New global poverty line of $1.90 at 2011 purchasing power parity – is it too high?

Published on Tuesday, 22 March 2016

Published by Hyun H. Son and Vinod Thomas on Tuesday, 22 March 2016

Riverside slum housing in Manila, Philippines.
Riverside slum housing in Manila, Philippines.

The World Bank’s new poverty line of $1.90 a day is the most drastic adjustment yet in the global poverty threshold—raising the measure by 50% from $1.25. The new line seems high at first glance, but the reality is that it is not higher and rather understates the true extent of global poverty.

The reason is that the poverty line has not been raised by 50%, but simply rebased on 2011 purchasing power parity (PPP). The PPP is used to account for changes in the poor’s living costs. The result: the new poverty line is roughly equivalent to the old one in real terms.

It might have been expected that a higher poverty line of $1.90 a day in 2011 PPP would see an increase in the number of the world’s poor. But the opposite has been observed. In 2011, the percentage of people estimated to be living in extreme poverty around the world was 14.5% based on the old poverty line of $1.25 compared to 14.2% using the new line of $1.90 in 2011 PPP.

The World Bank established the $1.90 per day poverty line in 2011 PPP by taking the simple average of the national poverty lines of the 15 poorest countries in terms of their per capita consumption. With all 15 countries given equal weight regardless of the size of their populations, the World Bank measured the global poverty line at $1.88 and rounded it to $1.90.

However, employing a limited number of reference countries to determine the poverty line has drawbacks. For one, global poverty counts based on this method are influenced by the exclusion or inclusion of countries in the sample. This volatility arises because of the small sample of countries.

Neither are all countries included in the reference group the poorest in the world. Of the 15 reference countries, 13 are in Sub-Saharan Africa, and the remaining two are in Asia – Nepal and Tajikistan. Tajikistan, however, is not one of the world’s poorest countries, with its percentage of poor at 6.04% of its population.

The global poverty line attempts to reflect a standard of living needed for a person or family to buy the bare minimum of food and non-food items. However, a minimum threshold set at $1.90 per person per day might not be sufficient to meet the basic needs. For example, about $1.6 a day per person in 2011 PPP can purchase a food basket comprising 2,100 calories, 58 grams of protein, 377 grams of carbohydrates, and 38 grams of fat, a recent study suggests. But this leaves just $0.3 for non-food items – education, health, and housing, among others. As such, a family of five could barely maintain a minimum standard of living on $9.50 a day.

Alternative measures have in fact yielded higher global poverty lines. The use of equivalent poverty lines offers a case in point. This idea of equivalent poverty lines was developed by Kakwani and Son. With each country having different rates of inflation and PPP conversion, it is argued that there is no single poverty line measured in 2011 PPP that is equivalent to $1.25 in 2005 PPP. To address this problem, Kakwani and Son estimated the equivalent poverty lines for 101 countries and arrived at a global poverty line by weighted average, with the weights assigned based on a country’s population size. Following this approach, a global poverty line of $1.93 in 2011 PPP, slightly above the new line, was estimated.

Based on the global poverty threshold derived from equivalent poverty lines (for example, $1.93 in 2011 PPP), the number of poor people worldwide is estimated at only 6.42 million fewer. In contrast, a previous modification of 1993 PPP to the 2005 PPP estimated an increase in the number of the world’s poor by about 500 million people based on the World Bank’s estimates. Such a large increase can only happen when the real poverty line is adjusted upward.

The global poverty line of $1.90 is not too high. It may in fact downplay the extent of global poverty, which remains an unfinished global development goal.