Column The $1.25 question

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: Has the World Bank revised its poverty figures or do we have a working paper by Shaohua Chen and Martin Ravallion, who happen to work for the Bank? There is a difference. As of today, the World Bank’s database still shows a poverty headcount ratio of 28.6% for India in 2000. No subsequent years are listed.

However, this is based on the national poverty line, the one produced by the Planning Commission and which varies from state to state and from rural India to urban India. The World Bank does not undertake surveys to collect data on household expenditure (not income). That’s still undertaken by NSS and the last large NSS large sample is for 2004-05. This shows a rural poverty ratio (percentage below poverty line) of 28.3%, an urban one of 25.7% and a composite one of 27.5%. Unless one argues growth doesn’t trickle through to the poor at all, poverty ratios in 2008 should be lower.

However, there is also an international poverty line and let us restrict ourselves to expenditure or income poverty, as opposed to other measures of poverty. In 1985 prices, this poverty line was fixed at $1 a day per person. Obviously, if one uses different poverty lines, one will end with different poverty ratios, even if the same survey data are used.

In common citations of the $1 a day poverty line, people often forget it was conceived at 1985 prices and sometimes, a broader $2 a day poverty line was also used. De facto, the poverty line wasn’t $1 a day.

It was $1 at 1985 prices, but $1.08 at 1993 prices and what Chen and Ravallion have now proposed is yet another revision to $1.25 at 2005 prices. If poverty lines are jacked up, naturally poverty ratios will increase. And indeed, poverty ratios don’t increase linearly, because expenditure and income distributions tend to be log normal. That’s precisely the reason trickle-down benefits of growth lead to sharp drops in poverty ratios as the thick part of the distribution passes above the poverty line. Drops from 25% to 10% occur within a couple of decades.