Here's what purchasing power parities can tell us about world poverty

The International Comparison Program (ICP) has just published new purchasing power parities (PPPs). It has revised the previously published 2011 PPPs to take into account the effects of national accounts rebasing. It also published new PPPs for 2017 that reflect new price data collected from around the world. In the World Bank’s global poverty measurement, PPP exchange rates are used to adjust for differences in price levels across countries. Previous releases of PPPs led to large changes in global poverty estimates, e.g. with the 2005 PPPs there were some 400 million more poor people in the world (Chen and Ravallion, 2010).

In a paper published today, we take a first look at what the new PPP estimates mean for the World Bank’s current global poverty estimates. Poverty measures are estimated from more than a thousand consumption/income distributions in PovcalNet (March 2020 update) covering 166 economies, that represent around three-quarters of the world’s population in 2015. To isolate the impact of the PPP changes on global poverty headcounts, only PPPs are updated in the paper, closely following the approach by Ferreira et al., 2016 (blog). The paper also discusses potential implications for the derivation of the international poverty line and reports results for the higher lines ($3.20 and $5.50 with the original 2011 PPPs), which may be more relevant for countries that have a low incidence of extreme poverty. In the blog we concentrate on the effects of the new PPPs on global extreme poverty.

The changes observed in the global poverty headcount with the revised 2011 and 2017 PPPs are small, and the historical trend remains virtually unchanged (see Figure 1). The revised 2011 PPPs slightly increase global poverty, while the new 2017 PPPs reduce it slightly, since around the mid-2000s. With the revised 2011 PPPs, the global poverty headcount increases by 0.3 percentage points (pp) to 10.3% in 2015, equivalent to 20 million more poor people in the world. In contrast, with the 2017 PPPs, the global poverty headcount decreases by 0.6pp to 9.4% in 2015, equivalent to 46 million fewer poor people in the world. These changes are very small when compared with previous ICP rounds, particularly the 2005 round, which suggested that 400 million more people were poor than previously thought.

In Figure 2, we take a closer look at the changes at the regional level for the revised 2011 PPPs. While extreme poverty slightly decreases in East Asia and Pacific, Europe and Central Asia, and the Middle East and North Africa, this is outweighed by increases in South Asia and Sub-Saharan Africa. The upward revisions in poverty in South Asia and Sub-Saharan Africa—the two poorest regions—drive the overall increase in global poverty as a result of the revised 2011 PPPs. Although the increase in millions of poor is larger in South Asia (14 million) than Sub-Saharan Africa (11 million), the increase in the poverty rate is larger in Sub-Saharan Africa (1.1pp) than South Asia (0.8pp). Countries in Sub-Saharan Africa with the highest increases in poverty rates in 2015 are Angola (3.8pp), Liberia (3.1pp), Nigeria (2.6pp), Cameroon (2.2pp) and Sierra Leone (2.1pp). The largest changes in millions of poor in 2015 are observed in the most populous countries in the developing world: India (14.1 million more poor people), Nigeria (4.7 million more poor people), Indonesia (3.6 million fewer poor people) and Ethiopia (1.7 million more poor people). India accounts for more than two-thirds of the increase in the global headcount, while Nigeria accounts for nearly half of the change in Sub-Saharan Africa.

The Atkinson Commission on Global Poverty advised the World Bank to retain the original 2011 PPPs for its global poverty measures until 2030 (the target date for the Sustainable Development Goals) and not incorporate future ICP rounds (World Bank, 2017). Tony Atkinson was concerned that new ICP price data could potentially move the goalposts, given the importance of methodological revisions in previous ICP rounds. At the same time, new PPPs also reflect more up-to-date price data, or revisions to previous input data in the case of the revised 2011 PPPs (also see the World Bank’s response to the Atkinson Commission report). We will incorporate the revised 2011 PPPs in the next PovcalNet update, given that they reflect updated and better input data (e.g. as the result of national accounts rebasing). This is similar to how PovcalNet periodically revises its other input data, such as CPI, GDP or population estimates, to reflect the most accurate information. How the World Bank will use the 2017 PPPs in its global poverty measures will require more analysis and deliberations.