Are Estimates of Poverty in Latin America Reliable?

Sanjay G. Reddy

English

Research Papers in Economics

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      May, 2008      Number  52
Are Estimates of Poverty in
Latin America Reliable?
Share of the Population in Latin America in Extreme and Overall Poverty
 Source: Reddy and Pogge.
by Sanjay Reddy,
Barnard College, Columbia University
What is the level of income poverty in Latin America and has it
been decreasing? Are current estimates reliable?
The most influential approach to gauging income poverty
regionally as well as globally uses the World Bank’s international
poverty lines of ‘one-dollar-a-day’ and ‘two-dollars-a-day’ per
person. The Bank uses ‘purchasing power parity’ (PPP) factors to
translate these international lines into local currencies.
The Bank’s estimates for Latin America suggest that 8.6 per cent of
the region’s population was in extreme poverty (living on less than
one dollar a day) in 2004 while 22.2 per cent was in poverty (living
on less than two dollars a day) (see Table). By comparison, extreme
poverty affected 10.8 per cent of the region’s population in 1981
and poverty affected 28.5 per cent.
The pace of poverty reduction in Latin America was thus slow—
slower than in the entire world. The global percentage of the poor
fell from 67 per cent in 1981 to 48 per cent in 2004, with extreme
poverty falling from 40 per cent to 18 per cent.
Unfortunately, the Bank’s method has serious problems. The most
basic is the arbitrary nature of its approach to identifying the
poor. In the United States, the reference country for setting the
Bank’s international poverty lines, even two-dollars-a-day does
not reflect the real costs of meeting the basic requirements of a
human being.
The ‘thrifty food plan’ of the U.S. Department of Agriculture
estimates the costs just for food at a much higher level than $2 a
day per person. PPP adjustments also distort the results since the
costs of food items (which are internationally traded) are much
higher in developing countries than this method (which gives
great weight to the low cost of services there) suggests.
Thankfully, there is an alternative to the Bank’s approach, i.e., the
poverty estimates of the Economic Commission for Latin America
and the Caribbean (ECLAC). While it has its own deficiencies, ECLAC’s
approach tries, at least, to use nutritionally anchored poverty lines
that capture better the local cost of purchasing basic foodstuffs.
It thus better captures the real requirements of human beings.
ECLAC poverty estimates for Latin America are invariably higher
than those of the Bank. In 2005, the former suggest that almost
40 per cent of the population was poor (compared to about 22 per
cent in 2004 for the Bank) and about 15 per cent was extremely poor
(compared to 8.6 per cent for the Bank).
Unfortunately, the ECLAC method has its own flaws. It assumes,
for instance, that all households have the same demographic
composition. And it estimates non-food requirements in an ad hoc
manner so that allowances for such requirements vary widely among
countries. A third approach (Reddy and Pogge, forthcoming) seeks to
improve on the ECLAC method.
This alternative approach would carefully construct poverty lines
within each country based on a common underlying conception
of the real requirements of human beings. This means that each
national poverty line would reflect the local cost requirements of
achieving a specific set of universal basic human capabilities.
However, the resulting estimates would be comparable because
the capabilities would be defined globally.
An example is provided by the ability to be adequately nourished. In
this case, the poverty line would reflect the local cost of purchasing
commodities with a certain nutritional content. While being locally
relevant, such a poverty line would also have a common meaning
across space and time.
Thus, it would be possible—especially in contrast to the World Bank
method—to conduct meaningful and consistent inter-country
comparisons. Such an approach eliminates the need for PPPs, which
are invariably arbitrary.  Rather, it strengthens and coordinates
national poverty estimates, by applying a common and well-
grounded conception of poverty in all countries.
Reference:
Sanjay G. Reddy and Thomas Pogge (forthcoming). ‘How Not to Count the Poor’, in J. Stiglitz, S. Anand
and P. Segal (eds.) Debates in the Measurement of Poverty, Oxford: Oxford University Press. Available at
<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=893159>.
World Bank Estimates 1981 2004
$1 a day line  10.8   8.6
$2 a day line  28.5  22.2
ECLAC Estimates 1990 2005
Lower Poverty Line  18.0  15.4
Upper Poverty Line  41.0  39.8

Estimates

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Are Estimates of Poverty in Latin America Reliable?

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