The Meaninglessness of Ending 'Extreme Poverty'

The real meaning of a poverty line in flux

Photographer: Dimas Ardian/Bloomberg

This September, the world’s leaders will converge on the United Nations to declare a new set of Sustainable Development Goals for planetary progress over the next 15 years. Their first target will be to “eradicate extreme poverty for all people everywhere, currently measured as people living on less than $1.25 a day.” That’s a heady vision, one already embraced both by U.S. President Obama and Jim Kim, president of the World Bank—the organization that set the $1.25 poverty line back in 2005.

There's just one problem: According to the World Bank, extreme poverty isn't what it used to be. It turns out that the technique the bank has used in the past to set the extreme poverty line essentially guarantees we won’t wipe out extreme poverty by 2030—or ever. To save face, the World Bank's economists are likely to change the method to one that creates a definition of extreme poverty that can be eradicated. But in doing so, they’ll set a poverty line that will move further and further away from anyone’s actual idea of what it is to be poor.

Ask people what level of income would make them poor and they tend to come up with a number that's relative to their income. In the U.S., people are surveyed as to the amount of income necessary for a family of four to "get along." In 1950, the answer was $48 a week (PDF), or around 75 percent of household mean income that year. More than half a century later in 2007, the average answer was $1,000 a week—or around 77 percent of mean income.

Given that most people define poverty using a relative approach, it isn’t surprising that most governments tend to come up with national poverty lines that are explicitly or implicitly relative to average incomes.

The U.S. is an exception: It has a poverty line that is explicitly absolute—you are poor if your income is lower than the cost of a food basket, plus an allowance for nonfood expenditures like rent. This standard was set in the 1960s and has been updated only to reflect inflation. As a proportion of U.S. median household income, the poverty line has fallen from one-half to below one-quarter since 1963.

But the European Union uses a poverty line that is explicitly relative—you are poor if you live in a household with an income that is below 60 percent of mean household income. And it turns out that while most developing countries purport to use an absolute poverty line, in practice they implement a relative approach. Most commonly, the poverty line is officially set using a basket of goods meant to reflect basic needs. But as countries get richer, the basic needs bundle gets more generous. Food costs start to include meat and fish alongside grains and vegetables, for example. And nonfood costs add utilities and transport alongside rent. That’s why China doubled its (supposedly absolute) poverty line in 2011 after years of strong economic growth. And it's why there is a strong positive relationship between gross domestic product (GDP) per capita and the value of the poverty line across countries.

For the past 25 years, the World Bank has set an extreme poverty line based on being “poor by the standards of the poorest countries.” In 2005, it used the average of the latest national poverty lines of the poorest 15 countries worldwide for which there were data. Among these countries, it appeared that the relationship between average national incomes and incomes defined as poverty broke down. World Bank staff argued this was a sign that at the lowest levels of national incomes the poverty line didn't measure relative poverty—it was an indicator of a truly minimum consumption basket, enough calories, shelter, and so on to guarantee physiological necessities. It was, in other words, truly a measure of extreme poverty.

But the latest analysis by World Bank staff, based on a considerably improved database, suggests that the poorest countries also see a relationship between increasing average consumption levels and increasing poverty thresholds. Even in the world’s poorest economies, poverty is still a relative concept.

This is a big problem for the goal of wiping out poverty using a definition based on the poverty lines of those poorest countries—because as they get richer, the line will move. It's long been clear that if the world is going to meet the goal of lifting everyone over $1.25 a day, the poorest countries are going to have to see rapid economic growth. No low-income country has a $1.25 poverty rate below 6 percent, and the median rate in those countries is 46 percent. Any scenario that sees the world reaching toward minimal $1.25-a-day poverty in 2030 involves 15 years of very healthy GDP per capita growth in low-income countries.

But if getting everyone above an absolute income level like $1.25 is going to involve average incomes rising precipitously, that’s also going to force up national poverty lines. When those national poverty lines are used to set the global extreme poverty line, it too will go up—no longer $1.25, but $2.00 or $3.50. There's no scenario that sees the world ending poverty if the poverty line is set relative to the average incomes of the world’s poorest countries.

To mollify its president and presidents elsewhere, the World Bank is likely to move to a new measure of global extreme poverty that is truly fixed. The current favorite appears to be taking the same 15 poverty lines used in the 2005 exercise and updating them for national inflation rates, converting them to dollars using the latest estimates of the purchasing power of national currencies, and taking the average. That process leads to a new “extreme” poverty line of $1.82 in 2011 dollars, and it will mean global poverty numbers will join the U.S. (with the same poverty line since the Johnson administration) in being based on an absolute definition of poverty. At the moment, the resulting number isn’t too different from the average of recent poverty lines across low-income countries, which comes out to $1.92 — but over time the lines will diverge as national poverty lines rise with average incomes.

If the global extreme poverty line was originally meant to reflect “being poor by the standards of the poorest countries,” by 2030 that standard will be “being poor by the average definition two or three decades ago of the poorest 15 countries with available statistics updated by more or less reliable inflation and purchasing power numbers since then.” On the plus side, that may allow a 69-year-old ex-President Obama to declare the U.S. met his State of the Union commitment to end poverty from 17 years before. But, by that point, it isn’t clear why anyone would think the accomplishment meant very much.

 

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