The International Comparison Program (ICP) has just released new purchasing power parities (PPPs) for the 2021 reference year. In addition, the ICP has revised the 2017 PPPs that were published four years ago, which are currently used in the measurement of global poverty. The revisions to the 2017 PPPs primarily reflect changes in national accounts expenditure weights and do not necessarily reflect changes in the underlying price data. In the 2017 ICP cycle, revisions to the previous 2011 ICP cycle were also published for similar reasons and were adopted by the World Bank for global poverty monitoring.
This time around, the Bank will not adopt the revised 2017 PPPs for global poverty monitoring, and this blog explains why. Our reasons are two-fold: the changes are very small, and we anticipate being able to update to the new 2021 PPPs more quickly than in the past, reducing the need for an interim update.
PPPs affect the measurement of global poverty in two ways: First, PPPs are needed for setting the values of the global poverty lines. Countries around the world set poverty lines to capture what it means to be poor in their society. The World Bank’s extreme poverty line has always been based on these national definitions of poverty found in the poorest countries in the world. Since these national poverty lines are set in local currencies, they are brought to a common scale using PPPs, adjusting for price differences. Second, PPPs are used to make levels of income or consumption more comparable across countries by adjusting for international differences in price levels. Poorer countries tend to have lower price levels especially for non-tradables such as labor costs, so they become richer when PPPs are used instead of standard market exchange rates.
The changes to global poverty measurement from the new PPPs are very small. The revised 2017 PPPs barely change the global poverty lines (Table 1). The international poverty line of $2.15 increases by less than 1%, and the higher poverty lines of $3.65 and $6.85 more relevant for assessing poverty in lower- and upper-middle-income countries also increase by less than 2%. Rounding to the nearest 5 cents still yields lines of $2.15 and $3.65, while the upper-middle income poverty line would increase by $0.10. Similarly, the revisions to the 2011 PPPs a few years ago would have pushed up the highest poverty line by $0.20. This points to the fact that the 2017 PPP adjustments recently published are of a smaller magnitude than the earlier adjustments to the 2011 PPPs.
Table 1: The impact of revised 2017 PPPs on global poverty lines
The revised 2017 PPPs also result in minimal changes to global and regional poverty trends. Figure 1 presents these results at all three poverty lines (holding all lines fixed, including the line typical of upper-middle-income countries).
Extreme poverty trends with the original and revised 2017 PPPs, as measured by the international poverty line of $2.15, are virtually indistinguishable for the world, and nearly all regions, and especially for Europe and Central Asia, Latin America & the Caribbean, and Sub-Saharan Africa.
There are similarly small differences in poverty trends at the higher poverty lines of $3.65 and $6.85, including for South Asia. The impact of the PPP revisions is somewhat larger for Asia (including East Asia and Pacific, as well as South Asia), which is explained by an improvement in how housing PPPs are estimated, which have been applied retrospectively to the 2017 PPPs in addition to 2021 PPPs.
If the revised 2017 PPPs were to be adopted, the share of the world’s population living on less than $2.15 in 2022, the most recent year with poverty data, would increase slightly, from 9.0% to 9.2%. The changes at the $3.65 and $6.85 poverty lines are of similar orders of magnitude, still rounding to 23% and 45%, respectively. These changes are also similar in size to the impact of the 2011 PPP revision.
Figure 1: Global and regional poverty trends with the 2017 PPPs
When new PPPs are introduced, they need to be analyzed and the data required for such a data update need to be put together (e.g., a new set of national poverty lines that are close to 2021). This will be done in the coming months for 2021 PPPs, as the ICP has made remarkable efforts to publish robust PPPs using prices collected during the COVID-19 pandemic.
In addition, the ICP has improved the quality of its PPPs, such as using a more standard methodology for linking the Commonwealth Independent States (CIS) region into the global set of PPPs and estimating housing PPPs in the Asia and Pacific region. These methodological changes have modest impacts on the final revised 2017 and 2021 PPPs. For more details on the construction of these new PPPs, see the 2021 ICP factsheet.
Given the methodological stability between the 2017 and 2021 ICP cycles, we anticipate that the new PPPs can be adopted relatively quickly. Preliminary results show that the 2021 PPPs are largely consistent with PPPs extrapolated from the 2017 cycle.
To avoid making too frequent changes, the World Bank will not revise its poverty estimates with the revised 2017 PPPs (which only have a very limited impact on global poverty as shown in this post). Therefore, in the upcoming PIP update in September 2024, as well as the forthcoming new edition of the Poverty and Shared Prosperity Report, we will continue using the original 2017 PPPs.
The authors gratefully acknowledge financial support from the UK Government through the Data and Evidence for Tackling Extreme Poverty (DEEP) Research Program.
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