It is estimated that 731 million people live in extreme poverty – this is based on household survey data which indicates that their daily consumption is less than the international poverty line (IPL), currently valued at $1.90 in 2011 purchasing power parity (PPP) US dollars. Why $1.90 per day? And, is that really enough to live a life free of extreme poverty?
One part of the answer to these questions involves examining how the IPL was initially constructed. The value of the IPL is derived from national poverty lines – lines which reflect social and economic assessments made in each country of how much someone needs in order to meet their basic needs and live a life free of poverty. The $1.90 value is an average of national poverty lines from 15 very poor countries. The inference is that if $1.90 defines the cost of basic needs in some of the poorest countries of the world then certainly someone living on less than this must be viewed as poor regardless of where they live.
In 1990, when the decision was made to base the IPL on national poverty lines from the poorest countries of the world, 60 percent of the global population lived in low-income countries. An average value of national poverty lines from low-income countries was very meaningful for a large portion of the global population. But as the world has grown richer, less than 10 percent of the global population now live in low-income countries (Fantom and Serajuddin, 2016). Because the vast majority of the total population of the world and the majority of global poor now live in middle- and high-income countries, it is reasonable to ask if the yardstick for measuring poverty should be the same for all countries of the world. Or, in other words, is $1.90 a relevant standard for measuring poverty in richer countries? It is clearly the case that countries define basic needs differently.
The figure above plots national poverty lines by economic development. The pattern is clear. As countries get richer, their assessment of basic needs increases in value. Fixing basic needs to be the same across all countries ensures equality in the bundle of goods across countries, and this is one important way of counting the poor across countries. But, equality of the consumption bundle across countries may not result in the same level of wellbeing. Basic functioning may be costlier in some countries relative to other countries, and fixing consumption to be constant could well mean an unequal treatment of people across the world in terms of their wellbeing.
One way to think about this is to say that a poverty line that keeps functioning the same across countries may result in a poverty line with varying levels of consumption. For example, participating in the labor market may be viewed as a minimal social functioning; the cost of this functioning may require only clothing and food in a poor society, while in a richer society it may require access to transportation, communication such as internet or cell phone, in addition to clothing and food.
To address this concern, the World Bank has introduced a new set of poverty lines that are tailored to the specific level of economic development of each country and are designed to measure “societal poverty”. First, the societal poverty line is never less than the IPL of $1.90. If someone suffers from extreme poverty, then they also suffer from societal poverty. But, this new measure also defines someone as suffering from societal poverty if they live on less than $1 plus half of what the median person in their country consumes. As countries get richer and median consumption levels increase, the societal poverty line (SPL) increases in value. For example, in a country where the median level of consumption per person is $3.00 per day, the SPL is $2.50, ($1 + 0.5*$3.00).
This relationship between the SPL and the median consumption level within the country is based on observing how countries increase the value of their national poverty line as they get richer. The SPL essentially reflects typical assessments of basic needs for countries at different levels of economic development. It is a poverty line that is as relevant for very rich countries as for very poor countries.
Using this standard, the estimated societal poverty headcount is approximately 2.1 billion people in 2015. This count is almost three times more than the global count of people living on less than $1.90 per day (estimated at approximately 731 million in 2015). The charts above display the change over time in both the count and the rate of societal poverty, as measured by the SPL; and similarly displays the count and rate of absolute extreme poverty as measured by the IPL of $1.90 per day. The first striking aspect is that while the total count of people living in extreme poverty has declined rapidly, the number of people who are identified as societally poor has largely stayed the same over the last 35 years.
In contrast, the percentage of the global population that are societally poor has fallen steadily since 1990, but still at a much slower rate than the decline of extreme poverty. This divergence in the rate of decline amplifies the distinction between the two measures. In 1990, societal poverty was estimated to be about 8 percentage points more than the extreme poverty rate; by 2015, the gap in terms of percentage point difference more than doubled in size.
In a growing global economy, this divergence is an expected outcome, and the magnitude of the change (in the difference of the rates) over the decades highlights the distinction in the informational content in both measures. In the early 1980s the societal poverty rate and extreme poverty rate were largely similar concepts since most of the world lived in countries with low median national consumption where the IPL and SPL are either identical or very close in the value. They largely portrayed the same picture of poverty. But, now as very few countries have high rates of extreme poverty, the SPL is capturing significantly more information about the distributional aspects of growth and who is poor when assessed by standards in accord with the economic development of their country.
Fantom, Neil James; Serajuddin, Umar. 2016. The World Bank's classification of countries by income. Policy Research working paper; no. WPS 7528. Washington, D.C. : World Bank Group.
Jolliffe, Dean and Prydz, Espen Beer. 2017. Societal poverty : a relative and relevant measure. Policy Research working paper; no. WPS 8073, Washington, D.C. : World Bank Group. Forthcoming in World Bank Economic Review; partial funding from the Knowledge for Change Program (KCP) and the UK Department for International Development (“Measuring Poverty and Shared Prosperity in a Changing World”) is gratefully acknowledged.