POVERTY-SPECIFIC PURCHASING POWER PARITIES (PPPs) IN AFRICA

# **1.** **_Introduction_**

For its $1.90-a-day global poverty estimates, the World Bank uses an International Poverty Line (IPL) anchored to the 2011 purchasing power parities (PPPs) for household consumption expenditure from the International Comparison Program (ICP). The World Bank’s practice of using ICP PPPs for household consumption expenditure to set its IPL, and convert it to local currencies, dates back nearly two decades and has not been without its critics.<sup>1</sup> The question often asked is how the IPL would change if these ICP PPPs were more poverty specific.

Critiques of using PPPs for household consumption expenditure (“consumption PPPs”) to set the IPL often note that these PPPs are constructed using patterns of aggregate household consumption, not the consumption of the poor. In addition, it is often stressed that the basket of consumer goods and services used for ICP price surveys—and thus, underlying ICP consumption PPPs—is not poverty specific. At the heart of such critiques lies the presumption that consumption PPPs would generally be more appropriate for poverty analysis if the ICP accounted for these two aspects.

In this paper, we examine the relevance of this presumption by constructing new consumption PPPs for Africa that take account of the above-mentioned critiques. We refer to these PPPs as poverty-specific PPPs and produce two varieties, both based on the 2011 ICP PPPs. The first are consumption PPPs recomputed with poverty-specific weights, drawing from Deaton and Dupriez (2011). The second are consumption PPPs recomputed without the items deemed outside the consumption patterns of the poor— for example, extra virgin olive oil, which the ICP priced in Africa.

We report two main findings, both pertaining to Africa but easily extended to other regions. First, we find that consumption PPPs estimated with poverty-specific weights are similar to 2011 ICP consumption PPPs. This corroborates the findings by Deaton and Dupriez (2011) who reached the same conclusion using 2005 ICP consumption PPPs from Africa and other regions. Second, we find that the overall effect of removing non-poverty items from consumption PPPs was negligible.

# **2.** **_Concepts and Preliminaries_**

## _2.1 ICP and PPPs_

The ICP is a worldwide statistical initiative to collect comparative price data and compile detailed expenditure data of the world’s economies. The program’s main outputs are PPPs of countries’ gross domestic product (GDP) and its main expenditure components.<sup>2</sup> ICP price data are collected via specially designed price surveys, while expenditure values in local currency are compiled from countries’ national accounts.

The latest ICP comparison to date is the 2011 ICP, which took place six years after the 2005 ICP. In this sense, ICP comparisons have historically occurred at infrequent time intervals, though this will change starting with the forthcoming 2017 ICP and onwards.<sup>3</sup> ICP comparisons are made from the expenditure side of the national accounts. PPPs are therefore calculated for different expenditure levels of aggregation, starting with basic headings and up to GDP. To maintain consistency with expenditures on GDP, ICP items underlying PPPs at each expenditure level were selected with the idea of approximating the full range of goods and services making up each expenditure level.

The different expenditure levels for which PPPs are calculated are illustrated by Figure 1. The second row from the bottom refers to the basic heading level, which is the building block for the ICP exercise. It

> 1 Before 2001 the World Bank set its two previous IPLs using ICP PPPs for gross domestic product.

> 2 Here and throughout the rest of the paper we use the term “economy” interchangeably with “country” to refer to territories for which authorities report separate statistics.

> 3 At its 47th Session (March 2016), the United Nations Statistical Commission (UNSC) agreed that the ICP should be conducted more frequently, with shorter intervals between successive rounds. For more details, see United Nations Statistical Commission (2016).

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