Stats on Poverty? Or the Poverty of Stats?

Reported by Sara Burke

NEW YORK, April 6, 2003—Sparks flew in the genteel conference room of the Carnegie Council on Ethics and International Affairs last week as a select group of economists from around the world debated poverty reduction and world inequality. Billed as a workshop, the event was organized by Nobel Laureate and former World Bank Chief Economist Joseph Stiglitz and his Columbia University-based group, Initiative for Poverty Dialogue (IPD). Dramatic disagreements among the world’s most prominent development economists on how to measure poverty—and even how to define it—unfolded in bizarre relief against the backdrop of UN Millennium Goal number one: to cut world poverty in half by 2015.

The World Bank’s dollar-a-day, international poverty yardstick has been the standard measure of “absolute” poverty since 1990, when it was first used in the Bank’s World Development Report. According to the World Bank, 1.2 billion people lived in absolute poverty in 1990. In the years since, Bank statistics indicate that both the number and percentage of poor people has fallen worldwide. The enormous amounts of data and political and logistical difficulties involved in analyzing world poverty give the World Bank a virtual monopoly on the numbers. Recently, the authority of World Bank poverty figures has been challenged by economists from both the right and the left. These challenges reflect more broad-based political attacks on the Bank in the last few years from hard-core free-traders, on the one hand, and the anti-globalization movement, on the other. Although politics was not on the workshop agenda, defensive World Bank economists and their IPD patrons fielded challenges from two distinct fronts of economic opposition.

The right-wing challenge comes from economists who think the Bank overestimates world poverty. Columbia University bad-boy economist, Xavier Sala-i-Martin, is the prime example. He thinks the world’s poor number only about 300 million people, a quarter of what the World Bank claims. Not surprisingly, this optimistic assessment of the effects of globalization was picked up quickly and celebrated widely in the press, with headlines like “The U.N. Is Dead Wrong on Poverty and Inequality” (Business Week) and “The Rich Get Richer and Poor Get Poorer. Or Do They?” (The New York Times). Sala-i-Martin was noticeably absent from the conference round table—he was invited, according to Joseph Stiglitz, but declined to attend. However, his absence was offset by the inclusion of former Rand Corporation, World Bank, and Deutsche Bank economist Surjit Bhalla, whose poverty estimates are, if anything, even more optimistic than Sala-i-Martin’s.

The left-wing challenge to the Bank comes from an economist-philosopher duo who say that defining poverty only in terms of income—as the World Bank does—and not also in terms of people’s basic needs like food, clothing, shelter, health-care, and other factors that vary from region to region, is not the way to measure poverty. According to Barnard College economist Sanjay Reddy and Columbia University philosopher Thomas Pogge, the Bank’s income-based definition of poverty isn’t the only problem with its estimates. They argue that even the income-based calculations put out by the Bank are based upon such inconsistently gathered and limited data that precise measurements of poverty cannot be made from it, and yet World Bank figures hold almost uncontested authority with governments, NGOs, and the popular media, all of whom frequently cite World Bank estimates as evidence that neoliberal policies and globalization have reduced global poverty.

While Reddy and Pogge (whose work is available at present their challenge in the politest of ways, it is clear that it comes at the worst possible time for the World Bank and its defenders, like Stiglitz. They have enough work on their hands discrediting the Sala-i-Martins and Bhallas in the world of economics—and then convincing the press to write about it—without having to deal with upstarts like Reddy and Pogge. That may explain why volatile Princeton economist Angus Deaton spent as much time pounding the table and yelling, “imaginary data!” at Surjit Bhalla as he did reprimanding Sanjay Reddy and Thomas Pogge for providing what he called “the fringe” with fodder for attacks. “You are quoted all over the world,” he admonished the duo. “Right now you are the leading cause of discussion critical of the Bank.”

The heart of the issue for the World Bank is fine-tuning its methods, not overturning them. Currently, the Bank bases its poverty line on income and purchasing power parity (PPP) statistics, on household survey data, and on a particular method devised in 1990. In 1990, the Bank based its international poverty line on the official domestic poverty lines of thirty-three countries surveyed in 1985. These domestic poverty lines were then scaled up or down to track changes in the national consumer price indices of those countries and then converted back to 1985 national currency units. These 1985 units were then converted to a common “real purchasing power” unit utilizing 1985 PPP conversion factors (in U.S. dollars.)

This placed the global poverty line at $1/day in 1990 because the poorest countries of the thirty-three surveyed had official domestic poverty lines that matched that conversion. This $1 (in 1985 PPP) was then converted back into national currency units using the 1985 PPP conversion factors, and the results were inflated or deflated according to national consumer price indices. The results were applied to household survey data to arrive at a headcount of poor people in a particular country in a particular year.

Contrary to popular conception, this does not mean that world poverty is defined by what $1 U.S. would buy in another country, like Malawi or Argentina. The dollar-a-day income measure is based on relative, not nominal, exchange rate terms. That means world poverty is based on what $1 U.S. would buy in the U.S. To add confusion to an already complicated formula, the World Bank changed its method for its 2000 poverty estimates, resulting in a new poverty line that may not be comparable with its 1990 line.

Among the many problems with the World Bank method, its critics say, is its reliance on household surveys that are inconsistent from country to country and year to year. To get around survey deficiencies, economists like Xavier Sala-i-Martin and Surjit Bhalla base their methods on mysteriously filling holes in the World Bank’s income data in ways that produce world poverty figures dramatically lower than the World Bank’s. The problem with the “optimists’ approach” is that it defies common-sense observations of the effects of neoliberal globalization on the world’s poor and seems conveniently tailored to bolster neoliberal objectives.

Frustration with this approach surfaced frequently during the workshop. During the final session, World Bank Development Research Group economist Shaohua Chen exploded at Surjit Bhalla, “Show us what you are doing with World Bank data!” And in a question and answer session with the press, Joseph Stiglitz called studys like Sala-i-Martin’s, “Gross distortions. Most who claim that the trend of global poverty is reducing do so without acknowledging that China’s growth and inequality reduction has brought the whole world up, and China has not followed neoliberal policies.”

Sanjay Reddy and Thomas Pogge focus their three-point criticism of World Bank methods differently than Bhalla and Sala-i-Martin. The first problem, according to Reddy and Pogge, is that the Bank does not define poverty in terms of access to a minimum set of basic needs, such as nutritional capabilities or the commodities that can generate them. This sort of “capabilities approach” means that resource requirements (say, the amount of grain eaten daily by a farmer in a grain-producing region, or the amount of rice eaten daily by an urban industrial worker in a rice-producing region) can be generally defined to create a standard that can vary across gender, age, and other groups and across time and regions. Second, the Bank uses standard PPPs that are based on average prices of all commodities, not just those that are needed by poor people. Evaluating purchasing power over commodities like cars, Dom Perignon, and VCRs is obviously not relevant for poverty estimates. Finally, because the Bank’s estimates are based on limited data that varies from country to country in its consistency, it conveys a false sense of precision that has been used by many—both inside and outside the Bank—to claim that world poverty is decreasing.

And that leads us back to the UN’s Millennium Goal number one. An average thinking person might be excused for wondering how a contentious group of economists proposes to cut world poverty in half in a mere twelve years. “Optimists” like Sala-i-Martin and Bhalla provide an easy solution: we’re already there! So why not smash any remaining impediments to neoliberal privatization, liberalization, and the like? In fact, turn up the heat!

Joseph Stiglitz’s solution is more nuanced, but perhaps not fundamentally different than Sala-i-Martin’s. He advocates—not shock therapy—but a kinder, gentler neoliberalism that stresses rolling out one liberalization measure at a time. “There are huge debates about the consequences of globalization for poverty and huge inferences about the numbers,” he said in the closing remarks of the workshop. “It is the role of policies in promoting economic growth that is the real issue. We have to encourage economists not to look so narrowly at growth, but to look policy by policy at neoliberalism and evaluate each in its own right.”

The jury of skeptical poor is still out on that one.

Sara Burke is the editor of Gloves Off: she urges interested readers to keep reading Gloves Off or subscribe to our (roughly) monthly updates as we go into much more depth on the issues of poverty and inequality in the near future. To subscribe email the editor and put "SUBSCRIBE" in the subject line.

Related Links

Initiative for Poverty Dialogue
Joseph Stiglitz's organization conceived to aid developing countries in exploring policy alternatives and to foster greater participation in economic policymaking.

If you're not creeped out by the javascript eyes that follow your cursor around the screen or the endlessly looped muzak version of Frank Sinatra's, "Something Stupid" in his homepage, you'll be able to find links to his papers and to their multiple citations in the press.

Social Analysis
Sanjay Reddy's and Thomas Pogge's site has links to their paper "How Not To Count the Poor" as well as letters back and forth between themselves and World Bank economist Martin Ravallion.

World Bank
This is the link to the World Bank-Media Center's issue brief on poverty.