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GOAL AND TARGET ADDRESSED

Goal 1. Eradicate extreme poverty and hunger

Target 1.A Halve, between 1990 and 2015, the proportion of people whose income is less than $1.25 a day



DEFINITION AND METHOD OF COMPUTATION

Definition This proportion of population living below $1.25 (2005 PPP) a day is defined as the proportion of the population living in households below the international poverty line where the average daily consumption (or income) per person is less than $1.25 a day measured at 2005 international prices adjusted for purchasing power parity (PPP) . This indicator replaced the $1 a day poverty since Fall 2008. As a result of revisions in PPP exchange rates, poverty rates cannot be compared with poverty rates reported previously for individual countries.

This indicator is expressed as a percentage.

Concepts The poverty line is a marker used to measure poverty based on consumption or income levels. A person is considered poor if his or her consumption or income level falls below the minimum level necessary to meet basic needs. This minimum level is referred to as the poverty line. The poverty line for the calculation of this indicator is the $1.25 a day international line, converted into national currency units using PPP exchange rates for consumption. 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”, this poverty line has been widely accepted as the international standard for extreme poverty. The new poverty line was estimated using PPP estimates from the 2005 International Comparison Programme and the most recent household surveys available for developing countries. National consumer price indices were used to calculate the international poverty line in local currency to prices prevailing at the time of the surveys. The time series going back to 1990 have been recalculated using this new poverty line.

The purchasing power parity (PPP) conversion factor for private consumption represents the number of units of a country's currency required to buy the same amounts of goods and services in the domestic market as one United States dollar would buy in the United States. It is based on the System of National Accounts’ concept of actual individual consumption.


The proportion of the population living below the poverty line is also known as the headcount index (or incidence of poverty or poverty rate).

Method of Computation

The percentage of the population living below the poverty line is calculated using either consumption or income data, gathered from nationally representative household surveys. Consumption is preferred to income for measuring poverty, because income is more difficult to measure accurately and can vary over time even if the standard of living does not. However, in practice the two methods yield similar results.

Consumption, including consumption from own production (or income when consumption is 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. Households are then ranked by either consumption (or income) per person and compared to the poverty line to determine the numbers of people living above and below the poverty line.

The sample distributions of poor people are weighted by household size and sample expansion factors so that they are representative of the population of each country. This generates an estimate of the number of people living in households with levels of per capita consumption or income below the poverty line. The total number below the poverty line 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.

The formula for calculating this indicator is as follows:

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where P0 represents the headcount index, I(.) is an indicator function that takes on the value 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 and N is the total population.

RATIONALE AND INTERPRETATION

The $1.25 a day poverty line—the critical threshold value below which an individual is determined to be poor—corresponds to the value of the poverty lines in some of the poorest countries (the poorest countries are determined by international rank of Gross National Income per capita in PPP terms). This threshold is a measure of extreme poverty that allows comparisons to be made across countries when it is converted using PPP exchange rates for consumption. In addition, poverty measures based on an international poverty line attempt to hold the real value of the poverty line constant over time allowing for accurate assessments of progress toward meeting the goal of eradicating extreme poverty and hunger.

The indicator values range from 0 (no population in extreme poverty) to 100 (all the population in a country living below the international poverty line). To attain MDG target 1.A, the percentage of poor people in a country must be half or less than its 1990 value by 2015.

SOURCES AND DATA COLLECTION

The indicator is ideally produced using micro-level data on household income or consumption expenditures from nationally representative household surveys. Only nationally representative surveys that contain sufficient information to produce a comprehensive consumption or income aggregate (including consumption or income from own production) and allow for the construction of a correctly weighted distribution of per capita consumption or income should be used. Nationally representative household surveys are usually conducted by the national statistical office. In some cases surveys are conducted by the ministry of economic planning, central banks, or by private agencies under the supervision of government or international agencies.

In developing countries, household surveys on income or expenditure typically take place every three to five years, although intervals vary across countries. A common problem with household consumption data is comparability across surveys: household survey questionnaires can differ widely and similar surveys may not be strictly comparable because of differences in survey methods. These problems have become less prevalent as survey methods are improving and becoming more standardized, but achieving strict comparability is still difficult.

For other possible problems that can be encountered in data collection for this indicator, see “SOURCES AND DATA COLLECTION” for Indicator 1.1a.

DISAGGREGATION

See “DISAGGREGATION” for Indicator 1.1a.

COMMENTS AND LIMITATIONS

The poverty rate is a useful tool for policy makers and donors to target development policies to the poor. Yet it has the drawback that it does not capture the depth of poverty; failing to account for the fact that some people may be living just below the poverty line while others live far below the poverty line (see also Indicator 1.2). Policymakers seeking to make the largest possible impact on reducing poverty rates might be tempted to direct their poverty alleviation resources to those closest to the poverty line (and therefore least poor).

In making international comparisons of poverty estimates, there are conceptual and practical problems to address. Possible problems include the following:

  • Internationally comparable lines are useful for producing global aggregates of poverty. However, 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 that reflects the country’s economic and social circumstances (see “DEFINITION AND METHOD OF COMPUTATION” for Indicator 1.1a). 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 differ.
  • PPPs are based on prices of goods and services that may not be representative of the consumption patterns of the poor. 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 poverty estimates may be affected by the quality of the PPPs. Differences in sampling procedures, measurement errors, and the comparability of goods and services priced as part of PPP data collection can affect measured price levels.
  • The quality of consumer price indices around the world varies widely, which may affect the reliability of extrapolations of PPPs from the benchmark (survey year) values and comparisons across countries. Furthermore, product definitions may differ from one part of a country to another.
  • Differences in the relative importance of consumption of non-market goods may affect poverty rate estimates. The local market value of all consumption in kind (including own production) should be included in total consumption expenditure. Similarly, imputed profit from the production of non-market goods should be included in income.
  • 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 vulnerability, people’s feeling about relative deprivation and lack of voice and power of the poor.

GENDER EQUALITY ISSUES

In many settings, households headed by women tend to have lower incomes and members of those households are therefore more likely to live below the poverty line. However, this relationship should be examined taking into account national circumstances and the definition of head of household, which is not always defined as the chief source of economic support. Gender relations, including whether households are headed by women or men, may also affect intra-household resource allocation and use.

DATA FOR GLOBAL AND REGIONAL MONITORING

Estimates of poverty for global and regional monitoring are calculated by the World Bank. International poverty estimates are usually not calculated for high-income countries, where the $1.25 a day poverty line is not relevant.

The first global poverty estimates for developing countries produced by the World Bank were published in the World Development Report 1990 using household survey data for 22 countries. Since then there has been considerable expansion in the number of countries that field household income and expenditure surveys. The World Bank’s poverty monitoring database maintained by the Development Research Group now includes more than 675 surveys representing 116 developing countries collected between 1979 and 2007. Not all of these surveys are comparable in design and sampling methods. Non-representative surveys, though useful for some purposes, are excluded from the calculation of international poverty rates. As of 2009 there were 508 surveys for 115 countries available for deriving poverty estimates. More than 1.2 million randomly sampled households were interviewed in these surveys, representing 96 percent of the population of developing countries. Data coverage is improving in all regions, but the Middle East and North Africa and Sub-Saharan Africa continue to lag. The database is updated annually as new survey data become available, and a major reassessment of progress against poverty is made about every three years.

To compare the number of poor across countries and compute regional aggregates, country estimates must first be “lined up” to a common reference year. This involves estimating figures through interpolation for countries that do not provide survey data for the reference year, but do provide data for years before or after the reference year. 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 using a given rate of growth in income or expenditure.

The 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 in the national accounts is used instead. While there can be no guarantee that the survey-based measure of income or consumption changes 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 mean consumption obtained from the surveys forward and backward to the reference year.

The second step for constructing comparable poverty rates is to compute the headcount poverty rate for the reference year after normalizing the distributions observed in the two survey years by the reference year mean consumption. 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 estimates. For example, if the reference year is 1993 and two surveys are available for 1989 and 1995, two means can be computed for the reference year based on two surveys, M93(89) and M93(95) where M93(t) is the estimated mean for 1993 using the survey for year t. Based on the 1989 distribution and M93(89), the headcount index obtained using the 1993 mean and the 1989 distribution H93(89) can be estimated. Similarly, based on the 1995 distribution and M93, H93(95) is estimated. The poverty headcount for 1993 is estimated as the weighted average of H93(89) and H93(95) according to the following formula:

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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 the 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.

SUPPLEMENTARY INFORMATION

No information available yet.

EXAMPLES

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REFERENCES

Asian Development Bank (2008). Comparing poverty across countries: The Role of purchasing power parities. In Key Indicators for Asia and the Pacific, Part I, Special Chapter. Manila. Available from http://www.adb.org/documents/books/key_indicators/2008/pdf/KI2008-Special-Chapter.pdf.

International Bank for Reconstruction and Development/The World Bank (2008). Global Purchasing Power Parities and Real Expenditures: 2005 International Comparison Program. Washington, DC. Available from http://siteresources.worldbank.org/ICPINT/Resources/icp-final.pdf.

Chen, Shaohua and Martin Ravallion (2000). How did the world’s poor fare in the 1990s? Policy Research Working Paper, No. 2409. Washington, DC: World Bank. Available from http://go.worldbank.org/HTJHJR5W90.

Chen, Shaohua and Martin Ravallion (2008). The developing world is poorer than we thought, but no less successful in the fight against poverty. Policy Research Working Paper, No. 4703. Washington, DC: World Bank. Available from http://go.worldbank.org/BQERQI1H10.

Ravallion, Martin, Shaohua Chen and Prem Sangraula (2008). Dollar a day revisited. Policy Research Working Paper, No. 4620. Washington, DC: World Bank. Available from http://go.worldbank.org/6E1P1FGPL0.

World Bank. Development Data and Statistics. Washington, DC. Internet site http://data.worldbank.org.

World Bank. PovcalNet Online Poverty Analysis Tool. Washington, DC. Internet site http://iresearch.worldbank.org/PovcalNet.

World Bank (1990). World Development Report 1990: Poverty. Washington, DC. Available from http://go.worldbank.org/WRCXH1RPT0.

World Bank (2000). World Development Report 2000/2001: Attacking Poverty. Washington, DC. Available from http://go.worldbank.org/L8RGH3WLI0.

World Bank (2002). A Sourcebook for Poverty Reduction Strategies. Jeni Klugman (ed.). Washington, DC. Available from http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/EXTPRS/0,,contentMDK:22404376~pagePK:210058~piPK:210062~theSitePK:384201~isCURL:Y,00.html.

World Bank (2005). World Development Report 2006: Equity and Development. Washington, DC. Available from http://go.worldbank.org/UWYLBR43C0.

World Bank (2008). Poverty data: A supplement to World Development Indicators 2008. Washington, DC. Available from http://siteresources.worldbank.org/DATASTATISTICS/Resources/WDI08supplement1216.pdf.

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