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World bank poverty figures: what do they mean?

Adam Parsons
15 September 2008

The World Bank's revised international poverty line of $1.25, which on many counts reveals a negligible difference in reducing poverty since 1981, raises legitimate questions about the assumed success of globalisation.

An economic catastrophe occurred on August 26th 2008 that was quickly forgotten across the media: an extra 430 million people were classified overnight as absolutely poor. The cause was no tsunami or natural disaster, but simply the revisions of World Bank statisticians who adjusted the international poverty line from $1.08 to $1.25 a day.

Contradicting the Bank's celebrated decline in extreme poverty figures last year to less than a billion for the first time, the new measurements revealed a far less optimistic outlook - a total of 1.4 billion poor people in 2005,[1] revised from 986 million in 2004.[2] A margin of error, in other words, of 42 percent, defining a quarter of the developing world as living without sufficient means for human survival.

Despite this, the World Bank keenly stressed that poverty eradication continues to improve, as reflected in the incongruous title of their report: "The Developing World Is Poorer Than We Thought, But No Less Successful in the Fight against Poverty."[3] It does not mean that the plight of the poor has worsened, we were told, only that the plight is now better understood.[4] The lack of almost any critical news coverage implied that the rest of the world was inclined to agree. Does it really matter, after all, where the line is drawn in the sand, or how the number crunchers add up their figures? Is the question of poverty measurement not merely academic?

In fact, the revised figures are of crucial importance to not only the cause for global justice, but also our understanding of the world over the past quarter century of globalisation. The World Bank, as the near exclusive provider of global poverty figures, uses the statistics to support its policies of deregulation, privatisation, market liberalisation, and increased economic growth through free trade as the overruling means to combating poverty. It may acknowledge that inequality has grown sharply since globalisation and the current food crisis will be long-lasting, but so long as poverty is on a downward trend and the Millennium Development Goals remain in sight, then its continued defence of neoliberal policies can be vindicated.

For several years, however, several academics have challenged the methodology of the Bank's statistics and claimed that the figures are underestimated by up to 40 percent, and may not prove that global poverty is being reduced at all.[5] The new poverty figures, which on many counts reveal a negligible difference in reducing poverty since 1981 despite the World Bank's positive bias, raise legitimate questions about the assumed success of globalisation.

History of a dollar a day

The history of the dollar a day definition of global destitution made its debut in the 1990 World Development Report, which was largely a discovery of one of the Bank's leading researchers, Martin Ravallion, and two co-authors who noticed that national poverty lines clustered around the dollar-a-day mark for many developing countries. The infamous dollar a day measure was duly christened, previously defined by 1.2 billion people living in absolute poverty in 1981 - now revised to 1.9 billion people according to the new estimates, or one in two of the developing world population at the time. In the years since, periodic World Development Indicators released by the Bank have shown an apparent reduction in both the overall number and percentage of poor people worldwide.

Since the Millennium Summit in 2000 that set the development goal of halving the proportion of people suffering from extreme poverty by 2015 (according to 1990 base levels), these statistics are used as a benchmark for the world's progress in eradicating the most severe incidences of destitution. For this reason alone the importance of the figures cannot be understated, making the lack of attention given to the enormously revised poverty estimates deeply surprising.

Controversy over global poverty measurement peaked in 2002 when an economist-philosopher duo in the United States, Sanjay Reddy and Thomas Pogge, claimed that the Bank's income-based calculations used such faulty methodology that precise measurements could not be concluded. The three conceptual errors cited in their popular critique, How Not to Count the Poor, ranged from the straightforward to the more obscure. Firstly, income poverty is only one aspect of deprivation, and other factors such as under-nutrition, access to health services and a minimum set of basic needs should be accounted for. Relying on income poverty estimates alone, they wrote, results in a "meaningless poverty line".

Secondly, the Bank's purchasing power parity (PPP) statistics (which use a basket of goods to compare purchasing power across countries) are based on average prices of all commodities, including luxuries like cars or VCRs, that fail to reflect the actual purchases of poor people. Finally, the two academics finely detailed the limited data used and the inconsistencies of country to country comparisons that conveyed a "false sense of precision" that world poverty is decreasing. They emphasised how concerned they were that, considering the magnitude of these conceptual flaws, the money-metric or income-based approach to defining poverty had endured for then 15 years.[6]

Six years later in 2008, the figures still hold an almost uncontested authority with governments, NGOs and the popular media who frequently cite the estimates as evidence that neoliberal policies and globalisation have reduced global poverty. This makes it doubly surprising that the Bank's spin on the new figures have been so readily accepted and hardly questioned. The figures for 2005 at the $1.25 baseline, no matter how the statistics are tailored, paint a dismal picture of mass destitution; 1.4 billion people living in extreme poverty is equivalent to more than four times the entire population of the U.S., an inconceivable number to envisage.

Poverty doubles in Africa

In Africa, the number of poor people nearly doubled over the period of globalisation, from 200 million in 1981 to 380 million in 2005, with still half the population of sub-Saharan Africa living below the poverty line. In India, the country with the largest number of extremely poor however defined, more than 4 out of 10 Indians - or 41.6 percent of the entire population - survive on less than $1.25 a day.[7] When compared to the previous estimate of 24 percent of the population, it meant that 200 million people living in absolute poverty effectively fell through the cracks of the World Bank's headcount. Revisions to China's figures were similarly dramatic, up to 207 million from a previous 130 million people in extreme poverty.

The example of China, which accounts for nearly all the world's reduction in extreme poverty in absolute terms, remains a subject of controversy with the new figures. It is undoubted that China's ‘economic miracle' of giant growth rates resulted in a remarkable pace of poverty reduction, but a certain perspective is required. For a start, both India and China declined to participate in most of the earlier price surveys on a sample of goods and services (used to measure how much the equivalent of a dollar can buy in different countries). China refused to participate in any of these surveys until 2005, leading to a large element of guesswork in past figures for such an all-important economy, and hence a muddying of the global picture. Even if the figures had been accurately approximated, it is doubtful that the Bank could take any credit for having influenced Chinese policy reforms. As former World Bank Chief Economist Joseph Stiglitz acknowledged during the poverty measurement debates of 2003, China's growth and inequality reduction has brought the whole world up - but China has not followed neoliberal policies as prescribed by the World Bank.[8]

When China is therefore removed from the equation to attain a more accurate picture, the most damning conclusion from the new figures becomes clear: the number of poor in the developing world has remained almost the same, at about 1.2 billion, over the period of globalisation between 1981 and 2005.[9] This fact alone places the Bank's hailing of a dramatic reduction in poverty over 25 years , from 53 percent in 1981 to 26 percent in 2005, into a different light. Progress in poverty reduction outside of China, when accounting for the overall number of poor, has in fact been negligible. At the very least, this calls into question the Bank's optimism in declaring that "there has been strong - if regionally uneven - progress toward reducing overall poverty."[10] At most, it underlines the fact that globalisation has been largely ineffective at either reducing the burgeoning ranks of the world's poorest of the poor, or including this vast swathe of the global population into the mainstream economy.

The World Bank has already undertaken two revisions of the base year for calculating PPP rates (from 1985 to 1993, and now to 2005), wreaking havoc to its poverty estimates each time. When employing the aggregate headcount, previous World Development Reports revealed that global poverty increased[11] After the Asian Development Bank (ADB) released their new poverty line the day after the Bank's new estimates, the fallibility of statistical analysis was poignantly illustrated by the example of India. According to the ADB, the number of poor in India is 622 million for 2004-05,[12] compared to the Bank's estimate of 456 million, and the Indian planning commission's national estimate of 301 million for the same base year.

Missed goals on poverty

The assumption that the Millennium Development Goals on poverty and hunger will still be reached, as emphasised by the latest development indicators, is now contradicted by other studies publicised by the Bank. Following the crisis of food and energy price inflation, World Bank President Robert B. Zoellick reported that another 100 million people in low-income countries could be pushed deeper into poverty[13] - a humanitarian emergency that the Bank recently reported will continue into the foreseeable future.[14] This means that an extra 530 million people in total - well over half a billion - are now thought to be struggling for survival compared to previous estimates. On current trends, at least a billion people will still live below the $1.25 a day line in 2015, including a third of the world's poor who will live in Africa.[15] Only China is currently on target to achieve the goals, admits the Bank, while the rest of the developing world is not.[16] According to other estimations, this is an understatement: without urgent action the world could see hunger doubling instead of halving by 2015.[17]

This cursory analysis of the Bank's statistics is meant only to emphasise an obvious and, since the release of the widely uncriticised new data, a remarkably neglected point: that the World Bank's poverty figures are no longer indicative of any real improvement in the plight of the poor - even by their own measures. As the latest figures graphically illustrate, almost half the world - over three billion people - live on less than $2.50 a day. Altogether, the Bank reports no change in the number of people living below $2 a day, at around 2.5 billion between 1981 and 2005. And it is unlikely, they warned, that the number of absolute poor will drop below one billion again before 2015. The distinction between the haves and have-nots could not get any clearer.

If Reddy and Pogge's criticisms are taken into consideration, the extent of extreme poverty only becomes more macabre. The Bank's new World Development Indicators are no more reliable than the last estimates, says Reddy, despite their reassurance of "methodological and operational improvements". The revised international poverty line of $1.25 is still far too low to cover the cost of purchasing basic necessities, he argues, and the Bank's use of PPP measurements are made inappropriate by substantially understating the relative cost of purchasing the goods which are needed to escape poverty. There remains a lack of a clear criterion for identifying the poor, he says, and the features that supposedly constitute improvements in the Bank's estimates lead only to increased confusion.

Unfit for use

Reddy concludes that the enormous fluctuations in the Bank's poverty figures, of a kind that would be unacceptable for most economic statistics, makes them unfit for use.[18] The new reality of poverty as officially defined by the Bank already seems untenable, but if Reddy and Pogge are correct in assuming a ‘worst case' forty percent underestimation in the figures, then a figure of 2.2 billion people - or about a third of the world population living in absolute poverty - would seem unimaginable. It is hard not to agree with their conclusion made in 2002 that these basic omissions, now more than 18 years old, are indicative of the low priority that has hitherto been attached to the global problem of persistent severe poverty.

Criticising the existing international poverty line is not to argue that such a measure should be done away with. The questions of how many poor people there are in the world, how poor they are, where they live, and how these facts are changing over time are of major importance from any moral, social or economic standpoint. Reddy and Pogge have therefore long stressed the need for an alternative methodology, one that relates to the possession of local resources sufficient to achieve basic human needs.[19]

Their endorsement of a ‘capabilities approach' to defining poverty includes other important sources of information about people's standard of living, such as health status, educational attainments, protection from the elements and minimal healthcare. Such a definition would give the international poverty line a clear and plausible meaning, as well as provide a uniform standard for adjusting national poverty lines that are consistent with the global standard.[20]

The World Bank's disregard of its basic deficiencies in analysing poverty is ultimately not surprising. After all, the Bank makes no disguise of its uncompromising belief in economic growth through unfettered markets as the strongest antidote to poverty, ignoring all signs since the 1980s that wealth has failed to trickle down to the poorest of the poor. More surprising, however, is the lack of external scrutiny of the Bretton Woods institutions in the formulation and usage of global poverty figures, and the lack of criticism on what those figures reveal.


[1] Shaohua Chen and Martin Ravallion. The Developing World Is Poorer Than We Thought, But No Less Successful in the Fight against Poverty (The World Bank Development Research Group, August 2008)

[2] World Development Indicators 2007 (World Bank, April 2007)

[3] Shaohua Chen and Martin Ravallion (2008), op. cit.

[4] The Bottom 1.4 Billion (The Economist, 28 August 2008)

[5] See Sanjay G. Reddy & Thomas W. Pogge, 2005.  "How Not to Count the Poor" (Colombia University, version 6.2.3. 29 October)

[6] Ibid.

[7] Chen and Ravallion 2008, see table on p. 31.

[8] Quoted from a poverty reduction debate held in New York by the Initiative for Poverty Dialogue (IPD).  See; Sara Burke. Stats on Poverty? Or the Poverty of Stats? (Glovesoff.org, 6 April 2003) Accessed September 2008 <http://www.glovesoff.org/ringside_reports/poverty_040603.html>

[9] This is when population growth is accounted for. This fact was emphasised in one of the World Bank's press releases - New Data Show 1.4 Billion Live On Less Than US$1.25 A Day, But Progress Against Poverty Remains Strong (World Bank, 26 August 2008)

[10] World Bank Updates Poverty Estimates for the Developing World (World Bank press release, 26 August 2008)

[11] Sanjay G. Reddy and Camelia Minoiu. Has World Poverty Really Fallen? (Review of Income and Wealth Series 53, Number 3, September 2007) see table 8, p. 500.

[12] ADB Study Offers New Way to Measure Poverty in Asia (ADB press release, 27 August 2008).

[13] Food Price Crisis Imperils 100 Million in Poor Countries, Zoellick Says (World Bank press release, 14 April 2008)

[14] Rob Taylor. Food crisis and silent famine to continue: World Bank (Reuters, 3 September 2008)

[15] Shaohua Chen and Martin Ravallion. The Developing World Is Poorer Than We Thought, But No Less Successful in the Fight against Poverty (The World Bank Development Research Group, August 2008)

[16] Ibid, p. 20.

[17] World Bank and IMF Emergency Loans: A Cure or a Curse for the Food Crisis? (Eurodad, 17 June 08)

[18] Sanjay G. Reddy. The World Bank's New Poverty Estimates - Digging Deeper into a Hole (Socialanalysis.org, accessed September 08) <http://www.columbia.edu/~sr793/response.pdf>

[19] For more information, see Thomas Pogge. A Consistent Measure of Real Poverty: A Reply to Ravallion (International Poverty Centre, Australian National University, One Pager no. 54, May 2008)

[20] For more information, see the conclusion in Thomas W. Pogge and Sanjay G. Reddy. Unknown: The Extent, Distribution, and Trend of Global Income Poverty (socialanalysis.org, Version 3.4, 26 July 2003) <www.socialanalysis.org>

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