Monday, 30th October 2017

E- paper

New goals

The subject of global poverty features prominently in the sustainable development goals, which set a target of eliminating 'extreme poverty' by 2030. The latter refers to people living below the 'international poverty line' of $1.90 a day at 2011 'purchasing power parity'. This last measures the true purchasing power of a country's currency in terms of a numeraire currency that is typically the American dollar. The PPPs are required to convert the dollar- denominated IPL 

By Ranjan Ray
  • Published 24.08.17
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The subject of global poverty features prominently in the sustainable development goals, which set a target of eliminating 'extreme poverty' by 2030. The latter refers to people living below the 'international poverty line' of $1.90 a day at 2011 'purchasing power parity'. This last measures the true purchasing power of a country's currency in terms of a numeraire currency that is typically the American dollar. The PPPs are required to convert the dollar- denominated IPL to that in the local currency of a country to enable the poor in that country to be identified and counted. The International Comparison Program has an elaborate procedure for estimating and updating the PPPs that are used in assessing global poverty. The enumeration and monitoring of global poverty have been the responsibility of the World Bank. The origin of this connection is a product of history with the earliest studies on global poverty in the late 1970s having been undertaken by researchers working in the World Bank. The terminal year of the millennium development goals, 2015, witnessed a spate of studies on global poverty, most of which were authored by World Bank researchers.

The then chief economist and senior vice-president of the World Bank, Kaushik Basu, convened in 2015 a high level commission under the chairmanship of the eminent British economist, the late Anthony Atkinson, along with an advisory board of 23 renowned economists "to advise the World Bank on the methodology currently used for tracking poverty in terms of people's consumption, given that prices change over time and purchasing power parities across nations shift... [and] to give advice on other dimensions and relativities of poverty and deprivation that ought to be measured". The report was completed and made available to the public very recently, as World Bank, Monitoring Global Poverty: Report of the Commission on Global Poverty, 2016. The contents of the report are of special interest to Indian policymakers since India contributes more than other countries to the global pool of the poor. Unfortunately, the composition of the poverty commission was very narrow, with no representation from non-economists, country statistical offices or non-governmental organizations from either Africa or South Asia.

The report makes 21 recommendations. The first 10 recommendations deal with 'Monitoring extreme poverty', recommendations 11 to 19 with 'Complementary indicators and multidimensionality', and 20 and 21 with the practical sounding, 'Making it happen'.

The first recommendation reiterates the current practice of defining 'extreme poverty' in terms of an IPL expressed in each country in terms of the currency of that country. This should be read in conjunction with the 10th recommendation that the global poverty estimates should be updated up to 2030 on the basis of the IPL specified in local currency and in line with domestic inflation as measured by the national CPI. The crucial part is the suggestion that the PPPs to be used in specifying the IPL as the starting point will be the 2011 International Comparison Program PPPs, which will henceforth be frozen at their 2011 PPP values and that the PPPs from the further ICP rounds will not be incorporated until 2030. The task of updating the poverty lines in line with inflation all the way to 2030 will fall entirely on the domestic CPIs of the various countries.

These two recommendations are the centrepiece of the poverty commission report and, yet, are the most problematic. It is well known that the ICP PPPs are based on a different basket of items than the CPI and until the inconsistency is ironed out through successive rounds of the ICP, it is unwise to switch overnight from one to the other. The recommendation to freeze the use of the ICP PPPs at the estimates from the 2011 round assumes a degree of accuracy of the 2011 ICP PPPs that has not been established yet.

A more fundamental objection is that the idea of a single 'international poverty line' to be applied to all countries regardless of their economic status and regional location makes little sense, especially if one recalls that such a poverty line is obtained as the mean of the poverty lines of the 15 'poorest countries'. Nearly all these countries are in Africa with abysmal levels of poverty. It follows that the poverty line thus obtained will be set at too low a level for countries such as India or Indonesia with significantly higher rates of growth.

Consistent with its failure to question the concept of a globally specified IPL, the poverty commission does not scrutinize the multilateral estimation strategy underlining the calculation of the ICP PPPs. It is odd that, notwithstanding the close connection between PPP estimation and poverty enumeration, the commission spends so little time and space to examine the multilateral PPP estimation methodology used by the ICP. Why, for example, in bilateral welfare comparisons between India and Vietnam, should one be forced to use the ICP PPPs which are based on the price and quantity information from all the countries participating in the ICP, many of whom are far removed geographically, developmentally and culturally, from both India and Vietnam?

This raises the wider issue of the robustness of the IPL vis-à-vis alternative PPPs. The report says that the IPL at $1.90 a day at 2011 PPP is indeed quite robust to alternative procedures and quotes the World Bank's chief economist as attributing this robustness to "a strange alignment of the stars". This is not true. The perceived robustness of the IPL is achieved by the fact that the alternative studies quoted in the report were all based on the ICP PPPs.

The report's 19th recommendation to "include a multidimensioned poverty indicator based on the counting approach" ought to be welcomed. This is in line with the recent literature on multi-dimensional poverty measurement and will align the World Bank's poverty statistics with that reported in the Human Development Reports. The report notes in passing the need to have panel data since it is important not only to count and monitor poverty but also to distinguish between transitory and persistent poverty and incorporate that in the global poverty measures. The report takes a static view of poverty in both the unidimensional and multidimensional contexts. This limits the report's policy appeal since more important than simply tracking the aggregate poverty numbers is the need to identify and count those households that are experiencing persistent poverty and identify the dimensions that are recording the longest as well as uninterrupted spells of deprivation. The report lost the opportunity to take the lead by urging the World Bank to move to a dynamic framework for poverty enumeration and monitoring. It ought to have made a specific recommendation to provide the required panel data bases across countries over a realistic time-frame.

The need to subject the World Bank's poverty enumeration to regular auditing by an outside body noted in recommendation number 21 is another of the commission's recommendations that deserves to be strongly supported by all the stakeholders. Perhaps predictably, the senior management of the World Bank has rejected this recommendation and refused to subject the bank to outside scrutiny. Hopefully, sooner rather than later, the bank will be forced to adopt this recommendation.

The report contains much useful material and makes several recommendations that deserve support. For example, the attention drawn in the third recommendation to people 'missing' from the global poverty count and the need for adjustments to survey under-representation and non-coverage is to be welcomed. Also welcome is the commission's emphasis on the need for the national poverty statistics to be better aligned with the global poverty statistics. However, it is disappointing that the poverty commission failed to question the very concept of an 'international poverty line' and the multilateral PPP estimation strategy of the ICP. The commission lost an opportunity to make the World Bank's poverty monitoring strategy more transparent and sensitive to the needs and aspirations of those left behind. However, it does make a start for a radical rethink on poverty.

The late Anthony Atkinson, an outstanding economist, has in producing this report left us with a document that can provide the basis for radical departures from the way the World Bank measures global poverty. The Global Poverty Commission Report will be a permanent reminder of his contributions towards making the world a better place to live in for us all.