Guest Blog: World Bank research director critiques the new UN poverty index

July 28, 2010

     By Duncan Green     

Martin Ravallion is Director of the World Bank’s research department, the Development Research Group. These are martin ravallionthe views of the author, and need not reflect those of the World Bank.

“Everyone agrees that poverty is not just about low consumption of market commodities by a household.  There are also important non-market goods, such as access to public services, and there are issues of distribution within the household. It is agreed that consumption or income poverty measures need to be supplemented by other measures to get a complete picture.

But does that mean we should add up the multiple dimensions of poverty into a single composite index? Or should we instead measure consumption poverty with the best data available, while also looking for the best data on other dimensions of poverty as appropriate to the country context?

The Oxford Poverty and Human Development Initiative (OPHI) has recently launched a Multidimensional Poverty Index (MPI), and calculated it for over 100 countries.   The MPI is a composite of indicators selected for consistency with the UNDP’s famous Human Development Index (HDI). The HDI uses aggregate country-level data, while the MPI uses household-level data, which is then aggregated to country level. The index has ten components; two represent health (malnutrition, and child mortality), two are educational achievements (years of schooling and school enrolment), and six aim to capture “living standards” (including both access to services and proxies for household wealth).  The three broad categories–health, education, and living standards–are weighted equally (one-third each) to form the composite index.   

One can debate the precise indicators chosen for the MPI by the Oxford team (who are clearly aware of the many data concerns). For example, the MPI’s six “living standard” indicators are likely to be correlated with consumption or income, but they are unlikely to be very responsive to economic fluctuations.  The MPI would probably not capture well the impacts on poor people of economic downturns (such as the Global Financial Crisis) or rapid upswings in macro-economic performance.

The precise indicators used in the MPI were not in fact chosen because they are the best available data on each dimension of poverty. Rather they were chosen because the methodology used by the MPI requires that the analyst has all the indicators for exactly the same sampled household. So they must all come from one survey. There is much better data available on virtually all of the components of the MPI, but these better data can’t be used in the MPI since they are only available from different surveys. This aspect of their methodology greatly constrains the exercise. If one chooses not to form the composite at household level but to look instead at the separate dimensions of poverty one is free to choose the best available data on each dimension of poverty.

There is a deeper concern about the MPI, which holds even if the best data all came from just one survey. The index is essentially adding up “apples and oranges” without knowing their relative price. When one measures aggregate consumption from household-survey data for the purpose of measuring poverty, as in the World Bank’s “$1 a day” measures, one relies on economic theory, which says that (under certain conditions) market prices provide the correct weights for aggregation. We have no such theory for an index like the MPI. A decision has to be taken, and no consensus exists on how the multiple dimensions should be weighted to form the composite index. 

On closer scrutiny, the embedded trade-offs (stemming from the weights chosen by the analyst) can be questioned, and may be unacceptable to many people.  In the context of the HDI, I pointed out 15 years ago that by aggregating GDP per capita with life expectancy the HDI implicitly put a value on an extra year of life, and I showed that this value rises from a very low level in poor countries to a remarkably high level in rich ones (4-5 times GDP per capita).   If it was made clearer to users, I expect that they would question this trade-off embedded in the HDI.

The MPI index faces the same problem. How can one contend (as the MPI does implicitly) that the death of a child is equivalent to having a dirt floor, cooking with wood, and not having a radio, TV, telephone, bike or car?  Or that attaining these material conditions is equivalent to an extra year of schooling (such that someone has at least 5 years) or to not having any malnourished family member?  These are highly questionable value judgments. Sometimes such judgments are needed in policy making at country level, but we would not want to have them buried in some aggregate index.  Rather, they should be brought out explicitly in the specific country and policy context, which will determine what trade off is considered appropriate; any given dimension of poverty will have higher priority in some countries and for some policy problems than others. 

Poverty is indeed multidimensional.  But it is not obvious how a composite multidimensional poverty index such as the MPI contributes to better thinking about poverty, or better policies for fighting poverty.  Being multidimensional about poverty is not about adding up fundamentally different things in arbitrary ways. Rather it is about explicitly recognizing that there are important aspects of welfare that cannot be captured in a single index.”

Sabina Alkire of OPHI (and the creator of the MPI) responds tomorrow. For Duncan’s introductory post on the MPI see here.

July 28, 2010
Duncan Green