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Social Welfare Functions and Development pp 229–251Cite as

Palgrave Macmillan

Global Poverty Counts

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Abstract

How many people are considered poor in the world? This question may seem simple, but drawing a global poverty line demands an intricate analysis of subsistence needs, relative prices, and purchasing power that vary across countries over time. In 2015, the World Bank refined its estimates of the purchasing power parity (PPP), which is a currency conversion for comparing the size and price levels of economies, by updating the base year from 2005 to 2011. The release of the 2011 PPP has sparked debates about how a new global poverty threshold should be established. This chapter aims to determine a new global poverty threshold based on the 2011 PPP.

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Notes

  1. 1.

    See Ferreira et al. (2015).

  2. 2.

    An earlier version of this chapter discussing the equivalent poverty lines was shared with some economists at the World Bank in early 2015.

  3. 3.

    To be precise, it was actually $1.02 a day.

  4. 4.

    We are grateful to Espen Beer Prydz of the World Bank for providing us with consumer price indices for 101 countries. We would also like to acknowledge that Mr. Prydz helped clarify many issues relating to the new global poverty line of $1.90.

References

  • Bluhm, R., Crombrugghe, D., & Szirmai, A. (2014). Poor trends—The pace of poverty reduction after the millennium development agenda (MERIT working papers 006). Maastricht: United Nations University–Maastricht Economic and Social Research Institute on Innovation and Technology.

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  • Deaton, A. (2010). Price indexes, inequality, and the measurement of world poverty. American Economic Review, 100(1), 1–34.

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  • Ferreira, F., Chen, S., Dabalen, A., Dikhanov, Y., Hamadeh, N., Jolliffe, D., Narayan, A., Prydz, E., Revenga, A., Sangraula, P., Serajuddin, U., & Yoshida, N. (2015). A global count of the extreme poor in 2012: Data issues, methodology and initial results (Policy research working paper 7432). Washington, DC: World Bank.

    Book  Google Scholar 

  • Jolliffe, D., & Prydz, E. (2015). Global poverty goals and prices: How purchasing poverty matters (Policy research working paper 7256). Washington, DC: The World Bank.

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  • Pogge, T. (2010). Politics as usual: What lies behind pro-poor rhetoric. Cambridge: Polity Press.

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Author information

Authors and Affiliations

  1. Sydney, New South Wales, Australia

    Nanak Kakwani

  2. Asian Development Bank, Manila, Philippines

    Hyun Hwa Son

Authors
  1. Nanak Kakwani
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  2. Hyun Hwa Son
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Appendices

Appendix 1

The equivalent poverty lines based on 2005 and 2011 PPP are derived in this section. If the extreme poverty line in 2005 at 2005 PPP was $1.25 per person per day, then what would be the equivalent poverty line in 2011 at 2011 PPP? The following definitions are presented below:

  • PPP(2005): Purchasing power parity in 2005

  • PPP(2011): Purchasing power parity in 2011

  • PLLOCAL(2005): Poverty line in local currency in 2005

  • PLLOCAL (2011): Poverty line in local currency in 2011

  • CPI(2005): Consumer price index in 2005

  • CPI(2011): Consumer price index in 2011

  • PLUS (2005, 2005 PPP): Poverty line in U.S. dollars in 2005 PPP

  • PLUS(2011, 2011 PPP): Poverty line in U.S. dollars in 2011 PPP

The following relationships will hold:

$$ P{L}_{LOCAL}(2005)=P{L}_{US}\left(2005, 2005 PPP\right)\times PPP(2005) $$
(A8.1)
$$ P{L}_{LOCAL}(2011)=P{L}_{US}\left(2011, 2011 PPP\right)\times PPP(2011) $$
(A8.2)

Adjusting the poverty lines in local currency for inflation in the country gives:

$$ P{L}_{LOCAL}(2011)=P{L}_{LOCAL}(2005)\times \frac{CPI(2011)}{CPI(2005)} $$
(A8.3)

Substituting (A8.1) and (A8.2) into (A8.3) gives:

$$ \begin{array}{l}P{L}_{US}\left(2011, 2011 PPP\right)\\ {}=P{L}_{US}\left(2005, 2005 PPP\right)\times \left[\frac{PPP(2005)}{PPP(2011)}\right]\times \left[\frac{CPI(2011)}{CPI(2005)}\right]\end{array} $$

This equation gives the two poverty lines, PL US (2005, 2005 PPP) and PL US (2011, 2011 PPP), which are equivalent because they imply the same real poverty lines in local currency in 2005 and 2011. If PL US (2005, 2005 PPP) is set equal to $1.25, then the equivalent poverty line in 2011 in 2011 PPP will be given by

$$ PL(2011)=1.25\times \left[\frac{PPP(2005)}{PPP(2011)}\right]\times \left[\frac{CPI(2011)}{CPI(2005)}\right] $$
(A8.4)

PL(2011) is the international poverty line in 2011, which provides the same poverty rates as $1.25 a day in 2005. It is noted from (A8.4) that PL(2011) is not unique for all countries, and varies with inflation rates in the country between 2005 and 2011, as well as PPP rates in 2005 and 2011. A country with a high inflation rate will give a higher poverty line in 2011. Similarly, if the PPP exchange rate for the country appreciates in 2011 relative to that in 2005, the poverty line will also be higher. Therefore, there exists no single equivalent poverty line in 2011 PPP as is generally implied.

PPP(2011) is the PPP exchange rate in 2011, which has recently been estimated by the International Comparison Program. If PPP(2011) were not available, then one could still calculate the exchange rates using the 2005 PPP as

$$ EX\left(2011, 2005 PPP\right)=PPP(2005)\times \left[\frac{CPI(2011)CP{I}_R(2005)}{CPI(2005)CP{I}_R(2011)}\right] $$
(A8.5)

where CPI R (2005) and CPI R (2011) are the consumer price indices for the reference country (U.S.) in 2005 and 2011, respectively. The exchange rate in 2011 in a country is determined by the relative inflation rates in the country to that of U.S. Equating this exchange rate to PPP(2011) equations (A8.4) and (A8.5) yield

$$ PL(2011)=1.25\times \left[\frac{CP{I}_R(2011)}{CP{I}_R(2005)}\right] $$

which shows that the poverty line in 2011 that is equivalent to the poverty line of $1.25 depends on the inflation rate in the U.S.: the larger the inflation rate, the greater the poverty line in 2011 will be. There has been a suggestion to calculate the equivalent poverty line based on the rate of inflation in the U.S.A. But this method is problematic because it estimates poverty counts only under the highly restricted assumption that the 2011 PPP conversion rates are equal to the 2005 PPP rates when adjusted for the relative inflation rates of comparator countries to the U.S.

Appendix 2

Table A8.1 Equivalent poverty lines in 2011 PPP corresponding to $1.25 in 2005 PPP
Full size table
Table A8.2 The percentage and number of poor in developing world in 2011
Full size table

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Kakwani, N., Son, H.H. (2016). Global Poverty Counts. In: Social Welfare Functions and Development. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-58325-3_8

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  • DOI: https://doi.org/10.1057/978-1-137-58325-3_8

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  • Publisher Name: Palgrave Macmillan, London

  • Print ISBN: 978-1-137-58324-6

  • Online ISBN: 978-1-137-58325-3

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