Friday, August 3, 2012

Progress out of Poverty Index


The poverty line is the minimum level of income deemed adequate in a given country. The poverty line is usually determined by finding the total cost of all the essential resources that an average human adult consumes in one year. At its most basic, the poverty line is a statistical exercise, an attempt to track poverty over time and across specific geographies. It can be used to assess progress in the fight against poverty. The common international poverty line has in the past been roughly $1 a day. In 2008, the World Bank came out with a revised figure of $1.25 at 2005 purchasing-power parity (PPP).

However, increasingly this exercise of assessing poverty is courting controversy as governments have been blamed for fudging data to suit their perspectives. If a reformist stance needs to be communicated, the line is lowered so more people seem better off. And if an international donor is being wooed, the line is raised so that more people seem worse off and in need of aid.

This branch of economics related to the measurement of poverty is anyways one of the most esoteric, and taps into a statistics realm beyond the grasp of most except the most technically savvy.

So what measure should the development world rely on….especially in microfinance….disbursing funds to the poorest of the poor? How does one assess the eligibility, the genuineness and most importantly evaluate the impact of lending?  

I have come across this relatively simpler and more accurate tool that measures the poverty levels of groups and individuals called the Progress out of Poverty IndexTM (PPI™) during my stint here at Grameen Foundation Indonesia.

The PPI is based on an approach developed by Mark Schreiner of Microfinance Risk Management, L.L.C. It is a user-friendly tool that estimates the likelihood that clients’ fall below the national poverty line or the international $1/Day/PPP and $2/Day/PPP poverty lines.

Using the PPI, Micro Finance Institutions can better determine their clients’ needs, the programs that are most effective, how quickly clients’ poverty get alleviated, and what elements help them to move out of poverty faster. Each country has a specific PPI that, while retaining a universal methodology, is based on a country's best nationally representative income and expenditure household survey.

Consultative Group to Assist the Poor (CGAP), the Ford Foundation and the Grameen Foundation endorse the use of rigorous poverty assessment tools and believe the PPI is a highly effective tool for those institutions interested in measuring the likelihood of client poverty.

For each country, the process starts with a nationally representative income and/or expenditure survey. The data from the survey is analyzed to rank indicators that strongly correlate with poverty. These indicators are then tested and vetted with local MFIs and their representatives. The results of the PPI allow an MFI to make informed decisions and improve their processes. 

By using the PPI over time, MFIs can:

  • Improve mission adherence
  • Improve scrutiny and selection of target clients
  • Improve products and programs that are better suited to their target clients
  • Increase their competitive edge, profitability, and ability to retain clients by responding more quickly and effectively to changes in their communities 
  • Provide timely and accurate information to their investors

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