Data Help Desk

Development Data Group

The World Bank

Postal Address:Mailstop MSN MC2-209, 1818 H Street, NW, Washington, DC 20433 USA

Telephone:+1 202 473 7824

Fax:+1 202 522 3669

E-mail: data@worldbank.org

Website:http://iresearch.worldbank.org/PovcalNet/, http://www.worldbank.org/data

Neil James Fantom

Development Data Group

The World Bank

Postal Address:Mailstop MSN MC2-209, 1818 H Street, NW, Washington, DC 20433 USA

Telephone:+1 202 473 3323

Fax:+1 202 522 3669

E-mail: nfantom@worldbank.org

Website:http://iresearch.worldbank.org/PovcalNet/, http://www.worldbank.org/data

The poverty rate at $1.25 a day is the proportion of the population living on less than $1.25 a day, measured at 2005 international prices, adjusted for purchasing power parity (PPP).

Purchasing power parities (PPP) conversion factor, private consumption, is the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as a U.S. dollar would buy in the United States. This conversion factor is applicable to private consumption.

The formula for calculating the proportion of the population living below the poverty line, or headcount index, is as follows:

Where I(.) is an indicator function that takes on a value of 1 if the bracketed expression is true, and 0 otherwise. If individual consumption or income (yi) is less than the poverty line (z), then I(.) is equal to 1 and the individual is counted as poor. Np is the total number of the poor. N is the total population.

Consumption or income data are gathered from nationally representative household surveys, which contain detailed responses to questions regarding spending habits and sources of income. Whenever possible, consumption is preferred to income for measuring poverty. When consumption data are not available, income is used. Income is generally more difficult to measure accurately, and consumption accords better with the idea of the standard of living than income, which can vary over time even if the standard of living does not. Nevertheless, consumption data are not always available, and when they are not there is little choice but to use income.

Consumption, including consumption from own production (or income when unavailable), is calculated for the entire household and then divided by the number of persons living in the household to derive a per capita measure.

Poverty measures based on an international poverty line attempt to hold the real value of the poverty line constant across countries, as is done when making comparisons over time. The poverty line used is based on the conversion of the $1.25 a day international poverty line into the national currency using the latest PPP exchange rates for consumption.1 The $1.25 a day poverty line measured in 2005 prices replaces the $1.08 a day poverty line measured in 1993 prices. Often described as “$1 a day,” $1.08 has been widely accepted as the international standard for extreme poverty. The new poverty line maintains the same standard for extreme poverty—the poverty line typical of the poorest countries in the world—but updates it using the latest information on the cost of living in developing countries. Local consumer price surveys are then used to adjust the international poverty line in local currency to prices prevailing along the time of the surveys.

Households are ranked by either consumption or income per person. The distributions are weighted by household size and sample expansion factors so that a given fractile (such as the poorest decile) should have the same share of the country-specific population across the sample. This generates an estimate of the number of people living in households with per capita consumption or income below the poverty line. The total number of poor is divided by the total population to estimate the proportion of the population that is poor. This number is multiplied by 100 to derive a percentage.2

International comparisons of poverty estimates entail both conceptual and practical problems. A key building block in developing income and consumption measures of poverty is the poverty line—the critical threshold value below which an individual or household is determined to be poor. Countries set their poverty lines at different thresholds, making consistent international comparisons of poverty difficult. The $1.25 a day poverty line corresponds to the value of the poverty lines used in some of the poorest countries. Local poverty lines tend to have higher purchasing power in rich countries, where more generous standards are used, than in poor countries.

The internationally comparable lines are useful for producing global aggregates of poverty. In principle, they test for the ability to purchase a basket of commodities that is roughly similar across the world. But such a universal line is generally not suitable for the analysis of poverty within a country. For that purpose, a country-specific poverty line needs to be constructed, reflecting the country’s economic and social circumstances. Similarly, the poverty line may need to be adjusted for different locations (such as urban and rural areas) within the country, if prices or access to goods and services differs.

An important step in the process of compiling global poverty estimates is the conversion of the $1.25 a day international poverty line into respective national currency units. PPP exchange rates, such as those from the International Comparison Program or the Penn World Tables, are used because they take into account the local prices of goods and services not traded internationally. Although PPP rates were designed for comparing aggregates from national accounts, they were not intended for making international poverty comparisons. PPPs are based on prices of goods and services that may not be representative of the consumption baskets of the poor, so they may not fully reflect the relative price level faced by very poor consumers. As a result, there is no certainty that an international poverty line measures the same degree of need or deprivation across countries.

The reliability of the poverty estimates may be affected by the quality of the PPPs and price indexes used. Although the 2005 International Comparison Program was the most comprehensive international price survey ever undertaken and employed more advanced methods than previous rounds, the resulting estimates may be affected by differences in sampling procedures, measurement errors, assumptions and approximations made in estimating prices that could not be obtained from price surveys, and the form of the multilateral price index. All of this notwithstanding, the 2005 International Comparison Program provides our best estimates of the comparative purchasing power of currencies.

Similarly, the quality of consumer price indexes around the world varies widely, which may affect the reliability of extrapolations over long periods and comparisons across countries. Consumer price indexes can be particularly problematic when the specification of goods included in consumer price surveys and the expenditure weights used to aggregate prices have not been updated in a long time. Furthermore, unlike the International Comparison Program price surveys, products priced in the consumer price index may be loosely defined and may differ in characteristics from one part of the country to another.

The price data from which the PPPs are calculated are supposed to reflect national average prices in each country. However, in many countries, the price surveys were carried out entirely, or in large part, in urban areas. In China, for example, the International Comparison Program surveys were conducted in 11 highly urbanized provinces. Based on International Comparison Program sampling information, Ravallion, Chen, and Sangraula (2008) treated the 2005 consumption PPPs from Argentina, Brazil, Bolivia, Cambodia, Chile, China, Colombia, Ecuador, Pakistan, Peru, Thailand, and Uruguay as representing urban price levels. For China differentials between the national urban and rural poverty lines were used to adjust the PPPs to correct for the putative “urban bias.” Similar adjustments were made to the PPPs in India and Indonesia, although the International Comparison Program survey data for these countries covered both urban and rural areas.

In these cases urban and rural PPPs were derived from the ratio of the urban to rural poverty lines such that their expenditure- weighted average was equal to the national PPP. These PPPs were then used to convert the international poverty line to separate urban and rural lines in local currencies, which were applied to urban and rural consumption distributions.

This approach is only possible when countries maintain well defined urban and rural poverty lines and consumer price index series.

Comparisons of countries at different levels of development also pose a potential problem because of differences in the relative importance of consumption of nonmarket goods. The local market value of all consumption in kind (including own production, particularly important in underdeveloped rural economies) should be included in total consumption expenditure. Similarly, imputed profit from the production of nonmarket goods should be included in income. This is not always done, though such omissions were a far bigger problem in surveys before the 1980s. Most survey data now include valuations for consumption or income from own production. Nonetheless, valuation methods vary. For example, some surveys use the price in the nearest market, while others use the average farmgate selling price.

There is also a problem with comparability of across surveys: household survey questionnaires can differ widely, and similar surveys may not be strictly comparable because of differences in quality. These problems are diminishing as survey methods improve and become more standardized, but achieving strict comparability is still impossible. Problems of survey design and data collection are discussed in detail in the metadata document for national poverty estimates.

The poverty rate, a “headcount” measure, is one of the most commonly calculated measures of poverty. Yet it has the drawback that it does not capture either income inequality among the poor or the depth of poverty; failing to account for the fact that some people may be living just below the poverty line while others experience far greater shortfalls. Policymakers seeking to make the largest possible impact on the headcount measure might be tempted to direct their poverty alleviation resources to those closest to the poverty line (and therefore least poor). Lastly, this indicator measures poverty based on household per capita income/consumption, ignoring intra-household inequality in the distribution of resources, and does not take into account other dimensions of poverty such as inequality, vulnerability, and lack of voice and power of the poor.

Global poverty rates are based on the international poverty line of $1.25 day measured at 2005 prices and cannot be directly compared with national level poverty rates, which are derived using country specific poverty lines estimated in local currencies.

The indicator is produced by the World Bank Development Research Group based on microlevel data from nationally representative household surveys, which are conducted by national statistical offices or by private agencies under the supervision of government or international agencies and obtained from government statistical offices and World Bank Group country departments.

Only nationally representative surveys that are of good quality, contain sufficient information to produce a comprehensive consumption or income aggregate, and allow for the construction of a correctly weighted distribution of per capita consumption or income are used.

As described above, global poverty indicators are produced for each country using an international comparable poverty line, enabling comparisons across countries.

In principle, there is no adjustment for missing data, as the indicator is calculated only in years and countries for which suitable survey data are available.

The World Bank has records from 675 household surveys covering 115 developing countries collected between 1979 and 2007. More than 1.2 million randomly sampled households were interviewed in these surveys, representing 96 percent of the population of developing countries. Not all these surveys are comparable in design and sampling methods. Nonrepresentative surveys, though useful for some purposes, are excluded from the calculation of international poverty rates. There are 508 surveys for 115 countries used for deriving poverty estimates.

The World Bank produced its first global poverty estimates for developing countries for World Development Report 1990 using household survey data for 22 countries. Since 1979 there has been considerable expansion in the number of countries that field such surveys, and the number of data sets within two years of any given year rose dramatically, from 13 between 1978 and 1982 to 158 between 2001 and 2006.

Data coverage is improving in all regions, but the Middle East and North Africa and Sub-Saharan Africa continue to lag. The database, maintained by a team in the World Bank’s Development Research Group, is updated annually as new survey data become available, and a major reassessment of progress against poverty is made about every three years. A complete overview of data availability by year and country is available at: http://iresearch.worldbank.org/PovcalNet.

Data are available for 115 countries.

International poverty estimates are available for low and middle-income countries only. Some high-income countries also report poverty indicators, but the $1.25 day poverty line is not relevant. Therefore, the indicator is "not applicable" for high-income countries.

The lag between the reference year and actual production of data series depends on the availability and reliability of the household survey for each country. Lag between the latest available year for aggregate estimates and the actual production year is about 3 years.

Data are updated semi-annually in April and September of each year, but the availability of new estimate for a country will also depend on availability of new household surveys. Household budget or income surveys are undertaken at different intervals in different countries. In developing countries they typically take place every three to five years.

To compare the number of poor across different countries and compute regional aggregates, country estimates must first be “lined up” to a common reference year, interpolating for countries in which survey data are not available in the reference year but are available either before, after, or both. The more survey data available (that is, the more data for different years), the more accurate the interpolation. The process requires adjusting the mean income or expenditure observed in the survey year by a growth factor to infer the unobserved level in the reference year. Thus, two assumptions are required to implement this process: distribution-neutral growth and a conjectured real rate of growth between the survey and reference year. Distribution-neutral growth implies that income or expenditure levels are adjusted for growth assuming that the underlying distribution of income or expenditure observed in survey years remains unchanged. Under this assumption, it is straightforward to interpolate the poverty estimate in a given reference year implied by a given rate of growth in income or expenditure. Rate of change in real consumption per capita should be based on the change in real consumption measured by comparing country survey data across different years. In practice, however, survey data in most countries are not available on an annual basis. Therefore, the change in private consumption per capita as measured from the national accounts is used instead. While, there can be no guarantee that the survey-based measure of income or consumption change at exactly the same rate as private consumption in the national accounts, under certain circumstances and over short periods of time it can provide a reasonable approximation.

When the reference year falls between two survey years, an estimate of mean consumption at the reference year is constructed by extrapolating the means obtained from the surveys forward and backward to the reference year. The second step is to compute the headcount poverty rate at the reference year after normalizing the distributions observed in the two survey years by the reference year mean. This yields two estimates of the headcount poverty rates in the reference year. The final reported poverty headcount rate for the reference years is the average of the two. When data from only one survey year are available, the reference year mean is based on the survey mean by applying the growth rate in private consumption per capita from the national accounts. The reference year poverty estimate is then based on this mean and on the distribution observed in the one survey year. The better data coverage is in terms of number and frequency of available surveys, the more accurate this lining-up process is and the more reliable the regional estimates will be.1

The World Bank World Development Indicators (WDI) Online database, which contains this series, is updated semi-annually in April and September each year, but availability of a new estimate for a country will depend on availability of new suitable household surveys. International poverty estimates are also published in PovcalNet—an interactive analysis tool, available at: http://iresearch.worldbank.org/PovcalNet.