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The right poverty measure for post-2015
This is part of a series of blogs that debate how a post-2015 framework ought to measure poverty - find out more.
Stephan Klasen is professor of development economics and empirical economic research at the University of Göttingen, where he also heads the Ibero-American Institute. Previously he was professor of economics at the University of Munich as well as a fellow at King's College in Cambridge and an economist at the World Bank in South Africa.
A proposal for internationally coordinated national poverty measurement
With the High-Level Panel due to report soon on the post-2015 development framework, the debate about goals, targets and indicators will surely intensify. One of the key issues will be how poverty should be considered in a world following the millennium development goals (MDGs). I will argue here that there is much value in retaining an income-based poverty measure as a target (and indicator), but that we should move away from the $1.25 a day measure, towards a process of global income poverty measurement based on internationally coordinated national poverty measurement.
Why a separate income poverty target?
It is widely agreed by now that poverty is a multidimensional phenomenon that is imperfectly captured by incomes. The multidimensional poverty index (MPI) also now offers a measure of multidimensional poverty available for over 100 developing countries that is roughly comparable and has considerable merit. So why not make poverty reduction the central goal and use the MPI to monitor it?
In my view, one of the great successes of the current MDGs is that they reflect a multidimensional view of poverty in a disaggregated, dashboard approach. The overall goal of the MDGs was sustainable poverty reduction, but there was a dashboard of goals to capture the various dimensions of poverty separately. This not only made the goals very easy to understand, monitor and communicate; it also largely avoided an essentially fruitless discussion about which of these goals should be more important (they are all important) and the acceptable marginal rates of substitution between goals.
Just imagine the MDGs had planned ‘to increase the Human Development Index (HDI) by 30%’. We would have spent years arguing over the precise formulation of the HDI while most of the public would have been left wondering what this was all about. The same would apply if we made the MPI the main indicator for poverty reduction. It would divert attention from doing something about the individual components (health, education and important aspects of living standards) and instead lead to discussions about indicators, cut-offs, weights and aggregation rules.
One could also think about replacing the income poverty target of the MDGs with the MPI. But that would also not be useful. The MDGs already reflect a multidimensional view of poverty, including health, education, water and sanitation access, and the like. Adding these dimensions again in the poverty measure amounts to double-counting. And given the importance of income poverty in national poverty measurement in many countries of the world, it is surely justified to have one target in a multidimensional post-2015 framework focusing on that important aspect.
So, which income poverty indicator?
Currently, income poverty measurement is based on the $1.25 international poverty line, adjusted for purchasing power parity (PPP) across the world. While this method of calculating poverty using an internationally comparable line has been a significant advance enabling global comparable poverty measurement for the first time, there are three significant problems with this approach for use in national and international poverty monitoring. First, as this is an international poverty line, it has little relation to existing national poverty lines. As a result, the resonance of the international poverty line as a tool to monitor and analyse poverty in individual countries has been limited. Instead countries rely largely on their own income poverty lines, which have more resonance and legitimacy.
A second problem relates to the updating of the international poverty line and the associated PPP comparisons over time. With each new PPP round, the international poverty line has been updated (from $1.02 in 195 prices to $1.08 in 1993 prices, which was used for the first MDG target, to $1.25 in 2005 prices). In the case of the last update, both the country sample of national poverty lines to estimate the international poverty line, as well as the PPPs, was changed. After updating the line, the entire time series of poverty measurement is then changed (going all the way to 1981), using the new poverty line and the new PPP exchange rates.
As has been noted by many this update led to a substantial upward revision of the number and share of poor people in the developing world (from around 29 per cent in 1990 using the $1.08 line, to 41 per cent in 1990 using the $1.25 line, with similar discrepancies in other years). The effect on measured trends in poverty reduction has been small, but there is a huge uncertainty about the levels of poverty in the world as well as the regional distribution. It is also not obviously clear which international poverty line and which PPP adjustment is ‘better’.
While there are good arguments to believe that the 2005 PPP process was superior compared to 1993 in many regards, it had its own biases; moreover, even it is the best way to generate comparable prices and poverty lines for 2005, it is unclear whether it generates comparable prices and poverty lines for 1990, let alone 1981. After all, the 2005 PPPs only try to ensure comparable prices across the world in 2005 but say nothing about comparable prices in the past (or future). We are now eagerly awaiting the results of the 2011 international comparison of prices, which will generate a new international poverty line in 2011 PPPs, and also lead to recalculations of poverty across the world today and as far back as 1981. But the uncertainties generated by these procedures are immense, so it is well worth thinking about alternatives.
One plausible alternative, related to a suggestion by Sanjay Reddy, is to define a global goal of reducing income poverty but base it on an internationally coordinated and consistent measurement of poverty at the national level. Methods to set the poverty line in each country would be coordinated internationally (for example employing the widely used ‘costs of basic needs’ method), but levels and trends of poverty would then be calculated at the national level using national currencies. Global poverty numbers (and shares) would simply be the sum of the poor in each country, calculated using an internationally comparable method.
This approach would have two immediate advantages. First, it would obviate the need to rely on PPP comparisons, with all the uncertainties and fluctuations this would entail. Second, national and international poverty measurement would be closely linked, with national poverty levels and trends being reflected immediately in the international numbers.
Lastly, one should think harder about whether a very low absolute poverty line is still relevant for the world we live in now. The $1.25 a day poverty line is increasingly irrelevant for the majority of people in developing countries whose poverty lines are substantially above this line. Incorporating a ‘relative’ element into the setting of poverty lines across the world, either by following the proposition by Martin Ravallion and Shaohua Chen of a ‘weakly relative’ international poverty line, or by systematically including such considerations in the setting of national poverty lines, will be a fruitful way forward for international income poverty measurement.
Other contributions to our debate on measuing poverty so far include Martin Ravallion on two goals for fighting poverty and Lant Pritchett on the case for a high global poverty line.