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Don’t cite global numbers unless you know they’re trustworthy (They usually aren’t)

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.”

3) Why don’t you just ask people if they think they are poor?

Gallup’s World Poll does.

In contrast to the World Bank global poverty rate of 25 percent (around which there were those misguided revisions and many other uncertainties on the order of 40 percent of the original estimate):

33 percent worldwide say they don’t have money for food,
38 percent say their living standards are poor, and
39 percent say they are “in difficulty.”

So you are on safe ground saying, “there are lots of people in poverty.” But don’t insult our intelligence with an exact number.

4. Deaton offers consolation: you don’t really need a global poverty number.

In spite of the attention that they receive, global poverty … measures are arguably of limited interest. Within nations, the procedures for calculating poverty are routinely debated by the public, the press, legislators, academics, and expert committees, and this democratic discussion legitimizes the use of the counts in support of programs of transfers and redistribution. Between nations where there is no supranational authority, poverty counts have no direct redistributive role, and there is little democratic debate by citizens, with discussion largely left to international organizations such as the United Nations and the World Bank, and to non-governmental organizations that focus on international poverty. These organizations regularly use the global counts as arguments for foreign aid and for their own activities, and the data have often been effective in mobilizing giving for poverty alleviation…It is less clear that the counts have any direct relevance for those included in them.

Deaton is apparently not a big fan of the Millennium Development Goal approach of international accountability for precise reductions in global poverty numbers, which will be a tad difficult when you don’t know what those numbers are.

Preview of coming attractions: other global numbers are also based on a firm foundation of wet sand. The people who claim to know the exact number of hungry people in the world … you might want to start issuing mucho disclaimers now.

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9 Comments

  1. I like this post, and agree with most of what you say. But a part of me dies when I see people base arguments on polling.

    If you think that the generation of poverty statistics is an imprecise field, then you’d *love* polling procedures. So much depends on:

    – the person asking the question
    – the phrasing of the question (“Are you in poverty?”, “Do you consider yourself to be poor?”, “Would you assess your material conditions as well below the norm?” are all related questions that will get very different answers)
    – the place where the question is asked. Stopping someone in the street and asking a question may elicit a different answer to asking them in their own homes
    – the audience for the response (everyone has questions which they answer differently for different groups)

    and we haven’t even gotten into sampling questions, and issues of survey implementation (do all questioners use the exact wording on the page? is it a verbal poll, or do the respondents write answers etc. etc. etc.)

    And to make things worse, we know that perceptions of things like poverty, crime etc. are very time-dependent and may vary significantly from week to week or year to year; and for things like crime, which can be measured with some reliability, we know that perceptions often bear no resemblance to reality, in either magnitude or trend.

    Posted January 21, 2010 at 1:50 am | Permalink
  2. Alli wrote:

    As a student of development for 3 years (and counting), I must say that became jaded about relying poverty statistics about one year into it.

    I have come to reconcile the inaccuracy that obviously exists by recognising that it is not the number that matters but they idea that that number represents. Does it really matter if its .87, 1.4, or 1.7 to anyone other than economists? Any one of those numbers is unacceptable and represent a tool which I could use to help people conceptualize the fact that around a billion people are living in poverty on any given day or poll.

    If exact numbers are what mobilizes the world bank or a grant giving foundation, or the private sector then I might as well pick a number, cite it, and get to the point. If we shouldnt cite numbers that are incorrect then we should change the system that requires them.

    I do think we’d be far better off forgetting about exact numbers and putting the resources that go into finding them directly to the people who need it most

    Posted January 21, 2010 at 8:52 am | Permalink
  3. Stephen Jones wrote:

    I always thought PPP figures applied to haircuts and nothing else.

    Posted January 21, 2010 at 8:54 am | Permalink
  4. Ted H wrote:

    “Don’t insult our intelligence with an exact figure.”

    Uh, you are actually insulting the intelligence of most people by thinking anything actually believes these figures are exact. Literally no body thinks these figures aren’t exact. I didn’t think that before this post, it is only logical that it would be incredibly difficult to estimate such a figure.

    Also, both you and Angus Deaton are wrong to believe that numbers aren’t “needed.” Let’s say I’m a father and I need to go the grocery store to buy food for my family. But wait, the problem is I have no idea how many children I have! Now, let’s say I’m an aid distributor and I need to bring in medicine / food / water. But wait, the problem is, I have no idea how many people I have to help. If you don’t even bother to attempt to estimate how many people need help you are going to either underestimate, and hence do too little, or overestimate and waste a bunch of money and time. Saying that numbers “aren’t needed” or of “limited interest” is absurd. The proper thing to say was that they are very helpful, but not necessary.

    Posted January 21, 2010 at 11:16 am | Permalink
  5. D. Watson wrote:

    By the way, the link to Deaton’s address doesn’t work. Here’s a good one.

    Posted January 21, 2010 at 3:28 pm | Permalink
  6. Dan Kyba wrote:

    In some countries there is a significant informal, semi-monetized and semi-subsistence economy mainly based upon small agricultural plots or fishing. This sector tends to be overlooked when calculating national statistics meaning that the numbers tend to be based upon the formal sector and which, due to the aforementioned omission, may then understate the GNI. At the same time, if you calculate the cost of living as based upon the formal economy and omit the impact of the unrecorded economic activity you will overstate the existence of true poverty.

    Be this as it all may, the poverty stats can be a good guide if you understand the caveats, make an informed guess as what the margin of error around those precise numbers might be and stay away from conflating numbers from separate countries. The big problem is the way such numbers are presented by the media in an uncritical manner concomitant with the way some NGOs use them as a marketing tool.

    Item 3 in the article makes a very good point, since poverty once people’s basic needs are covered can become very subjective and relative. The point is discussed at some length in Friedman’s massive effort: The Moral Consequences of Economic Growth.

    Posted January 21, 2010 at 3:55 pm | Permalink
  7. Jay wrote:

    What do Aid Watch readers think about this:

    Parametric Estimations of the world distribution of income
    Maxim Pinkovskiy Xavier Sala-i-Martin
    22 January 2010

    World poverty is falling. This column presents new estimates of the world’s income distribution and suggests that world poverty is disappearing faster than previously thought. From 1970 to 2006, poverty fell by 86% in South Asia, 73% in Latin America, 39% in the Middle East, and 20% in Africa. Barring a catastrophe, there will never be more than a billion people in poverty in the future history of the world.”

    Here is the link http://www.voxeu.org/index.php?q=node/4508

    Posted January 24, 2010 at 6:42 pm | Permalink
  8. Jay wrote:

    What do Aid Watch readers think about the data on at this site.

    http://www.voxeu.org/index.php?q=node/4508

    Posted January 24, 2010 at 6:43 pm | Permalink
  9. There is nothing “absurd” or “misguided” about the World Bank’s latest overhaul of its global poverty numbers. To see why the overhaul was needed, and understand its rationale, one must look closely at the inadequacies of the historical data.

    Since its 1990 World Development Report (WDR) on Poverty, the World Bank has anchored its international poverty lines to the national poverty lines used in the poorest countries. The original “$1 a day” line was a typical line amongst low-income countries in the data available at the time of the 1990 WDR. This is acknowledged to be a frugal line; naturally richer countries have higher national poverty lines. One could hardly argue that the people in the world who are poor by the standards of the poorest countries are not in fact poor. This gives the global poverty line a salience in focusing on the world’s poorest that a higher line would not have. Even so, the Bank has never insisted on using just one line; indeed, in its work with specific developing countries, the Bank uses the national poverty line considered most appropriate in each country.

    Naturally there is now much more data available than was the case in 1990. The original data set on national poverty lines covered only 22 developing countries, all for the 1980s and mainly drawn from academic studies. This sample had particularly weak coverage of Africa and the lines were sometimes only for rural areas and some excluded non-food needs. Since then, there has been a large expansion in the number of countries that have set their own national poverty lines. In its latest update, the Bank has used national poverty lines for 75 developing countries.

    The data on price levels has also improved substantially, thanks to the International Comparison Program (ICP), which collects the data on prices needed to estimate purchasing power parity (PPP) exchange rates. Prior to the latest ICP for 2005, the Bank’s main international poverty line was $1.08 a day at 1993 PPP. The new ICP price data for 2005 indicate that the cost-of-living is higher in developing countries than we thought.

    There are also a great many more household surveys available for measuring living standards. In the 1990 WDR the Bank used only 22 surveys for just 22 countries, while its latest update uses almost 700 surveys for 115 countries.

    In the light of these new data, the Bank has made a major re-assessment of the extent of poverty in the world and how it has changed over time. The full details are available in the paper by Shaohua Chen and Martin Ravallion, “The Developing World is Poorer than We Thought, But no Less Successful Against Poverty,” (Policy Research Working Paper 4703, World Bank). That paper gives revised poverty counts back to 1981. (As in all past updates of the Bank’s global poverty measures, all past estimates back in time are also updated, for all countries.)

    Armed with these new data, the Bank’s researchers returned to the same original idea as in the 1990 WDR, namely that the global poverty lines should be anchored to the poverty lines found in the poorest countries. The Chen-Ravallion paper used five international lines. The lowest of these was $1.00 a day at 2005 prices, which is very close to India’s official poverty line. The next lowest was $1.25 a day, which is the average line of the poorest 15 countries in the new data set. The highest was $2.50 a day, which is the median of all countries except the poorest 15.

    Angus Deaton endorses the basic method, namely to base the international lines on the national lines found in the poorest countries. The $1.25 line at 2005 PPP is essentially set the same way as the original $1 a day line. As you note, Deaton’s concern is that the precise group of countries changed with the updating of the sample of national lines. In particular, India was in the set of countries used to set the original $1 a day line, but it is not amongst the poorest 15 countries used to set the $1.25 line at 2005 prices.

    Yet it was expected that the set of countries would change with the new data. Nobody ever said that India had to be in the reference group of countries forever. It is agreed that the new sample of national poverty lines implies a higher international line than did the old sample of 22 countries in the 1980s. But, as the Bank’s researchers explain in their paper “Dollar a Day Revisited” (Policy Research Working Paper 4620, World Bank), the old sample of national lines used by the 1990 WDR was clearly unrepresentative of developing countries as a whole, while the new sample looks much better from this point of view. To have kept the set of countries constant, as Deaton proposes, would have been very hard to justify given what we now know—it would mean deliberately ignoring the biases in past estimates and ignoring the new data available to correct those biases.

    As noted in “Dollar a Day Revisited,” the original sample of national lines was not representative of developing countries, and was clearly biased downward (though we could not know how much until the new data were available). The sampling bias was unavoidable at the time, but it can now be fixed. Correcting for this bias raised the international line somewhat. But as long as we agree on the principle that this line should be representative of the lines found in low-income countries, we must accept that poverty is higher than we thought by those standards.

    Deaton proposes instead to use a mean of all national poverty lines, weighted by the number of poor. Naturally then the (relatively low) lines found in India (and also China) get a huge weight. However, we do not agree that Deaton’s proposal “presents better continuity” with past estimates. In fact it is not easy to make sense of his comparison between an international line of $0.92 a day in 2005 and the old $1.08 line for 1993. To say that there is “no need for a major revision in our perceptions of poverty” based on that comparison stretches credibility. How can the line in 2005 prices not be higher than the 1993 line? At any 2005 line over $1.03 a day the poverty count is higher than the Bank obtained before (as explained in Chen and Ravallion, $1.03 is the 2005 line that gives the same headcount index for 2005 as the $1.08 line at 1993 prices). So as long as it is agreed that $1 in 1993 international prices is worth more than $1 at 2005 prices, we must agree that the global poverty count for 2005 has risen.

    What then is at stake here? India’s (old) official poverty line is one of the five international lines considered by Chen and Ravallion, though they show clearly that a slightly higher line of $1.25 a day is more representative of the lines found in poor countries. As is clear from the above discussion, India’s official line is low by developing country standards. But any line is potentially contestable. If users of the Bank’s global poverty measures want to use India’s line they are free to do so. (The Bank’s interactive web site PovcalNet allows users to set any line they like.) However, India’s old official line is also thought to be too low in India. Indeed, an Expert Group appointed by India’s Planning Commission has recently proposed a new official line for India, which is about $1.17 a day at 2005 PPP. This is a lot closer to the Bank’s line of $1.25 a day.

    Moreover, the choice between $1.00 a day and $1.25 a day (or even higher lines) makes no difference to the Bank’s claim that measures of absolute poverty have fallen in the developing world over 1981-2005. Indeed, Chen and Ravallion show that this claim is robust to using global poverty lines anywhere between India’s line and the official poverty line used in the United States, which is $13 a day in 2005 (per person, for a family of four).

    The attention of a distinguished economist such as Angus Deaton to issues of global poverty is always welcome. Deaton’s paper contains important insights on a number of other issues not discussed above, including on the methods used to estimate PPPs. But his arguments against the new international line of $1.25 a day do not seem germane to our broader efforts to gauge the extent of poverty in the world, and (most importantly) how much progress the world is making against poverty.

    Posted January 26, 2010 at 11:50 am | Permalink

4 Trackbacks

  1. [...] Don’t Cite Global Numbers Unless You Know They’re Trustworthy (They Usually Aren’t) [...]

  2. [...] research into the steady decline of absolute poverty. His upbeat take is a good complement to Bill Easterly, over on Aidwatchers.com, who applauds recent querying (by Angus Deaton among others) of the exactness and indeed necessity [...]

  3. [...] this blog, but we’re also aware that this isn’t an exact science and that there’s some uncertainty in the data. The data may not reflect accurately the real number of people living in poverty. [...]

  4. [...] data on this blog, but we’re also aware that this isn’t an exact science and that there’s some uncertainty in the data. The data may not reflect accurately the real number of people living in poverty. There [...]

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    The Aid Watch blog is a project of New York University's Development Research Institute (DRI). This blog is principally written by William Easterly, author of "The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics" and "The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good," and Professor of Economics at NYU. It is co-written by Laura Freschi and by occasional guest bloggers. Our work is based on the idea that more aid will reach the poor the more people are watching aid.

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