MICROCAPITAL STORY: In Asia, Newly defined Poverty Lines Reveal Higher Numbers of People in Poverty, Risks To Millennium Development Goals And Growing Microfinance Opportunities

The World Bank and Asian Development Bank (ADB) both released studies recently that offer new definitions of international poverty. The original “$1-a-day Poverty Line” is a global poverty line for absolute poverty that was set by the World Bank in 1990, and is adjusted for various purchasing power parities (PPP). PPPs are conversion factors that ensure a common purchasing power over a given set of goods and services. People living at or below these poverty lines are said to be in extreme poverty.

The poverty estimates published by the World Bank reveal that 1.4 billion people in the developing world (one in four) were living on less than US$1.25 a day in 2005, down from 1.9 billion (one in two) in 1981. At first glance these broad stats seem promising. Yet in South Asia for example, the reductions have not kept pace with population growth; there were actually more poor people living in this region in 2005 than in the 1980s. “The sobering news-that poverty is more pervasive than we thought-means that we must redouble our efforts,” said Justin Lin, Chief Economist of the World Bank and Senior Vice President, Development Economics.

The study ADB conducted, “Key Indicators 2008”, defined a poverty line specific to the Asia and Pacific region as US$1.35 a day. Ifzal Ali, ADB Chief Economist, noted, “This is a landmark study for two reasons. 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.”

FinFacts, a financial website based in Ireland, noted that a major contribution of the ADB report was to examine the sensitivity of poverty estimates to different methods for evaluating PPPs. “PPPs are one of the most vital ingredients in generating internationally comparable estimates of poverty,” says Dr. Ali. The World Bank’s $1-a-day poverty estimates are based on PPPs developed for comparing household consumption across countries, known as consumption PPPs. However, ADB’s study considered it more appropriate to use a set of PPPs that are based on comparisons of prices of goods and services that the poor purchase.

Regardless of how poverty is defined, the rising food costs threaten to push back the gains made in Asia. George Wehrfritz of Newsweek observed that “though the studies differed methodologically, both significantly increased the number of Asians estimated to be living without adequate nutrition, clothing and shelter, a change that could complicate U.N.-led efforts to halve the global poverty rate by 2015.” Robert Zeigler of the International Rice Research Institute in Manila summarized the impact of the food crisis saying “people end up spending more of their incomes on rice and less on other foods, education, housing and medical expenses-or they eat less. Any way you slice it, people’s standard of living drops dramatically.” Both studies agree that food weighs heaviest on the budgets of the world’s poorest households. That’s part of the reason the current poverty equations look so grim.

Some Asian leaders are publicly calling for increased investment in microfinance to deal with these poverty trends. Corazon Aquino, former president of the Philippines, explained “many of you are familiar with the disturbing facts that make the Asian success stories somewhat of a paradox: 600 million Asians still live on US$1 a day while another 60% of the region’s population subsist on less than US$2 a day. Reducing poverty in Asia requires more than just economic growth. Such growth needs to be anchored through a program that will enable people in the region to become economically-productive citizens who would share in the task of ensuring a sustainable future.”

Last week in Hanoi, more than 500 delegates from 50 countries attended the Asia Microfinance Forum 2008, which addressed key issues facing the microfinance industry. Piyush Gupta, a speaker at the forum and Citibank’s Southeast Asia Pacific CEO, spoke to many of the central themes in saying that “microfinance plays a crucial role in reducing poverty and promoting wider financial inclusion, and there are thousands of microfinance institutions already operating in Asia. But around 200 million low-income households in the region still have no access to basic financial services. It’s very important that both public and private sector stakeholders understand how to support the microfinance industry’s future development.”

The World Bank is made up of two unique development institutions owned by 185 member countries-the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). ADB is an international development finance institution whose mission is to help its developing member countries reduce poverty and improve the quality of life of their people.

Based in Manila, Philippines, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants and technical assistance. In 2007, it approved $10.1 billion in loans, $673 million of grant projects, and technical assistance amounting to $248 million.

By Scott Everett, Research Assistant

Additional Resources:

FINFACTS: Home, Asia Key Indicators 2008: Asian Development Bank offers new way to measure poverty in the Asia and Pacific region, August 27, 2008

WORLD BANK: Home, “World Bank Updates Poverty Estimates for the Developing World”, August 26, 2008

NEWSWEEK: Home, “The Price Of Survival”, August 30, 2008

ABS-CBN: Home, “600 Million Asians Still Live on US$1 a day”, August 29, 2008

FINANCEASIA: Home, “Microfinance Moves Mainstream”, September 9, 2008

MicroCapital article, June 2, 2008, “Asian Development Bank (ADB) and Microfinance Information Exchange (MIX) Publish Rankings of Asian Microfinance Institutions”