The World Bank and how many people in the world are in extreme poverty

At the Aid Watch blog Bill Easterly point us to the AEA Presidential Address that Angus Deaton (see right) gave recently at the AEA meetings. Deaton discussed the measurement of world poverty and inequality, with particular attention to the role of PPP (purchasing power parity) price indexes from the International Comparison Project. Global inequality increased with the latest revision of the ICP, and this reduced the global poverty line relative to the US dollar. The recent large increase of nearly half a billion globally poor people came from an inappropriate updating of the global poverty line, not from the ICP revisions. Even so, Deaton explained, PPP comparisons between widely different countries rest on weak theoretical foundations. Deaton argued for a wider use of self-reports from international monitoring surveys, and for a global poverty line that is truly denominated in US dollars.

Easterly tells us that the lecture

will not let you ever trust the World Bank again on how many people in the world are in extreme poverty.

Easterly gives four examples as to why this is so:

1) “India has become poorer because India has become richer!”

The World Bank’s recent 40 percent upward revision of the global poverty number was based on an absurd procedure that led to the paradox in the quote.

To make a long story short, the World Bank decided to boot richer India out of the group of poorest countries used to determine the poverty line, which made the poverty line higher, which made Indian (and global) poverty higher – all because India was richer. This misguided revision of the poverty line, which accounted for virtually all of the upward revision, was not clear to virtually anyone until this new paper by Deaton.

2) Adjusting for purchasing power (how cheap the goods are) across countries is complex and probably impossible.

The details are as incredibly boring as they are hugely consequential.

As only one tiny example, the poverty count is sensitive to a mostly-made-up number that is incomparable across countries: the imputed rent to housing.

Then there is the “index number problem,” which only is of great fascination to 2 people, but unfortunately can change the ratio of US/Tajikstan incomes by a factor of 10. The trouble is that rich people and poor people consume very different things. For example, poor people may consume a lot of something that is cheap in the poor country, which is not consumed much and is expensive in the rich country. Similarly, rich people consume a lot of something else that is cheap in the rich country and expensive in the poor country. If you use rich country prices, you exaggerate poor people’s consumption basket value (they are given a lot of credit for consuming a lot of something very expensive, but it isn’t that expensive in the poor country and if it were, they would consume a lot less of it). Conversely, if you use poor country prices, you exaggerate rich people’s consumption basket value. There are possible intermediate solutions but no complete solutions to this intractable problem.

Deaton muses: “perhaps we are aiming too high when we try to construct a real income scale on which every country in the world can be placed.”

3) Why don’t you just ask people if they think they are poor?

World Gallup Poll does.

In contrast to the World Bank global poverty rate of 25 percent (around which there were those misguided revisions and many other uncertainties on the order of 40 percent of the original estimate):

33 percent worldwide say they don’t have money for food,
38 percent say their living standards are poor, and
39 percent say they are “in difficulty.”

So you are on safe ground saying, “there are lots of people in poverty.” But don’t insult our intelligence with an exact number.

4. Deaton offers consolation: you don’t really need a global poverty number.

In spite of the attention that they receive, global poverty ... measures are arguably of limited interest. Within nations, the procedures for calculating poverty are routinely debated by the public, the press, legislators, academics, and expert committees, and this democratic discussion legitimizes the use of the counts in support of programs of transfers and redistribution. Between nations where there is no supranational authority, poverty counts have no direct redistributive role, and there is little democratic debate by citizens, with discussion largely left to international organizations such as the United Nations and the World Bank, and to non-governmental organizations that focus on international poverty. These organizations regularly use the global counts as arguments for foreign aid and for their own activities, and the data have often been effective in mobilizing giving for poverty alleviation … It is less clear that the counts have any direct relevance for those included in them.

The moral of the story: don’t cite global poverty numbers unless you know they’re trustworthy, and most of the time they aren’t.