World Bank Updates Poverty Estimates for the Developing World

August 26, 2008

  • World Bank poverty estimates strengthened by better cost-of-living data
  • 400 million more people live in poverty than earlier thought
  • Developing world still on track to halve poverty from its 1990 levels by 2015

Updated February 17, 2010: The Chen and Ravallion (2008) research reported below still stands as the latest comprehensive estimate of poverty in developing countries. Projections of the impact of the financial crisis on poverty are available in a new World Bank report, Global Economic Prospects 2010. 

August 26, 2008—New poverty estimates published by the World Bank reveal that 1.4 billion people in the developing world (one in four) were living on less than US$1.25 a day in 2005, down from 1.9 billion (one in two) in 1981.

The new numbers show that poverty has been more widespread across the developing world over the past 25 years than previously estimated, but also that there has been strong—if regionally uneven—progress toward reducing overall poverty.

Looking at the new estimates from the perspective of the Millennium Development Goals, a set of internationally agreed development targets, the developing world is still on track to halve extreme poverty from its 1990 levels by 2015. This is the first of eight critical goals.

“However, the sobering news—that poverty is more pervasive than we thought—means that we must redouble our efforts, especially in Sub-Saharan Africa,” said Justin Lin, Chief Economist of the World Bank and Senior Vice President, Development Economics.

Updated poverty estimates are published by the Bank every few years, based on the most recent global cost-of-living data as well as on country surveys of what households consume.

Improved cost-of-living data for developing countries

Our latest revision of poverty numbers is the largest revision yet because of important new data revealing that the cost of living in the developing world is higher than we thought,” said Martin Ravallion, director of the World Bank’s Development Research Group.

Ravallion refers to new information published earlier this year on the comparative prices of goods and services (such as food, housing, transport and so on) across many countries, expressed as internationally comparable exchange rates known as purchasing power parities (PPPs).

The latest PPPs—for 2005—were made available by a global statistical initiative called the International Comparison Program (ICP). The improvements in the design, implementation and analysis of the ICP price surveys for 2005 mean that the new PPPs are more reliable than older data from 1993 and 1985, which underestimated the cost of living in developing countries.

More accurate estimates of poverty

In the light of these new data, the Bank’s estimates of the extent of poverty in the developing world have also been revised upward across the entire period of research (1981 to 2005).

The new estimates are a major advance in global poverty measurement because they are based on far better price data for assuring that poverty lines are comparable across countries,” said Shaohua Chen, senior statistician in the Development Research Group.

An earlier estimate of poverty—of 985 million living below the former international poverty line of $1 a day in 2004, down from 1.5 billion in 1981—was based on 1993 cost-of-living data which was the best available at the time.

The new poverty numbers, which show that 400 million more people lived below the poverty line in 2005 than earlier thought, are benchmarked to the revised international poverty line of $1.25 a day in 2005 prices. This line is a good standard for assessing extreme poverty because it is the average of the national poverty lines for the world’s poorest 10 to 20 countries.

The new international poverty line is not intended to replace national poverty lines,” said Ravallion. “When measuring poverty and discussing appropriate policies in a specific country one should naturally use a poverty line considered appropriate to that country, which need not accord with our international line.”

A forthcoming supplement to World Development Indicators will report poverty estimates using both the national poverty lines for each country as well as the new international poverty line that helps assess poverty comparably across all regions and countries.

Complete country-level data are available on PovcalNet, an interactive research tool that can be used to replicate Bank poverty estimates and test alternative assumptions, such as the poverty line or country groupings.

Overall progress at the global level

Ravallion’s paper on the new numbers, co-authored with Shaohua Chen, is titled “The developing world is poorer than we thought, but no less successful in the fight against poverty.”

The authors find that, though the estimate of the number of poor has increased, the rate of poverty reduction in the developing world is still as strong as when poverty was viewed from the lens of the 1993 price data.

Poverty has been declining at the rate of about one percentage point a year, from 52 percent of the developing world’s population in 1981 to 25 percent in 2005. This is no small achievement, given that the number of poor fell by 500 million in this period.

Yet even at this rate, about a billion people will still live on less than $1.25 a day in 2015,” said Ravallion. “And many of those who escaped 1.25-a-day poverty across 1981-2005 would still be poor by the standards of rich or even middle-income countries.”

Also, lags in survey data availability mean that the new estimates do not yet reflect the potentially large impact on poor people of rising food and fuel prices since 2005.

An uneven picture across developing regions

Poverty in East Asia—the world’s poorest region in 1981—has fallen from nearly 80 percent of the population living on less than $1.25 a day in 1981 to under 20 percent in 2005 (about 316 million), largely owing to dramatic progress in poverty reduction in China.

$1.25 a day poverty in South Asia has also fallen, from 60 percent to 40 percent over 1981-2005, but this has not been enough to bring down the region’s total number of poor, which stood at about 600 million in 2005.

In Sub-Saharan Africa, the $1.25 a day poverty rate has shown no sustained decline over the whole period since 1981, starting and ending at 50 percent. In absolute terms, the number of poor people has nearly doubled, from 200 million in 1981 to 390 million in 2005. However, there have been signs of recent progress; the poverty rate fell from 58% in 1996 to 50% in 2005.

In middle-income countries, the median poverty line for the developing world—$2 a day in 2005 prices—is more relevant. By this standard, the poverty rate has fallen since 1981 in Latin America and the Middle East & North Africa, but not enough to reduce the total number of poor.

The $2 a day poverty rate has risen in Eastern Europe and Central Asia since 1981, though with signs of progress since the late 1990s.

A constant effort to improve data

Data are never perfect, though they are getting better over time,” said Shaida Badiee, Director of the Bank’s Development Data Group. “The World Bank works constantly with partners in developing countries to improve data quality and access to data.”

An example of statistical improvement is the addition of price surveys for China to the 2005 round of the ICP. Many developing economies did not participate in earlier ICP rounds, but the 2005 ICP covered 146 countries including China.

The quality of the price data being collected has also improved over time, with product listings being specified in much greater detail. For example, in the 2005 ICP surveys, six different kinds of rice were classified by eight price-determining characteristics to ensure comparability between countries. In total, more than 1,000 products were included in the price surveys.

Ravallion notes that the scope and availability of household surveys of income and consumption have also improved vastly. “The latest poverty estimates draw on 675 household surveys for 116 developing countries, representing 96 percent of the developing world,” he said. “Yet 20 years ago we could only do these calculations properly for 22 countries. That is great progress in our knowledge about poverty in the world.”