Is poverty absolute or relative? When we think of (one-dimensional) income poverty, should we define the threshold that separates the poor from the non-poor as the cost of purchasing a fixed basket of goods and services that allows people to meet their basic needs? Or should we instead think of it as relative deprivation: as earning or consuming less than some given proportion of the country’s average living standard?

This is an old debate, and international institutions have made different choices. Whereas the European Union (through Eurostat) and the OECD typically rely on relative poverty lines – set at 50% or 60% of national median incomes – the World Bank has traditionally used an absolute poverty line, currently set at $1.90 per person per day, in 2011 PPP dollars. The World Bank’s motivation was to measure poverty across countries in a welfare-consistent way: We wanted the International Poverty Line (IPL) to correspond, as far as possible, to the same level of welfare, regardless of the country the individual lived in. PPP exchange rates were used to try to account for differences in the cost of living across countries, and the intention was that a line thus adjusted would capture the same levels of well-being, in a way that using half the median income in, say, Madagascar and the Czech Republic, never could. The specific value of the international poverty line was, by design, anchored on the poverty thresholds used by some of the world’s poorest countries (see Ravallion, Datt and van de Walle).

Blog courtesy of the World Bank

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