The international community has endorsed the Millenium Development Goal of reducing the poverty rate in the developing world by 50% over the 25 years, 1990-2015. While the target is arbitrary, it is nonetheless important to have a stretch goal like this to challenge us all to make the world a better place. To measure progress, naturally we need pretty good estimates of global poverty. The World Bank is the leading bean counter in this exercise. It just today released new estimates of global poverty that have the potential to illuminate the progress, but also the potential to confuse a lot of people. The research department of the World Bank has changed its global poverty line from $1 per day to $1.25 per day and has found about 468 million more poor people than it had previously estimated. About 135 million of these newly found poor are in China. How does one make sense of these new numbers? Here are some pointers:
Poverty trends have not changed
One useful thing to focus on is that the analysis of trends in poverty hasn’t changed at all. The World Bank’s old estimate for the developing world was 29% of the population living on less than $1 per day in 1990, declining to 17% in 2005 (about a 40% decline in 15 years, putting us on track globally to meet the MDG). The new estimates are 42% in 1990 living on less than $1.25, declining to 26% in 2005 (still a 40% decline). Changing the poverty line does not have much effect on the analysis of trends, because the same line is then applied consistently over time.
China is a leader in meeting the poverty MDG
The new estimates also confirm China’s leading role in meeting the MDG. Excluding China, the poverty rate for the developing world is estimated to be 35% in 1990, declining to 29% in 2005, about a 20% decline over 15 years – not fast enough to meet the MDG. Both the old and new estimates find that the developing world as a whole will meet the poverty reduction goal easily, unless something really unexpected happens in the final seven years until 2015. Excluding China, however, the rest of the developing world will have significant poverty reduction but not quite make the 50% goal, if recent trends continue. See graphic above.
The meaning and use of national and international poverty lines
I also feel that poverty analysis for particular countries is best done with poverty lines designed for the particular circumstances of the country. For China, we have the government’s official poverty line as well as the World Bank’s “cost of basic needs line.” The latter is the most “scientific,” in that it is based on how much consumption a person actually needs to have 2100 calories per day plus other basic necessities of life. The government’s official poverty line is lower – it is basically the amount one would need for the 2100 calories if you spent all your income on food. In practice, however, no one spends all their income on food, so that someone at this level is inevitably malnourished. The World Bank line is set at the level where we observe that a family with this per capita income actually consumes 2100 calories while having shelter, clothing, and other basic needs.
At the beginning of economic reform, the government’s poverty line was useful in that it identified the poorest one-fifth of the population so that they could be targeted with special programs. Recently, however, there is almost no one in China living below this line, so it is not very useful for policy. The basic needs line shows that China was in very poor straits at the beginning of reform, with about two-thirds of the population lacking the basic necessities of life (see graph at the very top). Poverty by that measure declined to 7% in 2005, and further to 4% in 2007. In my view, this is the most accurate statement of China’s poverty reduction record. If someone asks me, what is the poverty rate in China, my answer is 4% in 2007 (that is, about 53 million people).
The new $1.25 international line is substantially higher than the cost of basic needs poverty line. That is, the new international poverty line is substantially higher than the income needed to purchase the basic necessities of life in China. This line was determined by taking the poverty lines for the 15 poorest countries in the world for which there are data (13 African countries plus Nepal and Tajikistan) and converting these to dollars at new purchasing power parity exchange rates determined through the international comparison of prices. This line is then applied to the data for all developing countries using their PPP exchange rates from the new exercise. There is inevitably a large amount of uncertainty in these estimates: the 95% confidence interval for the estimate of the number of $1.25/day poor in China in 2005 is 100-200 million people. The main purpose of these estimates is to be able to add up all the poor in the world on the basis of a consistent line. They are not the best estimates to analyze poverty within any one country. But you can see from the graph they show the same trend over time as the poverty lines tailored to an individual country. (Note, too, that since the estimates use 2005 prices, they do not yet reflect the sharp rise in food prices since then).
Wherever you draw the poverty line, China gets the gold medal for poverty reduction.