Quantifying the purchasing power differences across countries and income groups is critical for measuring global poverty and monitoring the effectiveness of poverty alleviation policies. Crucial steps in compiling such poverty incidences are the conversion of the US$1/day international poverty line into the respective national currency units of countries using PPPs and determining the number of people who fall below that threshold. This measure is a key indicator for monitoring the Millennium Development Goals. Current Limitations In the absence of poverty-specific PPPs, the common practice is to use PPPs for aggregate consumption. This has two limitations. First, the PPPs are based on prices of consumption items for all countries in the comparison. Consequently, the PPP estimates for developing countries are unduly influenced by the consumption baskets and spending habits of their developed counterparts. Second, the PPPs are derived using national average expenditure weights. Therefore, goods that are important to the poor and comprise a large part of their expenditure carry proportionally less weight. Poverty Advisory Group A Poverty Advisory Group established to address the limitations of current PPPs has recommended that poverty-specific PPPs be computed for countries where poverty is prevalent, using price relatives from ICP sources together with weights representing expenditure patterns of the poor. The data to construct such weights can only come from nationally representative household expenditure surveys. Integration of ICP and Household Expenditure Surveys A characteristic feature of the ICP survey framework is that individual consumption expenditure by households is broken down into 90 classes according to the Classification of Individual Consumption According to Purpose (COICOP). Some classes are further divided into 110 Basic Heading (BH) expenditures. The ICP provides detailed price data for specifications of individual items that are classified into the 110 BHs. Though the ICP provides a detailed account of regional variations in prices, its expenditure side of the matrix leaves much to be desired. On the expenditure side, Household Expenditure Surveys (HES), in contrast, typically provide a detailed breakdown of expenditures by regions and income groups. But the price side of their matrix is mostly sparse, if not virtually blank. One very important off-shoot of the 2005 ICP Round is the work to integrate the ICP and HES by establishing a correspondence between the ICP and HES expenditure classifications. For this purpose, a two-step expenditure data compilation work has been initiated. The first step involves computing the weighting coefficients representing consumption patterns of the poor, for countries that have reliable and recent data on household expenditure. Where possible, the computation of these sets of weights takes into account regional and rural-urban variations in consumption patterns. The work involves: Recoding and aggregating data on expenditure by commodity according to the 110 BH classification of the ICP, and Deriving the share of each ICP BH expenditure in the total household consumption, for different population categories (e.g. by income level, urban/rural).
Since the HES questionnaires are not designed according to the ICP BH classifications, some products and services will need to be regrouped. For example, the household survey questionnaire may collect data on “carrots,” “tomatoes,” and many other vegetables, which need to be aggregated into a single ICP BH -- “Fresh Vegetables.” In other cases, when the HES questionnaire lacks detail, data may be split under separate BHs. Obviously, such efforts are governed more by what is feasible than what is desirable. This first step of the work will result in data files providing the household annual consumption by BH, for as many BH expenditures as possible. Coverage The work will ultimately cover about 80 developing countries, depending on the timeliness, quality and scope of national HES. So far, data for 35 countries have been finalized. It is expected that the work for the remaining countries should be done by the end of July. For an additional 40 or so countries in the 2005 ICP Round, the required household expenditure data are either unavailable, old or of relatively poor quality for poverty PPP calculation. This group will be treated differently: the required expenditure shares by income group will be generated utilizing an econometric model. This involves conducting econometric analysis of unit record data from a number of benchmark countries, to identify the determinants of household expenditure patterns for predicting expenditure patterns for those countries (and time periods) where expenditure share data are not available. Mainstreaming Poverty PPPs The global poverty-PPP project is being managed separately from the ICP and is funded by the World Bank, to avoid undue burden on the ICP program, now going through significant changes and improvements. The Asian Development Bank (ADB) and the African Development Bank (AfDB) are funding independent regional poverty research initiatives. The global and regional initiatives are well coordinated to avoid duplication of.efforts. The work from this round will be leveraged to further refine the Poverty-PPP methodology in future ICP rounds. The ultimate objectives are to integrate poverty PPPs into the mainstream work of the ICP and to allow inter-regional cost-of-living comparison within a country. The text above is an abridged version of an article prepared by the ICP Global Office, and published in the February 2006 issue of The ICP Newsletter. |
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