World Bank Corrects Global Poverty Statistics, Increasing Absolute Number

The World Bank last week released new figures – reflecting new and improved methodology – on the number of people in poverty around the world.  The effect was to increase the number from roughly a billion people to something like 1.4 billion.  The Economist explains:

IN APRIL 2007 the World Bank announced that 986m people worldwide suffered from extreme poverty—the first time its count had dropped below 1 billion. On August 26th it had grim news to report. According to two of its leading researchers, Shaohua Chen and Martin Ravallion, the “developing world is poorer than we thought”. The number of poor was almost 1.4 billion in 2005.

This is not a case of a sudden upwelling of newly poor people, but rather a change in methodology and an improvement in measurement techniques:

This does not mean the plight of the poor had worsened—only that the plight is now better understood. The bank has improved its estimates of the cost of living around the world, thanks to a vast effort to compare the price of hundreds of products, from packaged rice to folding umbrellas, in 146 countries. In many poor countries the cost of living was steeper than previously thought, which meant more people fell short of the poverty line.

Ms Chen and Mr Ravallion have counted the world’s poor anew, using these freshly collected prices. They have also drawn a new poverty line. The bank used to count people who lived on less than “a dollar a day” (or $1.08 in 1993 prices, to be precise). This popular definition of poverty was first unveiled in the bank’s 1990 World Development Report and was later adopted by the United Nations (UN) when it resolved to cut poverty in half by 2015.

The researchers now prefer a yardstick more typical of the 15 poorest countries that have credible poverty lines. By this definition, people are poor if they cannot match the standard of living of someone living on $1.25 a day in America in 2005. Such people would be recognised as poor even in Nepal, Tajikistan and hard-pressed African countries such as Uganda. But for those who still think a “dollar a day” has a better ring to it, the authors also calculate the number of people living on less than that at 2005 prices (see table).

There are still methodology questions here – for example, are the buying patterns of the poor the same as those of the median consumer?  Critics of the (new) methodology note that the poor buy in smaller quantities, and so might wind up buying at higher prices at ‘super-retail’ rather than in cheaper bulk, even compared to ordinary consumers.  Interestingly, a study by the Asian Development Bank found that in a significant number of countries, the poor in fact manage to buy ‘smarter’ and so pay less.  But not in all.  And the new numbers do not yet reflect global price inflation in commodities such as food and fuel; inflation, it is now pretty widely understood, is a tax on the poor first of all, because they are captive to two things: the present (because they do not have the income to be able to hedge into the future) and cash (not being able to utilize the financial instruments by which other people hedge against declines in the value of money).

Are there policy implications in all this?  The New York Times, in an editorial today, suggested several.  One is that the new study 

should also serve as a jarring reminder to the leaders of the world’s much-touted new economic powers — India and China — about the inequities growing amid their growing wealth. Forty-two percent of India’s people live below the World Bank’s poverty line, as do 16 percent of China’s.

Still, one might note that the fact that only 16 percent of China’s population is below that poverty line is itself an astonishing thing.  The inequities of distribution – partly class but also geographic within China and India, as the demographer Nicholas Eberstadt has pointed out – are a potent source of social strife, the sort of strife that could undo much of the economic growth.  However, the NYT also notes that

The new data confirm the primary role that economic growth must play in lifting millions out of poverty. Fast growth slashed the number of Chinese living in extreme poverty by three-fourths in less than 25 years. Achieving broad-based growth will not be easy.

On the one hand, that is, the Times agrees that economic growth must play the primary role in reducing poverty.  On the other hand, it then turns and says, by way of prescription, that the industrialized countries must be “shamed” into living up to their development aid commitments:

There’s still a big supporting role for rich countries. Last year, development aid from the Group of 8 industrialized nations amounted to $62 billion — far below the $92 billion that was promised to be delivered by 2010. We hope the World Bank’s new poverty count finally shames the Group of 8 into keeping that promise.

Therein lies a problem.  It is, as the Times acknowledges, a balancing act: private investment is highly unlikely by itself to save the poorest African countries. But the fundamental reason for that is that private investment is unlikely to go there in the first place, because the institutional setting is so disastrous for recouping investment, let alone a return.i It would be a splendid thing if development aid could bridge the institutional gap to help create public institutions capable of providing a sufficient governance environment to encourage private investment – no one is thinking Sweden levels of competent governance, and really no greater than China’s pretty spotty record.  But development aid, as such – money, as such – has a remarkably poor track record at creating an environment for private investment.  The same liabilities that poor governance creates for private investment, unfortunately, are also true of development aid.  

There are indubitably many public investments – in health, education, roads, electric power, etc. – that can make a large difference, and development aid can help fill those gaps.  But the track record on the returns on development aid is not very good.  It is, indeed, so poor that although there are arguments for why countries should make good on what they promised in the way of development aid, there is also plenty of room to argue that these ‘supply’ of development aid approaches get the question exactly backwards – presuming, as Jeffrey Sachs and the UN do, that the problem is insufficient development aid, money as such, instead of seeing it as a question of the incapacity on the demand side to use even such development aid as is already available.  It is questionable, in other words, whether, even if all the industrialized countries paid up tomorrow, those funds would actually make any difference to long term economic growth and the reduction of poverty, at least within the time frame proposed by the UN.  The track record, so far as I read it, anyway – and I grant that the UN does not see it this way – does not suggest that the problem is one of supply of funds.

(One other note.  This kind of technical study is the kind of thing the World Bank does best – it is a superb study, and reflects the best work of the organization.  It is, moreover, the Bank’s own competitive advantage.  Some other day, I will comment on what I think this means for the direction and mission of the Bank itself.)