achieving this target of ending extreme poverty and elicit strategic guidance using publicly available data only to ensure transparency in the analysis. To facilitate transparency, the annex includes a detailed description of source data as well as our projection approach.

# **II. Literature Review and Comparisons of Projection Methodologies**

# _Poverty projection based on constant growth elasticity or semi-growth elasticity_

Future poverty is often projected under an assumption of constant growth elasticity or semi-growth elasticity. Growth elasticity refers to the ratio of a percent change in the poverty rate to a percent change in income or consumption. Semi-growth elasticity refers to the ratio of a percentage point change in the poverty rate to a percent change in income or consumption. Klasen and Misselhorn (2006) argue that semi-growth elasticity is more useful for policy makers who usually focus on the percentage point reduction of the poverty rate.

|**Table 1: Growth elasticity and**<br>**semi-growth elasticity under the**<br>**2010 global distribution **<br>Global<br>povertyrate<br>Growth<br>Semi-<br>Growth|
|---|
|20<br>-1.94<br>-0.39|
|10<br>-2.42<br>-0.24|
|5<br>-2.22<br>-0.11|

_Source_ : Authors’ estimation using PovcalNet (October 2013 version).

While many used this approach for poverty projection within a country, Bourguignon (2003) and Klasen and Misselhorn (2006) showed that these approaches can work well for projection of poverty in a cross-country setting. Dercon and Lea (2012) used the constant semi-growth elasticity approach to project global poverty rates.

However, both constant semi-growth elasticity and constant growth elasticity are problematic when we need to estimate poverty rates for the distant future. Chandy, Ledlie, and Penciakova (2013) explain why the constant (semi-) growth elasticity approach does not work. Income distribution is not flat and often shows a large concentration of population in the middle income group. When the poverty rate is very high, a poverty line is often located in the huge population mass. As a result, even a small improvement in income can lift many out of poverty. However, as the poverty rate continues to decrease, not many are located near the poverty lines; as a result, a small increase in income can lift only a few out of poverty. Therefore, semi-growth elasticity tends to decline as the poverty rate declines. The effect of this curvature of income distribution to growth elasticity is more complicated because as the poverty rate declines, even a small _percentage point_ change in the poverty rate can cause a large _percent_ change in the poverty rate.

Table 1 shows how growth elasticity and semi-growth elasticity change if the 2010 global distribution in PovcalNet—the World Bank’s database of global poverty—is used.<sup>4</sup> As expected, semi-growth elasticity declines as the global poverty rate declines, while changes in growth elasticity are much more complex.

In conclusion, since poverty rates are expected to change significantly over a long time horizon, it is likely that projections for poverty in the distant future based on constant growth elasticity or semi-growth elasticity will be misleading. In particular, the projection based on semi-growth elasticity likely overestimates the pace of poverty reduction.

# _Distribution-neutral projection_

Due to the aforementioned problems on the constant (semi-) growth elasticity approach, some authors take a “distribution-neutral approach” (see Ravallion 2013, Lanjouw et al. 2013, Karver et al. 2012, Edward and Sumner 2013, and Chandy et al. 2013). All use the income or consumption distribution of a

> 4 See more details about PovcalNet in the annex.

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