Column The $1.25 question

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: that apparently dramatic increases in poverty occur if the poverty line is increased from $1.08 to $1.25 or even to $2.What complicates matters is that $1.08 or $1.25 isn’t at official exchange rates, but at PPP (purchasing power parity) exchange rates. The difference between official and PPP exchange rates occurs because the prices of goods and services, particularly non-traded goods and services, are lower in developing countries.

What’s now happened with poverty figures is a natural corollary to an earlier revision of PPP output figures in China and India, especially the former. Since prices in China and India were higher than what was earlier assumed, China’s PPP national income was reduced by around 40% and India’s PPP national income by around 30%. Following the same logic, the PPP poverty line is now proposed at $1.25 a day and the focus is again more on China than on India. While the logic is clear, there is still lack of clarity about robustness of the Bank’s PPP survey. For instance, using its own survey, ADB thinks the poverty line should be $1.35 a day. Using $1.08 a day, the World Bank estimated 879 million to be below the poverty line in 2004. If one uses $1.25 a day, the figure dramatically increases to 1.3996 million, almost 1.4 billion.