Measuring Poverty (9): Absolute and Relative Poverty Lines

There are many ways you can measure how many people in a country are poor. Quite common is the use of a so-called poverty line. First you decide what you mean by poverty – for instance an income that’s insufficient to buy life’s necessities, or an income that’s less than half the average income etc. Then you calculate your poverty line – for instance the amount of income someone needs in order to buy necessities, or the income that’s half the average income, or the income of the person who has the tenth lowest income if the population was one hundred etc. And then you just select the people who are under this poverty line.

I intentionally chose these examples to make a point about absolute and relative poverty. In the U.S., people mostly use an absolute poverty line, whereas in Europe relative poverty lines are used as well. As is clear from the examples above, an absolute poverty line is a threshold, usually expressed in terms of income that is sufficient for basic needs, that is fixed over time in real terms. In other words, it’s adjusted for inflation only and doesn’t move with economic growth, average income, changes in living standards or needs.

A relative poverty line, on the other hand, varies with income growth or economic growth, usually 1-to-1 since it’s commonly expressed as a fixed percentage of average or median income. (It obviously can have an elasticity of less than 1 since you may want to avoid a disproportionate impact on the poverty line of very high and very volatile incomes. I’ve never heard of an elasticity of more than 1).

Both absolute and relative poverty lines can be criticized. Does an absolute poverty line make sense when we know that expectations change, that basic needs change (in contemporary Western societies, not having a car, a phone or a bank account can lead to poverty), and that the things that you need to fully participate in society are a lot different now than they once were? We know that people’s well-being does not only depend on the avoidance of absolute deprivation but also on comparisons with others. The average standard of living defines people’s expectations and when they are unable to reach the average, they feel excluded, powerless and resentful. Can people who fail to realize their own expectations, who lose their self-esteem, and who feel excluded and marginalized be called “poor”? Probably yes. They are, in a sense, deprived. It all depends which definition of poverty we can agree on.

It seems that people do think about poverty in this relative sense. If you compare the (rarely used) relative poverty line of 50% of median income in the U.S. with the so-called subjective poverty lines that result from regular Gallup polls asking Americans “how much they would need to get along”, you’ll see that the lines correspond quite well.

So if relative poverty corresponds to common sense, it seems to be a good measure. On the other hand, a relative poverty line means moving the goal posts for all eternity. We’ll never vanquish relative poverty since this type of poverty just moves as incomes rise. It’s even the case that relative poverty can increase as absolute poverty decreases, namely when there’s strong economic growth (i.e. strong average income growth) combined with widening income inequality (something we’ve seen for example in the U.S. during the last decades). (Technically, if you use the median earner as the benchmark, relative poverty can disappear if all earners who are below the median earner move towards the median and earn just $1 or so less than the median. But in practice I don’t see that happening).

Measuring Poverty (4): The Problem of the Definition of Poverty

Before you can start to measure poverty, you first have to decide what you actually want to measure. What is poverty? That’s not just a philosophical problem because depending on the definition of poverty you use, your measurements will be radically different (even with an identical definition, measurements will be different because of different measurement methods).

Among people who measure poverty, roughly 6 different definitions of poverty are used:

  • insufficient income
  • insufficient consumption spending
  • insufficient calorie intake
  • food consumption spending above a certain share of total spending
  • certain health indicators such as stunting, malnutrition, infant mortality rates or life expectancy
  • certain education indicators such as illiteracy.

None of these definitions is ideal, although the first and second on the list are the most widely used. A few words about the advantages and disadvantages of each.

Income

Advantages:

In developed countries, income is a common definition because it’s easy to measure. Most people in developed countries earn a salary or get their income from sources that are easy to estimate (interest payments, the value of houses, stock market returns etc.). They don’t depend for their income on the climate, crop yields etc. Moreover, developed countries have good tax data which can be used to calculate incomes.

Disadvantages:

In developing countries, however, income data tend to be underestimated because it’s difficult to value the income of farmers and shepherds. Farmers’ incomes fluctuate heavily with climate conditions, crop yields etc. If you ask them one day what their income is, there’s no guarantee that this is a good estimate of their yearly income.

Another disadvantage is that people are generally reluctant to disclose their full income. Some income may have been hidden from the tax administration or may have been earned from illegal activity such as corruption, smuggling, drug trade, prostitution, theft etc. For this reason, using income to estimate poverty means overestimating it.

And, finally, some income may be difficult to calculate (e.g. rising value of livestock).

Consumption

Advantages:

The main advantage of using consumption rather than income to measure poverty is that consumption is much more stable over the year and over a lifetime (see above). Hence, if you ask people about the level of their consumption, they can just tell you about their current situation, without having to go back in time or to predict the future – which they would have to do if you asked them about income. Their current consumption is likely to be representative of their long term consumption, which isn’t the case for income. This is even more true in the case of farmers who depend on the weather for their income and hence have a more volatile income. If you know that farmers are often relatively poor, then this issue is all the more salient for poverty measurement.

Another advantage of using consumption is that people aren’t as reticent to talk about it as they are about certain parts of their income. It’s also appears that people tend to remember their spending better than their income.

Disadvantages:

If you want to measure how much people consume, you have to include durable goods and housing. And consumption of those goods is difficult to measure because it’s difficult to value them. For example, if a household owns a house, you have to estimate what it would cost to rent that particular house and add this to the total consumption of that household, at least if you want to compare their consumption to the consumption of the household next door who has to rent its house. And you can’t make poverty statistics if you don’t make such comparisons. Then you have to do the same for cars etc.

Another difficulty in measuring consumption, is that in developing countries households consume a lot of what they themselves produce on the family farm. This as well is often difficult to value correctly.

And finally, different people have different consumption needs, depending of their age, health, work etc. It’s not clear to me how these different needs are taken into account when consumption is measured and used as an indicator of poverty.

Other definitions

Calorie intake: the problem with this is that different people need different amounts of calories (depending on their type of work, their age, health etc.), and that it isn’t very easy to measure how many calories people actually consume.

Food spending as a fraction of total spending: if you say people who spend more than x % of their total spending on food are considered poor, you still have to factor in relative food prices.

Stunting as an indicator of malnutrition and hence of poverty: stunting (height for age) is a notoriously difficult thing to measure.

Other issues

Some aspects of life tend to be excluded from poverty measurement, even though they have a huge impact on people’s wellbeing. The amount of leisure time people have is perhaps a good indicator of poverty, in certain circumstances (excluding CEOs and US Presidents), but it’s hardly ever counted in poverty measurements.

Another thing: people may have comparable incomes or even consumption patterns, but they may face very different social or environmental conditions: an annual income of $500 may be adequate for people living in a rural environment with a temperate climate where housing is cheap, heating isn’t necessary and subsistence farming is relatively easy. But the same income can mean deep poverty for a family living in a crowded city on the edge of a desert. The presence or absence of public goods such as quality schools, roads, running water and electricity also makes a lot of difference, but poverty measurement usually doesn’t take these goods into account.

Measuring Poverty (2): Some Problems With Poverty Measurement

The struggle against poverty is a worthy social goal, and the absence of poverty is a human right. But poverty is also an obstacle to other social goals, particularly the full realization of other human rights. A necessary instrument in poverty reduction is data: how many people suffer from poverty? Without an answer to that question it’s very difficult to assess the success of poverty reduction policies (such as development aid).

And that’s were the problems start. There’s some uncertainty in the data. The data may not reflect accurately the real number of people living in poverty. There are definition issues – what is poverty? – that may reduce the accuracy of the data or the comparability between different measurements of poverty (or between different measurements over time), and there are issues related to the measurements themselves. I’ll focus on the latter for the moment.

Poverty is often measured by way of surveys. These surveys, however, can be biased because of

  1. sample errors: underreporting of the very rich and the very poor (more on sample errors here), and
  2. reporting errors: failure of the very rich and the very poor to report accurately.

The rich are less likely than middle-income people to respond to surveys because they are less accessible (their houses for instance are less accessible). In addition, when they respond, they may tend to underreport a larger fraction of their wealth as they have more incentives to hide (for tax reasons for example).

The very poor may also be inaccessible, but for other reasons. They may be hard to interview when they don’t have a fixed address or an official identification. In poor countries, they may be hard to find because they live in remote areas with inadequate transportation access. And again, when they report, it may be difficult to estimate their “wealth” because their assets are often in kind rather than in currency.

Because we can have underreporting of the two extremes on the wealth distribution, we believe that income distribution is more egalitarian than it really is. Hence we underestimate income inequality and relative poverty.

But apart from relative poverty we also underestimate absolute poverty since we’re often unable to include the very poor in the reporting for the reasons given above. By “cutting off” the people at the poor end of the distribution, it seems like most people are middle class and society largely egalitarian.

However, absolute poverty can also be overestimated: if the poor respond, we may fail to accurately assess their “wealth” given that much of it is in kind. And it’s unlikely that these two errors – underestimation and overestimation – cancel each other out.

These and other problems of poverty measurement make it difficult to claim that we “know” more or less precisely how many poor people there are, but if we make the same errors consistently we may be able to guess, not the levels of poverty, but at least the trends: is poverty going up or down?

What is Poverty? (2): Different Definitions of Poverty and an Attempt to Make Some Order

This is the World Bank‘s definition of poverty:

Poverty is an income level below some minimum level necessary to meet basic needs. This minimum level is usually called the “poverty line”. What is necessary to satisfy basic needs varies across time and societies. Therefore, poverty lines vary in time and place, and each country uses lines which are appropriate to its level of development, societal norms and values. But the content of the needs is more or less the same everywhere. Poverty is hunger. Poverty is lack of shelter. Poverty is being sick and not being able to see a doctor. Poverty is not having access to school and not knowing how to read. Poverty is not having a job, is fear for the future, living one day at a time. Poverty is losing a child to illness brought about by unclean water. Poverty is powerlessness, lack of representation and freedom.

And this is Wikipedia‘s definition:

Poverty is the deprivation of common necessities such as food, clothing, shelter and safe drinking water, all of which determine our quality of life. It may also include the lack of access to opportunities such as education and employment which aid the escape from poverty and/or allow one to enjoy the respect of fellow citizens. According to Mollie Orshansky who developed the poverty measurements used by the U.S. government, “to be poor is to be deprived of those goods and services and pleasures which others around us take for granted”.

The definition agreed by the World Summit on Social Development in Copenhagen in 1995:

Poverty is a condition characterized by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services. It includes a lack of income and productive resources to ensure sustainable livelihoods; hunger and malnutrition; ill health; limited or lack of access to education and other basic services; increased morbidity and mortality from illness; homelessness and inadequate housing; unsafe environments and social discrimination and exclusion. It is also characterized by lack of participation in decision making and in civil, social and cultural life. It occurs in all countries: as mass poverty in many developing countries, pockets of poverty amid wealth in developed countries, loss of livelihoods as a result of economic recession, sudden poverty as a result of disaster or conflict, the poverty of low-wage workers, and the utter destitution of people who fall outside family support systems, social institutions and safety nets.

The UN definition:

Fundamentally, poverty is a denial of choices and opportunities, a violation of human dignity. It means lack of basic capacity to participate effectively in society. It means not having enough to feed and cloth a family, not having a school or clinic to go to, not having the land on which to grow one’s food or a job to earn one’s living, not having access to credit. It means insecurity, powerlessness and exclusion of individuals, households and communities. It means susceptibility to violence, and it often implies living on marginal or fragile environments, without access to clean water or sanitation.

There’s also the very interesting definition by David Gordon in his paper, “Indicators of Poverty & Hunger“.

Poverty is the absence of any two or more of the following eight basic needs:

  • Food: Body Mass Index must be above 16.
  • Safe drinking water: Water must not come from solely rivers and ponds, and must be available nearby (less than 15 minutes’ walk each way).
  • Sanitation facilities: Toilets or latrines must be accessible in or near the home.
  • Health: Treatment must be received for serious illnesses and pregnancy.
  • Shelter: Homes must have fewer than four people living in each room. Floors must not be made of dirt, mud, or clay.
  • Education: Everyone must attend school or otherwise learn to read.
  • Information: Everyone must have access to newspapers, radios, televisions, computers, or telephones at home.
  • Access to services such as education, health, legal, social, and financial (credit) services.

And there’s the equally interesting but completely different definition by Peter Townsend:

Individuals, families and groups in the population can be said to be in poverty when they lack the resources to obtain the types of diet, participate in the activities and have the living conditions and amenities which are customary, or are at least widely encouraged or approved, in the societies to which they belong. Their resources are so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns and activities.

There are, of course, many other definitions, but if we stick to these examples and summarize them, we can conclude that poverty is the impossibility to meet certain basic needs or the absence of certain necessities or resources:

  • food *
  • clothing *
  • shelter *
  • sanitation *
  • clean water *
  • health **
  • education **
  • work **
  • power **
  • representation **
  • freedom **
  • information **
  • trust in the future (absence of fear) ***
  • access to opportunities and choices ***
  • respect ***
  • self-esteem ***
  • dignity ***
  • inclusion, participation in social and cultural life ***
  • independence ***.

All of these needs and resources are valuable and important in themselves, but I think we can distinguish them according to certain types. For example, you’re not necessarily poor if you’re uneducated. I can think of many uneducated rich people. And all poor people aren’t necessarily without an education. So I would propose the following distinction:

  • Food, clothing, shelter, sanitation and clean water are needs that are directly linked to poverty. You are, by definition, poor if you lack one of these resources (and you may even die). I call these first-level-resources (marked with *).
  • Health, education, work, representation, power, freedom and information, are resources, the lack of which can (but doesn’t have to) make you poor – poor in the sense of not having the first types of resources – and the presence of which is necessary to escape poverty. I call these second-level-resources or supporting resources (marked with **).
  • Respect, self-esteem, dignity, inclusion, participation, trust in the future and the absence of fear, and opportunities, are resources which, like health, education etc., you may lose when you become poor, but which do not really help you to escape poverty. I call these third-level-resources or concomitant resources (marked with ***).

When looking at the different definitions cited above, we also see that poverty has many dimensions:

  • A material dimension (food, clothing etc.)
  • A psychological dimension (respect, self-esteem, trust, fear)
  • A political dimension (power, representation) and
  • A social dimension (education, health, work).

The latter 2 dimensions point to the fact that poverty, while often suffered alone and in solitude, requires social cooperation if it is to be eliminated.

The material, political and social dimensions can, to some extent, be measured, which is necessary if we want to have an idea of the importance of the problem, its evolution over time, and the effectiveness and success of policy measures aimed to combat poverty. One can measure nutrition, housing, income, access to certain services, standard of living, quality of life etc.

The psychological dimension is much more difficult to measure, but no less important. This dimension also shows us that poverty is not just a matter of the current state one is in, and the resources one has or doesn’t have. It is also about vulnerability, about the future, about trust and fear. And it also has a relative side (obvious from the Townsend definition given above), which attaches itself to the problem of our current level of resources (the absolute side): poverty means comparing yourself to others, feeling like a failure, humiliated, shameful etc.