Poverty Line Measurement Analysis - Case Study Example

ARE POVERTY MEASURES BASED ON THE "A DOLLAR -A-DAY" POVERTY LINE A REASONABLE CONCEPT FOR THINKING ABOUT POVERTY ACROSS THE WORLD Executive summary This study seeks to determine whether the “one dollar-a-day” poverty line is a reasonable indicator of poverty across the world. This study used qualitative analysis of available second-hand sources that explore the limitations of the framework. The result found emphasized the lack of capability by measures based on it because fundamentally, they do not answer social, cultural and other country-specific variables that characterize poverty. 2) Introduction Measuring poverty is typically undertaken by establishing a poverty line or threshold that indicates the minimum income or consumption necessary to meet basic needs. The World Bank introduced the one-dollar-a-day poverty threshold in 1990 in its World Development Report. This poverty line, applicable only in low-income countries, is based in the 1985 purchasing power parity (PPP) dollars and refers to household expenditure per person. This paper will determine whether the “one dollar-a-day” poverty indicator and those measures based on it are reasonable benchmarks for poverty incidence across the world. Key sections are outlined to achieve this end: a review of the theory; empirical analysis of the data; policy recommendations and conclusion. This paper found that while the one-dollar-a-day indicator and those poverty measures based on it are credible and may reflect true poverty incidence, they are not comprehensive frameworks and that they leave several important variables behind primarily because the approach is numerical and predetermined it does not address country-specific factors that characterize the relativity of poverty. 3) Key data trends The World Development Report released in 2001 wherein poverty was measured based on 1 dollar-a-day poverty lined revealed that: 1) of all the world’s 6 billion people – 2.8 billion live on less than 2 dollars a day and 1.2 billion – a fifth – live on less than one dollar a day. (Chandra, 2004, p. 27) The average proportion of people in developing countries living on less than $1 per day fell from 32% to 25% between 1990 and 1999 and that a simple extrapolation of this trend to the year 2015 results in a headcount index of about 16%, indicating that the world is on track in reaching the global goal of halving poverty by 2015. (Townsend and Gordon, 2002, p. 378) 4) A Review-Theoretical approach to the analysis With the poverty line of $1 a day established, it became the reference point of several measures that calculate poverty incidence. For instance, the head count ratio (HCR) index identifies the percentage of the population living in households with consumption or income per person below the poverty line and the head count is then reported either as a percentage or as the number of individuals who are poor. (Harrison, 2007, p. 6) The HCR index does not explain the extent individual income falls below the poverty line. Another popular approach that uses the one-dollar-a-day poverty line is the poverty gap ratio index. It measures the mean distance below the poverty line as a proportion of the poverty line. Specifically, the poverty gap ratio is the sum of the income gap ratio for the population below the poverty line, divided by the total population. The measure becomes the ratio of income necessary to get all the poor people to the poverty line, divided by mean income in the society. (4.1)Summary The poverty measures anchored on the one-dollar-a-day poverty line are classified into two: those that measures poverty in terms of the percentage of individuals who are poor and those that measures the absolute number of people who are poor. These two approaches are often in conflict with each other and their disagreements further cloud their capacity to determine and measure world poverty. (4.2)Assumption The one-dollar-a-day indicator allows policy makers to compare data across countries using it as a reference point. This highlights the indicator’s significance in regard to policies developed to identify, measure, and eradicate global poverty. However, because the indicator is numerical and predetermined, it is assumed that the measures based on it will not be able to cover specific variables such as social factors, the relationship between wealth and human development, among other variables that are country- and culture-specific. (4.3)Limitation of the model There are numerous limitations in the one-dollar-a-day poverty line. The most significant, however, is that the threshold and all the measures based on it are insensitive to the actual extent of deprivation among the poor because of the assumption that they are valid through all low income countries. The limitations are specifically outlined below: it does not allow for cost of living differentials within countries; it does not distinguish between transient and chronic poverty; it only values goods and services delivered through the market; it does not consider intra-household allocation of expenditure it does not comprehensively address the differences in household size and composition 5) Empirical Analysis of the data, applying the theory The deficiency in the income-based approach in measuring poverty is demonstrated in the way countries are ranked in the list of World Bank and the United Nations Development Programme. In terms of the amount of wealth produced (GDP as measured by the World Bank), the United States is ranked first. However, the UNDP ranks the US 7th in their human development index. According to Helen Penn (2005), this only shows that the wealth earned by a country does not translate into a better life for its citizens. (p. 34) This is analogous to what this paper proposes: that income does not reflect poverty. One of the main arguments in regard to the validity of the measures based on the one-dollar-a-day poverty indicator is whether it is enough for international comparison. To answer this issue it is important to point out that, no one has actually investigated what income is needed for the households living in a rural community, slums or informal settlements in Delhi or Sao Paulo or other cities in developing countries. In using the one-dollar-day poverty, there is the assumption that the measures based on this reference point are applicable to all low-income countries. Unfortunately, that is not the case. In order to determine the reasonability of the measure, let us apply it to some examples. The first example is very basic, involving two persons: one, earning well below the poverty line, say 20 cents per day; and the other, earning a daily income of 80 cents. The former is obviously suffering more than the latter but, unfortunately, for the income-based measure, both persons are counted equally. This is also true in regard to how chronic and extreme poverty are viewed equally since they are technically classified together below the poverty threshold. This becomes problematic, wrote Meier and Stiglitz (2001), because when one household is experiencing a temporary fall into poverty while the other is chronically poor, then their predicament would have differing nature and that the appropriate policy responses toward them should probably be quite different as well. (p. 189) These examples argue why measures based in this poverty line may not be effective among those considered poor because they will not work equally well for the entire population. There is also a need to account for cost of living differentials and other similar problems such as household size and composition. In some cities, for instance, a dollar may buy little or nothing but that in other locations, it could buy decent clothes or a good meal. Then, to a relatively self-sufficient farmer, one dollar a day may be sufficient for many needs, but that in a big city it is much harder to get by without money. This latter example implies other variables that influence poverty as well - urbanization and increased commodification. Their incidence came to mean that more money is needed to cover basic needs. In this case, a dollar for people in cities and locations where these phenomena permeate may be way too low to describe poverty incidence. Another important fact is that the one dollar-a-day indicator does not cover changes in the markets, especially the division between what is free or subsidized and what has to be paid for. For example, the subsidy received by the poorest population in Indonesia in 1987 through their use of hospitals and primary health centers was twice that received by the poorest of the rural population. (Meier and Stiglitz, p. 189) Similarly, changes in fulfilling individual roles at work, in family and society, with consequences for nutritional and dietary requirements, as well as other consumables and services are not addressed. According to Petmesiduo and Papatheodorou (2006), the changes may not be consequential in a period of two to three years, but after five to fifteen years, the effect will be substantial, especially with the additional socio-economic effects of global warming and the depletion of natural resources. (p. 375) David Satterthwaite (2003) argued that even if measures were taken to adjust income-based poverty lines to take account of the differences in the price of basic goods and services between and within nations, “they would still miss the deprivations that arise from the failure of governance (which, in turn, is often related to the extreme weakness of the national economy).” (p. 188) Ravallion, Chen and Sangraula (2008) further offered several important insights that are helpful how poverty is seen across the world. Writing for the World Bank, these researchers analyzed the one-dollar-a-day poverty line indicator in the context of the new data that cover the period since 1990, drawing a large number of new country-specific poverty studies. Based from the aggregate new data, a model was developed to interpret empirical analysis, called the socially-specific poverty line (SSPL). The main idea in this model is that the point in the income space above which people tends to think they are not poor in a given society, and below which they tend to think they are poor. (p. 4) This is in consonance with Heikki Patomaki’s (2008) proposition that ‘one dollar a day’ means different things in different social contexts. (p. 256) Underlying the idea of SSPL is the premise that an individual’s own idea of what it means to be poor relies on that individual’s own level of living. This further reinforces the position that that poverty is relative and, hence, cannot be measured by an absolute indicator, which in this case is the poverty threshold of one dollar a day. This SSPL framework should be incorporated in coming up with a more effective indicator of poverty across countries. Finally, it is important to underscore that the poverty line is and must never be a fixed indicator over time. The changes in the global socio-economic landscape requires for its revisions time and time again. The emergence of globalization, for instance, could result to a different meaning of poverty as global economies become more and more integrated. Prasad et al. (2003) observed: If global growth continues at a rapid pace during the next century, it is possible that by the end of the century emerging-market economies, including China and India, could attain income levels exceeding those of Americans today. This implies that Malthusian notions of poverty are likely to become a distant memory in most parts of the world as global income inexorably expands… and issues of inequality, rather than subsistence, will increasingly take center stage in the poverty debate. (6)Policy recommendations Poverty measures across the world should not be entirely anchored on the one-dollar-a-day line. This paper has illustrated why this is so. For instance, using the nonnumerical frameworks such as what Ravallion, Chen and Sangraula proposed in their SSPL model should be taken into serious considerations. Integrating such variables would not only allow for more comprehensive measures and approaches in determining the nature and extent of poverty as well as the focus of poverty-oriented actions across countries but also, it would enable poverty-eradication policies to be more effective. 7) Conclusions Poverty has a number of dimensions and because of this complexity, there is no single perfect approach to measure its incidence. This paper has found flaws in the one-dollar-a-day poverty line measures. However it does not mean that such approach is no longer credible and, hence, cannot be employed. This finding merely underscores the fact that methodologies and measures available can be used together complementarily in order to achieve a more comprehensive outlook in regard to measuring the incidence of poverty. Furthermore, this paper also highlights that choosing one-dollar-a-day method from the other alternatives usually depends on the purpose it is going to be used for. In regard to determining poverty incidence, however, it severely lacks capability so as to come up with accurate picture poverty across the world. Bibliography Chandra, R., 2004, Social development in India, Volume 1, Gyan Publishing House. Harrison, A., 2007, Globalization and poverty, Chicago: University of Chicago Press. Meier, G. and Stiglitz, J., 2001, Frontiers of development economics: the future in perspective, Washington D.C.: World Bank Publications. Patomaki, H., 2008, The political economy of global security: war, future crises and changes in global governance, New York: Routledge. Petmesiduo, M., and Papatheodoruo, C., 2006, Poverty and social deprivation in the Mediterranean: trends, policies, and welfare prospects in the new millennium, New York: Zed Books. Prasad, E., Rogolf, K., Wei, S. and Kose, M., 2003, Effects of financial globalization on developing countries: Some empirical evidence, IMF Working Paper no. 031703. Washington D.C.: International Monetary Fund. Ravallion, M., Chen, S., and Sangraula, P., 2008, Dollar a Day Revisited, Washington D.C.: The World Bank Research Group. Satterthwaite, D., 2003, Water and sanitation, IIED. Penn, H., 2005, Unequal childhoods: young childrens lives in poor countries, New York: Routledge. Townsend, P., and Gordon, D., 2002, World poverty: new policies to defeat an old enemy, The Policy Press. Read More