World Poverty: Living on $1-a-day

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The commonly used “$1 a day” marker that defines extreme poverty was originally proposed by Ravallion, Datt, and van de Walle in a background paper for World Bank (1990).  In the latest update, “A Dollar a Day Revisited” [Policy Research Working Paper # 4620, The World Bank Development Research Department Group, May 2008] the current line for extreme poverty also known as absolute poverty has been adjusted up to $1.25.  The “cost of basic needs” method is used to arrive at this number.  “By this method, the food component of the poverty line is the expenditure needed to reach a food bundle, specific to each country (or region) that yields a stipulated food bundle requirement; a common figure is 2100 calories per person per day.  To this is added an allowance for non-food spending, which is typically anchored to the non-food spending of people whose food spending (or sometimes total spending) is near the food poverty line” [“A Dollar a Day Revisited,” 8].

            The local currency poverty line is converted to a common currency, the US dollar (USD), using the World Bank’s purchasing power parities.  “The International Comparison Program (commonly known as the ‘ICP’) is a worldwide statistical initiative to collect comparative price data and estimate purchasing power parities (PPPs) of the world’s economies.  Using PPPs instead of market exchange rates to convert currencies makes it possible to compare the output of economies and the welfare of their inhabitants in real terms (that is, controlling for differences in price levels)” [“Global Purchasing Power Parities and Real Expenditures: 2005 International Comparison Program” (International Bank for Reconstruction and Development/The World Bank.  Washington D.C., 2008.) 3]. “The 2005 International Comparison Program has produced estimates of the relative price levels of GDP and its principal aggregates for 146 economies.  These purchasing power parities express the values of local currencies in relation to the common currency.  In this report, the common currency is the U.S. dollar in 2005.  When applied to the value of GDP or any component of GDP, the resulting values reflect the real value of consumption in each economy, corrected for differences in price levels and unaffected by transitory movements of exchange rates” [Ibid., 9].

            Even though the main poverty line has been adjusted to $1.25-per-day it is still commonly referred to as “$1 a day” or “extreme poverty.”  The total number of people estimated to be living in extreme poverty is 1.4 billion in 2005, down from 1.9 billion in 1981.  Chen and Ravallion note that, “While the overall picture is good news, it is no cause for complacency.  The 390 million fewer poor by the $1 per day standard over 1981-2001 are still poor by the standards of middle-income developing countries, and certainly by the standards of what poverty means in rich countries.  And our estimates indicate that the number of people under $2 per day has actually risen” [Shaohua Chen and Martin Ravallion, “How Have The World’s Poorest Fared Since The Early 1980s?”  World Bank Policy Research Working Paper 3341, June 2004. 23-24].

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            Even so, progress is being made toward achieving Millennium Development Goal (MDG) 1—Eradicate Extreme Poverty and Hunger.  MDG1’s Targets 1 and 2 are to “Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day…[and to] Halve … the proportion of people who suffer from hunger”  [United Nations, “The Millennium Development Goals,” www.un.org/millennium/declaration/ares552e.htm].  Although this is encouraging, there will still be hundreds of millions of people living in extreme poverty.

            Chen and Ravallion give three qualifications of this progress: “Firstly, even achieving MDG1 will leave a great many very poor people.  The trend over 1981-2004 in the number living below $1 a day is about 17 million fewer people living under $1 a day per year.  At this rate of decline, there will still be over 800 million people living under $1 a day in 2015, even though the 1990 poverty rate will have been halved.  Secondly, progress has been slower for the $2 line.  Projecting our series forward linearly implies a headcount index for this line of about 40 percent in 2015, well short of the 30 percent figure needed to halve the 1990 index.  The number of people living below the $2 line actually rose over most of the period….  Projecting forward linearly to 2015 we can expect about 2.8 billion people 

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living under $2 a day (2 billion living between $1 and $2).  The relatively slower progress in reducing ‘$2-a-day poverty’ reflects, of course, the rising numbers of people living between $1 and $2.  That is not too surprising; those escaping extreme poverty will not be rapidly entering the global ‘middle-class.’  Thirdly, China naturally carries the largest weight in these calculations”  [“Absolute Poverty Measures for the Developing World, 1981-2004,” World Bank Policy Working Paper 4211, April 2007, 9-10].