Monitoring Global Poverty: Better Options for the Future

(Seminar #1)

Sanjay G. Reddy Sanjay G. Reddy

Analytical Summary

The Questions

Professor Sanjay Reddy’s presentation focused on two main questions: How many poor people are there in the world? Are their numbers increasing or decreasing?

He argued that the answers we give to these apparently simple questions can be of great practical significance. Estimates of the number of poor people in the world, where they live, how poor they are, and how their number is changing over time strongly influence assessments of the seriousness of the problem of global poverty, and of whether the world is “on the right track” with respect to the policies and institutions that it has adopted. Answers to these questions are also important, he claimed, for determining the scale of resources that should be devoted to eliminating poverty, the regions to which these resources should be directed, and the formation of judgments as to whether existing policies should be continued or changed. The answers to such questions are of special importance if specific targets (such as the Millennium Development Goals) are to be attained. Professor Reddy emphasized that poverty is a complex concept that can be understood in various ways, and that he and his collaborator Professor Thomas Pogge of Columbia University have chosen to focus on income poverty, which has been widely recognized to be only one aspect of poverty. However, he argued, income cannot be ignored and the inadequacy of real income necessarily must play an important role in any kind of comprehensive judgments of deprivation that we might possibly undertake.

Professor Reddy pointed out that for some twelve years now, the World Bank has estimated the prevalence of the real income aspect of poverty through the use of an international poverty line, colloquially known as “the $1/day” line. Reports for the most recent year, 1998, put the number of people below this line at 1,175.14 million. These figures are universally relied upon by official publications of governments and international organizations and in popular media, as the World Bank is the sole provider of such information. More importantly, he stated, these figures are frequently cited in support of the view that worldwide liberalization and globalization have helped to reduce poverty worldwide. Professor Reddy quoted a recent statement by World Bank president Jim Wolfensohn as demonstrative of this view:

“Over the past few years, [these] better policies have contributed to more rapid growth in developing countries’ per capita incomes than at any point since the mid-1970s. And faster growth has meant poverty reduction: the proportion of people worldwide living in absolute poverty has dropped steadily in recent decades, from 29% in 1990 to a record low of 23% in 1998.”

Reddy said that although many disagree with this particular interpretation of the World Bank’s data on poverty, most readers, including many economists take the figures themselves as clear-cut facts.

The Problem

Unfortunately, he argued, the method that the Bank has used to calculate global income poverty has serious flaws, which make the resulting estimates wholly untrustworthy. Reddy stated that we do not yet know, even approximately, how many poor people there are in the world, where they live, and how their number has changed over time.

Professor Reddy argued that the deficiencies in the Bank’s methodology are due to three errors. First, the Bank fails to define a global poverty line that corresponds to a clear and meaningful underlying conception of poverty—one that is linked to the actual elementary requirements of human beings. In other words, he stated, the dollar a day poverty line was chosen in an ad hoc way and was not chosen to have any specific interpretation in terms of inadequacy of resources to meet basic human needs or requirements or capabilities, such as requirements of nutrition or shelter. Second, Reddy said, by using purchasing power parities based on average prices on all commodities, the Bank’s cost of living adjustments across countries do not differentiate between the costs of purchasing different kinds of goods, and thus fails to focus on the costs of purchasing those goods that are most relevant to basic consumption needs of the poor. Determining purchasing power over commodities such as cars, plane tickets, and stereos—goods that are not consumed by the poor—is clearly irrelevant for poverty estimates. Third, the Bank incorrectly extrapolates from limited data, creating a false appearance of precision that masks the high probability of error of its global income poverty estimates.

Professor Reddy said that while it is currently impossible to identify the extent and direction of the distortions generated by the Bank’s estimates with precision, simple estimation procedures suggest that the biases may be substantial, and that they may have led to a substantial underestimation of the extent of income poverty in the world. He argued that this is true in two senses. First, if the Bank’s “$1/day” standard is maintained but it is translated in to national currencies using procedures that are linked to actual elementary requirements of human beings, it is likely that national poverty lines (and therefore poverty headcounts) will be substantially higher than currently reported. Second, if a more meaningful international poverty line, relating more clearly to elementary human requirements, is chosen, the resulting poverty lines, and poverty headcounts, would be higher still. There are also reasons to think that the trend of poverty reduction has been less favorable than as reported by the World Bank, in part because of the way in which estimates of purchasing power parity conversion factors change over time so as to reflect the changing structure of the world economy.

The Solution

Professor Reddy maintained that to understand and monitor how the world is doing with respect to global poverty, a clear standard of absolute poverty by which the poor can be identified and counted is needed.

Fortunately, he said, the flaws in the Bank’s current methodology have a common root and are avoidable through one straightforward innovation: the definition of severe income poverty must be more narrowly focused on the specific consumption requirements of the poor, reflecting elementary human needs or capabilities (such as adequate nourishment). A definition of this kind has a clear interpretational advantage over an international poverty line specified in arbitrary dollar terms, as it has the meaning that an individual who falls below it lacks in the resources to achieve the most basic of human capabilities. The avoidance of poverty understood in this sense can be specified in terms of the ability to purchase or otherwise command a basket of goods with a single constant set of characteristics that reflects the basic requirements (such as calories and micronutrients, protection from the elements, and minimal health care) of human beings. Professor Reddy argued that such a common standard will allow the world for the first time to have confidence that the concept of poverty used in estimating the number of the world’s poor means something—and that it means the same thing— regardless of where they live and when they live. If we fail to undertake efforts of this kind, he claimed, it will be difficult to accept that the institutions concerned with monitoring poverty are taking this task as seriously as they should.

Professor Reddy argued for a globally transparent and consultative process that underlies the development of this new and more credible approach to monitoring absolute income poverty. To this end, he proposed that a global network be created, consisting of scholars (from all relevant disciplines) and practitioners who will work together to construct and refine an alternative methodology for measuring global income poverty. In addition to developing the conceptual foundations of a more adequate methodology, he said, this network will identify and advocate the collection of the kinds of data that will be needed if reliable and comprehensive estimates of global income poverty are to be developed. This will include, for instance, a worldwide scheme for collecting data on the prices poor people must actually pay to meet their most elementary requirements. The network will also conceive and carry out pilot studies that demonstrate the possibility of consistent comparisons of the real-income dimension of poverty across countries and over time. Professor Reddy concluded by stating that the ultimate goal of his and Professor Pogge’s project is to foster a climate of ideas and public opinion within which international agencies will adopt a more transparent, meaningful and reliable approach to global income poverty measurement that can improve description, inference, institutional design and policy choice in the future.

Discussion

The following section presents some of the interesting issues that were raised by participants during the discussion period.

Can a person live on $1 a day?

One participant commented on the importance of Professor Reddy’s underlying critique. Like many people, she had believed that the Bank’s $1 a day measure was defined in nominal exchange rate terms. In other words, one US dollar in a developing country would go much farther there than in the United States. She was shocked, however, to learn from Professor Reddy’s presentation that this measure is in fact a relative income estimate, meaning that one must imagine a poor person living each day on one US dollar in the United States, and relate that level of poverty to other poor people around the world to understand what the Bank’s poverty figures actual mean. The participant suggested that if the poverty line in the United States is drawn at an income of $10,000 a year, for example, then a person who falls below the Bank’s $1 a day line would be living on an income of $365 a year. The problem with this measure, she explained, is that very few people would actually fall into this poverty category and that the measure is quite arbitrary with little actual meaning.

Professor Reddy agreed, noting that there is a great deal of confusion over the Bank’s definition of poverty, with many believing that the $1 a day line is measured in nominal exchange rate terms when it is actually defined as equivalent purchasing power. This, he argued, makes the Bank’s measurement even less defensible and violates people’s intuition that a poverty measure should refer to real deprivations rather than an arbitrary threshold.

Are statistics futile?

A participant warned against an over reliance on numbers and statistics, arguing that we must first address the poor quality and nature of data. He noted that many statistics are often at best guesstimates and can have a large margin of error, particularly those that address rural areas. Furthermore, the nature of data is often flawed, and national price indices, for example, reveal little about a country’s poverty levels. National economies must be relatively normalized and stable in order to offer an accurate picture of the country’s income level, yet very few poor countries have such economies. The participant believed that we should question poverty statistics and be cautious of their political misuse.

While Professor Reddy agreed with the participant that all statistics suffer from uncertainties, he shares Amartya Sen’s view that one is better off “roughly right than precisely wrong.” Therefore, on matters such as poverty measurements, we must decide which road to take—the skeptical or the hopeful. Whereas the participants’ question reflected a great deal of pessimism about statistics, Professor Reddy stated that while one should not overstate what can be achieved through the use of statistics (the potential political and social consequences of which can lead to substantial distortions in their collection and reporting), we must nevertheless do our best to use them to understand social realities, while remaining vigilant in ensuring their clarity and accuracy.

What obstacles are ahead?

A seminar participant from the United Nations wanted to know what Professor Reddy saw as the main obstacle to fulfilling his and Professor Pogge’s goals for more accurate world poverty measurements: is it a lack of understanding? A political unwillingness? A lack of resources?

Professor Reddy explained that a central problem is a lack of understanding of what data can do and why it is important. Boredom and lack of interest regarding poverty measurements is also a factor. He repeatedly hears the argument that too much money is spent on such efforts and that we would do better to focus our resources directly on the problems at hand. His response to such an argument is that it is very expensive to make mistakes based on a faulty understanding of data and that we should try to avoid such mistakes. Professor Reddy also noted that even economists regularly say to him, “Don’t we all know that the global poverty estimates and the one dollar a day line are nonsense anyway? Surely, none of us ever believed in them!” His answer to this statement is that while economists may not believe in the estimates, the world certainly seems to, and we owe it to the world to strive for more accurate measurements.

How has the Bank responded?

Given the implications of Professor Reddy and Professor Pogge’s critique of the Bank, one participant wanted to know what the World Bank’s response has been to their work. Is there a political strategy that they see as necessary for promoting their study and gaining support?

Professor Reddy referred the participant to www.socialanalysis.org, where a detailed critique of their work by Martin Ravallion (along with their response) is posted. He also stated, however, that we should think of the proposal for a new methodology as a public issue, not simply an issue that concerns one international institution. The public should understand what is at stake and what the issues are. Other institutions besides the World Bank can also potentially play a role in producing more credible estimates, and should begin to work on such efforts.

--prepared by Morgan Stoffregen and Christian Barry

Read More: Poverty, World Poverty

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