World Bank and poverty debates (II): Poverty reduction claims vindicated?

17 June 2008

Two new World Bank working papers have rekindled the debate over how to count the poor, with the Bank asserting that even more people have been brought out of poverty in China than had previously been estimated.

End 2007 came the publication of preliminary recalculations of global economic output excluding differences in domestic prices and currencies using so-called purchasing power parity (PPP) figures (see Update 59). That survey found that prices in China and India were higher than had been previously guess-timated, and therefore the purchasing power of their currencies was lower. Consequently, the Bank shrank its estimate of China’s output by a remarkable 40 per cent, and India’s by over a third. However, the meaning of these revisions for assessing the effectiveness of poverty-reduction efforts awaited further research.

In a May working paper, Bank researchers Ravallion, Chen and Sangraula converted national poverty lines (themselves based on new data) to a common currency using the new set of PPP figures. This analysis showed that the Bank’s famous ‘$1 a day’ absolute poverty line (using the 1993 baseline and old PPP figures) was no longer representative of the poorest countries. It was too low. They have proposed a new international poverty line of $1.25 a day (using both the new baseline of 2005 and new PPP figures).

this means that 553 million Chinese people were lifted out of poverty, compared with the old estimate of 509 million

Their other interesting related finding was that relative poverty is becoming a more important concern in an increasing number of countries.

The next step for the researchers was to evaluate what all of this means for global poverty reduction efforts. They started by asking the question for the key country in the debate – China. Under previous estimates (using the $1 a day line), poverty had fallen from 64 per cent in 1981 to 10 per cent in 2004; a fall of 54 percentage points. Using the new $1.25 line, poverty fell from 87 per cent in 1981 to 34 per cent in 2004; a similar decline.

However, the authors argue that this last estimate understates Chinese poverty reduction efforts due to the sample bias in the 2005 price survey. The Chinese government only allowed the survey to be conducted in eleven cities; Ravallion and Chen argue that “the prices obtained are unrepresentative of China’s rural areas, where prices are appreciably lower for many goods, especially food for which the poor tend to have the highest budget share”. Attempting to adjust for the sample bias, they find that poverty actually fell from 84 per cent in 1981 to 22 per cent in 2004; a fall of 62 percentage points. This would mean that 553 million people had been lifted out of poverty, compared with the old estimate of 509 million.

Future work will use the new data and poverty lines to estimate aggregate poverty measures for the rest of the developing world.

Behind the headline figures, debate continues to bubble over whether or not either the old or new figures tell us very much about changes in absolute poverty. Further complicating matters are debates over whether or not the Bank can take credit for having influenced Chinese policy reforms. One thing is for sure – with rising commodity prices putting pressure on those items that most directly affect the poor, this debate is far from finished.