Manuel Bueno

World Bank Report: More Poverty, But Higher Poverty Line

EscapingMost estimates of the size of the BoP population sit between 3 and 4 billion people. The original population figure of 4 billion by CK Prahalad in his “Fortune at the Bottom of the Pyramid” has been criticized as an over estimation. It is true that, for scientific analysis, exactness is something we should always aim for.

However, from the point of view of the colossal opportunity that BoP markets represent for the private sector, the exactness of our measurements of the BoP population is not crucial. That is why, in the past few years, the lessons taught in his book have been taken to heart and developed by BoP entrepreneurs, investors and researchers alike.According to?WRI and IFC’s publication, “The Next 4 Billion“, the number of people at the BoP is estimated at 4 billion, representing a market size of $5 trillion, in purchasing power parity (about the GDP of the UK and Germany together). If the actual population of the BoP was 3 billion people we would estimate the actual size of this market to be between $4 trillion (slightly less than Japan’s GDP) and $3 trillion (more than India’s GDP).

If I were a manager of any firm I would not forgo these trillion-dollar markets regardless of their actual size, because we are still talking about a huge potential market – as huge as some of the biggest economies on earth. (Note: For a list of GDPs in purchasing power terms,?follow?this link.)

World Bank heavyweights Martin Ravallion and Shaohua Chen, who have been doing research about poverty and policies to fight it since I was in kindergarten, recently published a report, “The Developing World is Poorer Than We Thought, But No Less Successful in the Fight against Poverty“, in which they assess the extent of poverty worldwide. In their report, they revise estimates of poverty since 1981 based on recent findings unearthed in the 2005 International Comparison Program (or ICP, for short). This program was conducted in order to enable better comparability between poverty estimates and consumer purchasing power from different countries.

The ICP results reveal that we have underestimated the costs of living in poor countries in the past. Correcting this bias results in a downward revision of purchasing power of household incomes. The conclusion is that there are more poor people than previously estimated. The current estimate is about 3.1 billion people, although the overall rate of progress against poverty is fairly similar to past estimates.

chart 1 (e)

So why is this study interesting for the BoP community? Revising our poverty data does not only change our absolute measurements of poverty estimates. It also enables us to revise the weight of different poverty groups in absolute and relative terms.

chart 2

The most interesting feature of the graph above is the amount of people who have reached the $1.25 standard, but are still very poor and vulnerable to outside shocks, such as the recent rises in food and fuel prices since 2005 (for an estimation of the effect of food prices on the BoP see my previous post “Food Price Inflation and the BoP“). While the amount of people living above $1.25 was 825 million people in 1981, it currently stands at 1.74 billion people.

Furthermore, the group of people living above $1.25 was 30% of the total people living below $2.50 in 1981, while now it stands at more than 55%.

Why is this important for the BoP community? According to “The Next 4 Billion”, when people within the BoP increase their purchasing power, they unleash their latent demand for ICT, transportation and health care services. It is at this point when they start investing in housing or education. It is at this point when BoP initiatives are most powerful in generating sustainable income for BoP communities.

If the World Bank’s previous estimates were way off, does that invalidate the findings in “The Next 4 Billion”?? It shouldn’t, as the BoP study was based on consumption data and was representative of low-income consumers’ spending behavior.? But it does re-emphasize that there are segments of society that the market is unprepared to serve – the bottom billion, as Paul Collier calls it – and that there is a real role for the World Bank and other aid agencies to play when it comes to these extremely poor customers. ?