Research Agenda: ICP PPPs and Global Poverty Measurement

ICP PPPs and Global Poverty Measurement

For more than three decades, the World Bank has relied on PPP measures from ICP in its calibration of the international poverty line (IPL) and in producing estimates of incidence of global poverty. The initial IPL of $1/day was based on results from the 1985 ICP and the Bank has subsequently revised the lines to $1.08, $1.25 and $1.90 based, respectively, on PPP data from the 1993, 2005 and 2011 rounds of the ICP. The influence of successive rounds of ICP on the IPL and the resulting changes in global poverty estimates have been the subject of intense debates. These debates have led the World Bank to seek advice from a group of distinguished researchers in this area led by late Professor Atkinson.

Recommendation 10 of the Atkinson Commission Report (World Bank, 2016) deals directly with the use of PPPs from ICP. The recommendation is that cross-country price comparisons (or exchange rates) be fixed at the 2011 PPP values, and that the IPL should be adjusted over time for each country, in local currency, using national CPI, or suitable alternatives, until 2030.

This is a far reaching recommendation as far as ICP is concerned in that the recommendation implies no role for PPPs from ICP rounds between 2011 and 2030 on IPL determination and on estimates of global poverty. However, in its response to Atkinson Commission Report, the World Bank left the scope for use of PPPs from ICP wide open. The following excerpt from the World Bank response adequately summarizes the state of play.

“While we welcome this recommendation, we recognize the trade-off that underlies it: incorporating new PPP values from future ICP rounds is desirable to the extent that real changes in purchasing power across countries are captured; and undesirable to the extent that changes arising only from methodological changes between rounds are captured instead. In the past, vigorous debates have ensued as to whether changes in global poverty when new PPP data became available were real, or induced by methodological instability. A concern that such perceptions undermine the credibility of the entire exercise were paramount in shaping this recommendation. Recognizing this trade-off, we plan to follow this recommendation, but leave open the possibility that future PPP rounds might be used again to inform the construction of the IPL, even before 2030, if and only if we are satisfied that the ICP methods have substantially stabilized over at least two ICP rounds. This would require that our own researchers, and the broader scholarly community, are largely of the view that changes in PPPs are then driven by real changes in cost-of-living parities, rather than in data collection or index-number methodology.” (page 3, A Cover Note to the Report of the Commission on Global Poverty, chaired by Prof. Sir Anthony B. Atkinson October 18, 2016)

In summary, Recommendation 10 of the Report clearly fixes the IPL at $1.90 based on PPPs from the 2011 ICP and the national currency equivalents in 2011 are projected forward based on the CPIs in respective countries. However, the World Bank response leaves the door open to the use of PPPs from ICP exercises between now and 2030. Any future decision to use PPPs from any of the subsequent rounds of the ICP has to rely on sound arguments demonstrating the superiority of the new PPPs to the use of 2011 PPPs as recommended by the Commission. Monitoring and close scrutiny of PPPs from the 2017 ICP and beyond and their impact on poverty measures is an essential task for the ICP and the World Bank. The following can be undertaken:

  • Assess the impact of 2017 ICP PPPs on global poverty measures;
  • Compare poverty estimates from the 2017 ICP PPPs with those resulting from the implementation of Atkinson Report based on the 2011 ICP PPPs;
  • Examine the implications of the shift towards compilation of annual series of PPPs which are planned for production from 2019 onwards;
  • Assess implications of availability of sub-national PPPs for large countries like China, India, and Indonesia for poverty measurement at the World Bank;
  • Identify strategies to make use of data underlying the headline PPP estimates from ICP; and
  • Investigate whether poverty-specific PPPs are more pertinent for poverty estimates. The Global ICP Unit has initiated work on this topic by examining whether the use of household survey expenditures and prices of products more relevant to the poor would yield significantly different PPPs than those produced by the ICP.