The World Bank has just announced a new definition of ‘extreme poverty’. This couldn’t be more timely: world leaders have just committed to eliminating extreme poverty as part of the Sustainable Development Goals (SDGs) (here’s ODI’s take on it), the World Bank has already made ending extreme poverty a strategic goal, and NGOs are campaigning to reach Zero Extreme Poverty by 2030.
But what does this new definition imply exactly?
How does the level of extreme poverty change under this new definition?
The World Bank estimates that less than 10% of the world’s population live under its new threshold of $1.90 a day (based on the US dollar exchange rate of 2011).
This is a dramatic fall from the more than 1 billion people in extreme poverty in 2011, under the old definition of living below $1.25 (measured in 2005 US dollars).
Why did they change the definition?
The previous definition of $1.25 a day relied on information about prices that was 10 years old. The recent announcement updates the extreme poverty definition to take into account the latest estimates of how prices of goods and services vary across countries, based on 2011 dollars.
Calculating the number of people in extreme poverty across countries relies on information about prices because the more expensive goods and services become, the less people can buy with a set amount of money. Measuring differences in prices across countries is known as purchasing power parity (PPP) and has been popularised by the Economist through the Big Mac Index, which compares the average price of a Big Mac around the world.
While measuring the price of a Big Mac is relatively easy because it is the same product from the same restaurant chain, comparing a standard consumption basket across countries is fraught with challenges. Experts embark on this challenge every 5-10 years – most recently in 2011 – and estimate changes in PPP between countries.
How does this impact our efforts to end extreme poverty?
The new definition heralds a significant departure from how the World Bank updated its extreme poverty line in the past. Up until the announcement, the extreme poverty line was created by averaging the national poverty lines of the poorest countries in the world. The original $1 a day measure (using 1985 PPP) was based upon an average of the 8 poorest countries in the world that had data available, while the $1.25 a day line was based on the average of the poorest 15 countries.
The problem with this approach is that extreme poverty will never end using this definition. For as long as the poorest countries in the world set a national poverty line that identifies some of their population as poor then there will always be people in extreme poverty.
The World Bank has attempted to overcome this challenge through the new definition by simply increasing the $1.25 (2005 PPP) poverty line to $1.90 (2011 PPP), to reflect a rise in the price of goods around the world. However, this approach no longer factors in how national poverty lines have changed over time. It implicitly assumes that the $1.25 (2005 PPP) line is the most appropriate extreme poverty line and it only needs to be updated to reflect those changes in price levels – as opposed to underlying changes in how the poorest countries in the world define poverty.
From the Bank’s perspective, the new definition is an understandable compromise, given the incompatibility of the goal to end extreme poverty and the World Bank’s existing approach in calculating the extreme poverty line, which effectively made the goal unreachable.
From a broader perspective this shift will raise questions and alarm bells, as the new definition may lead to tens of millions of people falling into or being lifted out of extreme poverty overnight, at a stroke.
We’ll be discussing these issues at ODI’s event on 21st October. Come along to share your questions and insights about this major development in the battle to eliminate extreme poverty.