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PPPs for policy making: a visual guide to using data from the ICP - Chapter 2: Poverty and inequality

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Monitoring poverty levels and the trends in poverty rates over time is important to the development agendas of many countries. Robust and consistent measures of poverty, whether they be global yardsticks allowing cross-country comparisons or national measures that reflect their own assessments of poverty, can help policy makers assess the success of poverty reduction strategies, gauge program effectiveness, and guide their development strategy.

Countries have identified poverty reduction as one of the most pressing goals under the United Nations’ 2030 Agenda for Sustainable Development with Sustainable Development Goal (SDG) target 1.1 looking to eradicate extreme poverty for all people everywhere by 2030.  International poverty lines identify the daily income or consumption level under which people struggle to provide for their basic subsistence needs. These levels are expressed in PPP dollars to enable a common measurement across all countries. The lowest of these, the extreme poverty line, is currently set at $1.90 a day in 2011 PPP terms using PPPs estimated at the level of Households and Nonprofit Institutions Serving Households (NPISHs) Final Consumption Expenditure and was originally based on national poverty lines found in some of the poorest countries. The $3.20 poverty line is derived from typical national poverty lines in countries classified as lower-middle-income, while the $5.50 poverty line represents typical national poverty lines in upper-middle-income countries. The poverty headcount ratio is defined as the percentage of the population living on less than these 2011 PPP-based levels of daily income or consumption (figure 2.1).

In order to assess the depth of poverty alongside its incidence, policy makers can examine the poverty gap (figure 2.2) defined as the mean shortfall in income or consumption from the extreme poverty line, counting the nonpoor as having zero shortfall, expressed as a percentage of the poverty line.

National poverty lines reflect social and economic assessments made in each country of how much a person needs per day in order to meet their basic needs. Additionally, the World Bank has defined societal poverty lines that are tailored to the specific level of economic development of each country. This is calculated as $1 + 50 percent of the daily national median consumption or income in 2011 PPP terms for each country, with a lower bound set at the extreme poverty line of $1.90 (figure 2.3).

SDG target 1.1 also examines the working poverty rate which identifies those that live in poverty despite working. This metric, from the International Labour Organization (ILO), indicates the adequacy of employment-related incomes, the quality of employment, and the state of the labor market’s health, and provides a baseline from which to measure the success of targeted policies (figure 2.4).