In 1961, the United States Department of Agriculture published an Economy Food Plan carefully designed ?as a nutritionally adequate diet for short-term or emergency use? for poor people. This diet was updated and later re-branded as the Thrifty Food Plan. The lowest cost stated for this minimal diet was $80.40 per person per month in 1999. (...)A Consistent Measure of Real Poverty: A Reply to Ravallion

Thomas Pogge

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      May, 2008      Number  54
A Consistent Measure of Real Poverty:
A Reply to Ravallion
by  Thomas Pogge,
Australian National University
In 1961, the United States Department of Agriculture published
an Economy Food Plan carefully designed “as a nutritionally
adequate diet for short-term or emergency use” for poor people.
This diet was updated and later re-branded as the Thrifty Food
Plan. The lowest cost stated for this minimal diet was $80.40 per
person per month in 1999.
The relevant equivalent of the World Bank’s $1 a day poverty
line is $37.75 per person per month in 1999, and $49 today.
This is clearly not enough to cover the basic nutritional and
other needs of human beings in the US.
Is an equivalent to these amounts enough in poor countries?
Obviously not, if “equivalent” means equally capable of meeting
basic human needs. The $1 a day measure, however, relies on
another notion of equivalence, which involves two conversions:
converting any amount in local currency units (LCUs), via the
national consumer price index (CPI), into its equivalent in some
base year (currently 1993), and then converting the result,
via 1993 purchasing power parities (PPPs), into 1993 US$s.
Imagine a simple world with three commodities: necessaries,
discretionaries, and services (always in this order). If their prices
do not move in lockstep, the CPI will reflect a weighted average
of their price movements, based on the national spending pattern.
By relying on the CPI, the $1 a day measure loses track of the price
of necessaries. Falling prices of discretionaries (e.g., consumer
electronics) may lead to a falling CPI even while rising biofuel
demand is raising food prices. Poor people on constant incomes
become poorer relative to what they need to buy, yet richer by the
calculations of the $1 a day method.
Suppose the prices of the three commodities are LCU 5, 6 and 1 in
some poor country and $3, $4 and $9 in the US. What is the PPP?
Here again the answer depends on the spending pattern—in both
countries. Suppose this pattern, in per cent, is 30, 50 and 20 in
the poor country and 10, 50, and 40 in the US. This yields a PPP of
1.55; so the $1 a day measure will take each LCU to be equivalent
to $1.55. But in reference only to necessaries, priced at LCU 5 and $3,
each LCU is worth only 60 cents! Again, many who are very poor,
relative to what they really need to buy, may not show up
in the $1 a day statistics.
What is going wrong? Intuitively, income poverty (in the rock-
bottom sense here at issue) is a function of what necessaries a
person can buy. Through its reliance on CPI and PPP calculations,
the $1 a day measure allows far too much influence to the prices
of non-necessaries consumed in the same society. Through its
reliance on PPPs, it also allows far too much influence to spending
patterns in the US (and indeed in all other countries included in
the PPP exercise). In our example, one LCU, though it buys only 60
cents worth of necessaries, is assigned much greater value because
services are so expensive in the US ($9 versus LCU 1) and because US
residents spend a lot on services. But should a poverty criterion be
influenced so heavily by facts about prices and consumption of
services that the poor do not need and do not consume?
Perhaps the best evidence one can have against any method is that its
applications can deliver massively divergent results. The two notions
of equivalence invoked in CPI and PPP calculations rely on very
different (national and global) spending patterns. As a consequence,
the comparison of two amounts in different years and countries varies
with the base year chosen for the PPP conversion. One can use the CPIs
of the two countries to convert into 1993 amounts and then compare
via 1993 PPPs. Or one can use CPIs to convert into any other year and
then do the comparison in PPPs of that year. One can get as many
different results as there are PPP exercises.
The magnitude of the base-year effect is observable, because the
Bank has actually worked with two base years. Before 2000, $1 a day
was defined in terms of $31 PPP 1985, after 1999 as $32.74 PPP 1993.
This switch of base year has caused large shifts in the relative
position of national poverty lines. For example, using 1993 rather
than 1985 as the base year raises all Chinese amounts—prices,
incomes, consumption expenditures—in all years by 31 per cent
relative to all Bangladeshi amounts in all years. And conversely,
using 1985 rather than 1993 as the base year raises all Bangladeshi
amounts in all years by 31 per cent relative to all Chinese amounts in
all years. The $1 a day poverty assessment depends then on yet
another irrelevancy: on the arbitrary choice of PPP base year.
Given the first Millennium Development Goal, millions of lives are
at stake in counting the poor. Doing this requires a much more direct
method than the $1 a day—a method that considers only the income
a household has and the prices of the necessaries it might buy.
A household is income-poor if it has no way of spending its
money so that the basic needs of its members are fulfilled.
Ravallion is right; there are multiple ways of reaching 2100 calories.
But this is irrelevant if the direct method focuses solely on the
cheapest way each household has to get there.
Ravallion is also right to insist on a uniform criterion of income
poverty, focused on the real income of the poor. Only the direct
method achieves a consistent focus on what really matters:
sufficiency for meeting basic human needs.
References:
Reddy, Sanjay G. and Pogge, Thomas (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>.
Ravallion, Martin. (2008). “Which Poverty Line? A Response to Reddy”. One Pager 53,
International Poverty Centre, Brasilia. Availabel at <http://www.undp-povertycentre.org/pub/
IPCOnePager53.pdf>.

Which Poverty Line? A Response to Reddy”. One Pager 53, International Poverty Centre, Brasilia. Availabel at IPCOnePager53.pdf>.

A Consistent Measure of Real Poverty: A Reply to Ravallion

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A Consistent Measure of Real Poverty: A Reply to Ravallion

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