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The Mismeasure of Poverty

ROME – In early 2012, outgoing World Bank President Robert Zoellick announced that the Millennium Development Goal of halving the global poverty rate relative to its 1990 level had been achieved in 2010 – five years ahead of schedule. But many analysts have challenged estimates that rely on the World Bank’s current poverty line, raised in 2008 from $1 to $1.25 per day, in purchasing power parity (PPP) terms.

Critics argue that, for methodological reasons, the PPP-based poverty line misrepresents the prevalence of poverty worldwide. For example, the three rounds of the World Bank’s International Comparison Program that have been conducted so far have each defined the poverty line differently, underscoring the weakness of the current measure. In fact, taking into account inflation in the United States, the poverty line should have been raised to $1.45 per day in 2005.

Improving global poverty estimates – the World Bank’s extend over three decades, beginning in 1981 – requires overcoming three major problems: insufficient survey data, flawed survey execution, and faulty PPP conversions. Unfortunately, the World Bank’s approach has evaded these issues or addressed them inadequately.

First, many countries lack survey data showing how income and consumption are distributed among their citizens. The World Bank avoids this problem by assuming that the poverty rate of any country without such data matches the region’s average. But this approach has led to North Korea being assigned essentially the same poverty rate as China, even though the former regularly receives food aid from the latter.