Purchasing power parity (PPP) and the international poverty line To measure poverty in the world as a whole, a common standard is required. Because market exchange rates tend to understate the real incomes of developing countries and overstate the extent of poverty, PPPs are used to compare income and consumption levels between countries. PPPs are calculated to compensate for differences in the price of goods and services between countries. The result is a conversion factor that can be used like an exchange rate to convert values in one currency into those of a reference currency (such as the U.S. dollar). In 2008, new PPP estimates for 2005 became available from the International Comparison Program. The World Bank's original “$1 a day” international poverty line was based on the poverty lines in the world's poorest countries. By focusing on the standards of the poorest countries, the $1 a day line gave the global poverty measure a salience in focusing on the world's poorest. Using the new 2005 PPP rates, the international poverty line was revised to $1.25 a day, which is the average poverty line of the 15 poorest countries in the world.
further disadvantaged by lack of knowledge about how to access basic social services. Compounded by weak social institutions, lack of adequate infrastructure, and environmental resources that have been depleted or spoiled, they may become caught in poverty traps. A multidimensional development strategy, coupled with good governance, is required to escape. The significant reduction in extreme poverty over the past quarter century disguises large regional differences. The greatest decline occurred in East Asia and the Pacific, led by China, where the poverty rate fell from 78 percent in 1981 to 17 percent in 2005 and the number of people living on less than $1.25 a day dropped more than 750 million. Over the same period, the poverty rate in South Asia fell from 59 percent to 41 percent. In contrast, the poverty rate has fallen only slightly in Sub-Saharan Africa rising from 53 percent in 1981 to 59 percent in 1999, then dropping to 51 percent in 2005, while the number of people living in poverty nearly doubled. The Millennium Development Goals (MDGs) call for 1990 poverty rates to be cut in half by 2015. At present many countries are falling short of that goal. The average daily income of those living on less than $1.25 a day increased slightly in most regions during the 1990s. A marked exception is Sub-Saharan Africa, where average income of the poor did not increase—remaining at a meager $0.73 a day—pointing to the severity and depth of poverty in this region. The number of people living on less than $1.25 a day is expected to fall to less than 1 billion by 2015, but the number living on between $1.25 and $2.00 a day will remain constant at about 1.1 billion for the next decade. These are still very poor people whose prospects will improve only through continued growth.
Children from poor households are more likely to be underweight Prevalence of child malnutrition, underweight (% of underweight children under 5) 60
Poorest
50
Richest
40
30
20
10
0
Bangladesh 2007
Jordan 2007
Source: Demographic and Health Surveys
Congo, Dem. Rep. 2007
Average daily incomes of the extremely poor have stagnated in Sub-Saharan Africa and Latin America and the Caribbean Average daily income of the population below $1.25 poverty line ($,PPP) Latin America & Caribbean
1.0
Sub-Saharan Africa Other developing economies
0.8
0.6
0.4
0.2
0.0
1981
1990
2005
Source: Chen and Ravallion, 2008, “The Developing World Is Poorer than We Thought, but No Less Successful in the Fight against Poverty”
Rich and poor
25