 20% 0% y = -2E-05x x R² = Variables L_PL L_PL2 PCE *** *** ( ) ( ) PCE_2-1.52e-05*** -9.51e-06*** (1.35e-06) (1.36e-06) LAC 0.639*** (0.0563) SAS (0.0662) SSA 0.195*** (0.0474) AC 0.242*** (0.0612) ECA 0.637*** (0.0562) Constant 3.066*** 3.108*** (0.0455) (0.0586) Observations R-squared

23 Country Name Year PCE mean$ Base Year NPL RPL per per day day RPL/ PCE Year PCE mean$ Latest Year NPL RPL per per day day Azerbaijan Bangladesh Belarus Bolivia Brazil Bulgaria Burkina Faso Burundi Cambodia Cameroon Chile China China-Rural China-Urban Colombia Costa Rica Djibouti Dominican Republic Ecuador Egypt El Salvador Ethiopia Ghana Guyana Honduras India India-Rural India-Urban Indonesia Indonesia-Rural Indonesia-Urban Jamaica Jordan Kazakhstan Kenya Lao PDR Madagascar Malawi Mauritania Mexico Mongolia Morocco Mozambique Nepal Nicaragua Pakistan RPL/ PCE

24 Country Name Year PCE mean$ Base Year NPL per day RPL per day RPL/ PCE Year PCE mean$ Latest Year Panama Peru Philippines Romania Russian Federation Sri Lanka Syria Tajikistan Tunisia Turkey Uganda Ukraine Venezuela RB Vietnam Yemen Rep Zambia Least Developed Countries Arab countries East Asia & Pacific Europe & Central Asia Latin America & Caribbean South Asia Sub-Saharan Africa Developing Region NPL per day RPL per day RPL/ PCE

25 $1.25 PR $2 PR $2.75 PR National Poverty Rate Regressio n PR $1.25 PR $2 PR $2.75 PR National Poverty Rate Regressio n PR Base year Latest year Country/ Region Yr Yr Djibouti Mauritania Yemen Rep Morocco Tunisia Egypt Jordan Syria China-Rural China-Urban Indonesia-Rural Indonesia-Urban Cambodia Lao PDR Mongolia Philippines Vietnam China Indonesia Azerbaijan Belarus Bulgaria Kazakhstan Romania Russian Federation Tajikistan Turkey Ukraine Bolivia Brazil Chile Colombia Costa Rica Dominican Republic Ecuador El Salvador Guyana Honduras Jamaica Mexico Nicaragua Panama Peru Venezuela India-Rural India-Urban

26 $1.25 PR $2 PR $2.75 PR National Poverty Rate Regression PR $1.25 PR $2 PR $2.75 PR National Poverty Rate Regression PR Base year Latest year Country/ Region Yr Yr Bangladesh Nepal Pakistan Sri Lanka India Burkina Faso Burundi Cameroon Ethiopia Ghana Kenya Madagascar Malawi Mozambique Uganda Zambia LDCs AC EAP ECA LAC SAS SSA DR

27 Country/ Region Annual Change Poverty Rate Annual Change Gini Annual Change PCE Annual Change HCE Country/ Region Annual Change Poverty Rate Annual Change Gini Annual Change PCE Annual Change HCE Djibouti 3.3% 1.4% -7.6% 4.7% Morocco -2.3% 0.3% 0.2% 1.2% Egypt -0.6% -0.3% 1.0% 2.0% Syria -1.5% -0.6% -0.3% 0.6% Jordan -5.3% 0.4% 3.7% 3.5% Tunisia -4.6% 0.1% 1.9% 2.7% Mauritania -2.2% 1.2% 2.9% -0.4% Yemen Rep -2.0% 1.7% -1.0% -2.2% China-Rural -12.0% 0.7% 4.5% 0.0% Guyana -4.1% -2.9% -3.0% 5.0% China-Urban -19.0% 2.0% 7.3% 0.0% Honduras -1.1% 1.4% -0.5% 3.5% Indonesia-Rural -1.0% 0.5% 3.1% 0.0% Jamaica -5.3% 1.5% 4.5% 0.2% Indonesia-Urban -1.8% -0.1% 2.5% 0.0% Mexico -0.7% 0.1% 1.7% 1.4% Cambodia -3.4% 1.1% 3.5% 4.8% Nicaragua -0.5% -0.4% 1.9% 2.4% Lao PDR -3.0% 1.2% 2.4% 3.3% Panama -1.1% 0.6% 2.6% 4.9% Mongolia 7.7% -0.2% 0.9% -1.7% Peru -5.5% -1.2% 4.2% 4.1% Philippines -3.5% 0.2% 1.4% 2.1% Venezuela RB 0.9% -0.1% -0.4% 0.2% Vietnam -9.0% 0.6% 6.9% 5.2% India-Rural -2.5% 0.6% 1.2% 0.0% China -8.1% 1.2% 6.7% 6.0% India-Urban -2.1% 0.8% 1.2% 0.0% Indonesia -1.6% 0.5% 3.1% 2.4% Bangladesh -2.5% -0.1% -0.1% 1.7% Azerbaijan -10.6% -0.3% 4.7% 9.3% Nepal -3.7% 2.9% 4.9% 1.9% Belarus -21.4% -1.4% 9.6% 11.6% Pakistan -4.0% -1.0% 1.0% 1.2% Bulgaria -22.8% 6.8% 7.4% 7.3% Sri Lanka -3.3% 1.4% 2.8% 4.9% Kazakhstan -12.6% -0.2% -1.6% 3.2% India -2.4% 0.7% 1.3% 3.9% Romania -3.2% 1.0% 6.1% 5.0% Burkina Faso 0.5% -3.3% 2.4% 2.8% Russian Federation -14.9% 0.0% 8.2% 8.0% Burundi -2.4% -3.0% 2.2% -0.6% Tajikistan -5.9% 0.9% 3.8% 15.4% Cameroon -5.5% -1.0% 6.0% 2.1% Turkey -2.9% 0.4% 1.3% 2.8% Ethiopia -0.6% -5.6% -1.2% -2.0% Ukraine -20.6% -0.4% 12.7% 8.3% Ghana -4.0% 0.6% 2.7% 3.1% Colombia -1.6% 0.2% 0.0% 0.6% Kenya 1.2% 1.1% 3.4% 0.5% Costa Rica -2.5% 0.4% 4.0% 2.1% Madagascar -0.8% 2.4% 3.7% 0.3% Dominican 3.1% -1.0% -3.3% 4.4% Malawi -3.6% -4.2% 2.5% 1.0% Republic Ecuador -0.6% -0.4% 2.6% 2.4% Mozambique -2.1% 0.2% 4.3% 4.9% Bolivia -0.5% -0.2% 1.1% 1.1% Uganda -4.2% 0.0% 2.4% 4.5% Brazil -4.1% -0.9% 2.8% 1.4% Zambia -2.2% -0.9% -4.1% 8.5% Chile -3.3% -0.4% 1.9% 2.5% El Salvador -1.3% -0.5% 1.8% 2.6% LDCs -11.9% 11.5% -6.7% -12.0% LAC -20.4% -4.9% 27.1% 21.8% AC -14.5% -1.4% 10.2% 30.5% SAS -23.1% 6.2% 13.0% 42.2% EAP -49.1% 9.9% 71.9% 60.7% SSA -13.5% -1.8% 22.6% 17.0% ECA -55.2% -0.1% 54.0% 57.0% DR -26.9% 0.3% 39.0% 40.7%

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