Asia Key Indicators 2008: In a report released today, the Asian Development Bank (ADB) offers a new way to measure poverty in the Asia and Pacific region.

The report, published in a special chapter of Key Indicators 2008, the flagship annual statistical publication of the ADB, describes important methodological issues involved in generating internationally comparable estimates of poverty.

The special chapter, titled Comparing Poverty Across Countries: The Role of Purchasing Power Parities, also provides comparable rates of poverty using price data specific to the Asia and Pacific region, and, critically, to the poor.

“This is a landmark study for two reasons,” says Ifzal Ali, ADB Chief Economist. “For the first time a thorough sensitivity analysis of internationally comparable poverty estimates has been carried out. Second, a poverty line that is relevant specifically to the Asia and Pacific region has been adopted.”

The new poverty line, called the Asian Poverty Line, is roughly $1.35 a day.

“While the $1-a-day poverty line remains an appropriate benchmark for counting the extent of extreme poverty in Asia, and the developing world more generally, in a region that has witnessed rapid economic growth it might also be time to evaluate poverty incidence using a benchmark that reflects the region’s dynamism,” says Dr. Ali.

A major contribution of the report is to examine the sensitivity of poverty estimates to different methods for evaluating purchasing power parities (PPP). PPPs are conversion factors that ensure a common purchasing power over a given set of goods and services.

“PPPs are one of the most vital ingredients in generating internationally comparable estimates of poverty,” says Dr. Ali.

But what PPP should be used? The report notes that the World Bank’s $1-a-day poverty estimates are based on PPPs developed for comparing household consumption across countries, known as consumption PPPs. From the perspective of poverty comparisons, however, it was considered more appropriate to use a set of PPPs that are based on comparisons of prices of goods and services that the poor purchase.

The report, using original data collected specifically for its study, examines where the poor shop, what they buy, in what quantity, as well as the quality of the products they purchase. The report notes, for example, that there is a considerable difference in quality and price between packaged rice bought in a supermarket and rice bought by the scoop in a wet market – where the poor traditionally shop. The prices paid for the products purchased by the poor are used to generate a new set of PPPs, called poverty PPPs.

“Our aim in this study was to shed light on how alternative approaches to compiling purchasing power parities can influence internationally comparable estimates of poverty,” says Dr. Ali.

Using consumption PPPs, the report estimates that in the 16 countries that participated in the study 1.042 billion people would have been living below $1.35 a day in 2005. Under the more robust poverty PPPs, this estimate would drop to 843 million people.

“Clearly, the choice of PPP used matters a lot to the final estimates of poverty and it is therefore critical that we price the most appropriate set of goods and services. This report shows that the collection of poverty-specific prices – the feasibility of which has been demonstrated by 16 developing Asian countries – is possible,” says Dr. Ali.