Precisely 1.419 billion live in extreme poverty in our world today. Oh, and it’s equally plausible that precisely 0.874 billion live in extreme poverty. Or maybe it’s 1.7517 billion.
Most development people confidently cite global statistics without knowing what they are based on. Sorry, that’s no longer allowed with today’s greater demands for transparency. Angus Deaton’s AEA Presidential Address just given at the AEA meetings will not let you ever trust the World Bank again on how many people in the world are in extreme poverty.Some nuggets:
1) “India has become poorer because India has become richer!”
The World Bank’s recent 40 percent upward revision of the global poverty number was based on an absurd procedure that led to the paradox in the quote.
To make a long story short, the World Bank decided to boot richer India out of the group of poorest countries used to determine the poverty line, which made the poverty line higher, which made Indian (and global) poverty higher – all because India was richer. This misguided revision of the poverty line, which accounted for virtually all of the upward revision, was not clear to virtually anyone until this new paper by Deaton.
Deaton doesn’t say this, but the World Bank behavior on calculation and publicity around this number was not exactly their finest hour.
2) Adjusting for purchasing power (how cheap the goods are) across countries is complex and probably impossible.
The details are as incredibly boring as they are hugely consequential.
As only one tiny example, the poverty count is sensitive to a mostly-made-up number that is incomparable across countries: the imputed rent to housing.
Then there is the “index number problem,” which only is of great fascination to 2 people, but unfortunately can change the ratio of US/Tajikstan incomes by a factor of 10. The trouble is that rich people and poor people consume very different things. For example, poor people may consume a lot of something that is cheap in the poor country, which is not consumed much and is expensive in the rich country. Similarly, rich people consume a lot of something else that is cheap in the rich country and expensive in the poor country. If you use rich country prices, you exaggerate poor people’s consumption basket value (they are given a lot of credit for consuming a lot of something very expensive, but it isn’t that expensive in the poor country and if it were, they would consume a lot less of it). Conversely, if you use poor country prices, you exaggerate rich people’s consumption basket value. There are possible intermediate solutions but no complete solutions to this intractable problem.
Deaton muses: “perhaps we are aiming too high when we try to construct a real income scale on which every country in the world can be placed.” ...