How Does the World Bank Measure Poverty?

There is almost never just one way to measure an economic variable, and poverty is no exception. Judgments are required about the best method—given the data available—at virtually every step, starting with the design and processing of the underlying household survey data. The judgments made should be explicit and subjected to independent review. In that spirit, Deaton (this issue) provides a usefully critical discussion of the current methods used by the World Bank for measuring poverty. This is welcome and timely. It is welcome in part because it is by Angus Deaton, who for 20 years has been a leading scholar on the theory and methods of welfare measurement using household-level data. And it is timely because of recent concerns about whether our current measurement tools fully reflect how the living conditions of the world’s poor are changing. I will not address all the points raised by Deaton—avoiding those on which I think there is broad agreement that the World Bank’s current methods could be improved. These include the way that (invariably troublesome) income surveys are handled, the scope for better use of subjective-qualitative welfare data, and the need to better acknowledge the limitations of welfare metrics based solely on consumption of market goods. This leaves two main issues that are very important for global poverty measurements—namely, how currency conversions are done and whether the poverty measures should be anchored to the national accounts. On both counts, Deaton makes recommendations for changing current methods. Before considering his recommendations, I will briefly describe how the World Bank measures poverty.