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.
In order to compare poverty across countries, a consistent international poverty line must be used to measure poverty. Using a single poverty line makes it possible to assess poverty incidence across countries and regions that is free from the influence of different country practices in setting poverty lines. The $1.25 a day poverty line corresponds to the value of the poverty lines used in some of the poorest countries. National poverty lines tend to increase in purchasing power with the average level of income in a country.
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 Penn World Tables or the World Bank, 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 commodities that are not representative of the consumption baskets of the poor, so they may not fully reflect the comparative cost of goods typically consumed by the very poor. As a result, there is no certainty that an international poverty line measures the same degree of need or deprivation across countries. Further, any revisions in the PPP of a country to incorporate better price indexes can produce dramatically different poverty lines in local currency.
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.
Lastly, this indicator measures poverty based on household per capita income/consumption, ignoring intrahousehold 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.