Chapter 8

What is poverty?

Measuring poverty

Empirical facts on poverty

Functional impact of poverty

Poverty LinePoverty Line A critical threshold of income, consumption, or access to

goods and services below which individuals are declared to be poor.

A minimum level of “acceptable” economic participation in a society

Consumption or Nutrition-based poverty lineConsumption or Nutrition-based poverty line▪ Minimum nutrient levels for an adequate diet (price of food or

consumption of calories)▪ Cost of shelter (rent) and clothing

Income-based poverty lineIncome-based poverty line▪ Legally declared minimum wage▪ Arbitrary threshold: say, 60% of mean income in a society

Overall expenditure versus item-by-item consumption

Should we compare the characteristics of a consumption basket with a benchmark basket?

Or, should we compare consumption expenditures with a minimum threshold?▪ Nutrition levels may not rise with income (demand for

canned foods or fast foods)▪ Income simply represents the capacity to consume, not

consumption itself

However, income or expenditure-based poverty lines are easier to use, given constraints imposed by available data

Absolute versus Relative Poverty

What is an “acceptable level of participation in a society?”▪ Owning a TV may be deemed socially necessary in

one country, but not another▪ Similar examples can be motivated for cars, higher

education, leisure, etc▪ Constituents of a poverty line may vary widely

across countries, making comparisons difficult

Poverty should be evaluated relative to prevailing socio-economic standards in a society

Temporary or Chronic Poverty?

We must be careful to distinguish between “structural” or “chronic” poverty and “temporary” poverty

Unanticipated shocks can push people temporarily below the poverty line (natural disasters, disease, poor rainfall, etc)

Policies to deal with temporary poverty can be very different from those required for chronic poverty

Households or Individuals?

Available expenditure data is often at the household level

Should we divide total household consumption expenditures by number of individuals in the household?▪ This gives an idea of average or “per-capita” expenses

Problems:▪ Allocation of expenditures within the household are skewed▪ Discrimination against females and elderly (gender and age

bias)▪ Large households typically have more children, who consume

less than adults▪ Fixed costs of setting up or running a household

Poverty lines are always an approximation to a very “fuzzy” threshold

Sustained deprivation can be insidious: effects are often felt at a later point of time

However, the poverty line gives us a starting point to study poverty

Some notation:

y denotes income or expenditure Subscripts i, j,…, refer to individuals p denotes the poverty line, converted to

a common currency▪ For nutrition-based poverty lines, p

represents the money required to attain the minimum calorie threshold

the mean income in the economy is m

Headcount (HC): Headcount (HC): number of people below the poverty line, i.e., number of individuals i such that

Headcount Ratio (HCR): Headcount Ratio (HCR): gives an idea of the relative incidence of the poor

where n is the size of the population

pyi

nHC

HCR

Fails to capture the extent to which income falls below the poverty line

People near the poverty line are less poor than those far below it

Can lead to problematic policy decisions: ▪ Policies are systematically biased in favor of

individuals very close to the poverty line, because they offer the biggest bang for the buck (politically)

The PGR is a measure of the average shortfall of income from the poverty line How much extra income or consumption, on

average, is required to get ALL poor people to the poverty line?

Division by mean income: an idea of how large the poverty gap is relative to the resources that must be used to close the gap

nm

ypPGR

piy i

One problem with the PGR: In societies with high inequality (where

average income is high), the PGR looks very small even though there may be a lot of poverty

An alternative :

Income shortfall is divided by the total income required to bring all poor people to the poverty line

pHC

ypIGR

piy i

Size of households below the poverty line typically tend to be larger than the average family size for the economy

Number of children per family is highly correlated with poverty Burden of poverty falls disproportionately on the young Affects childhood nutrition and education: long-term

consequences for the economy

Women are disproportionately represented as heads of poor households Absence of a principal male earner is closely related to

poverty This trend is widespread in Africa, Latin America, and

South and East Asia

Poverty in rural areas is significantly higher than that in urban areas (even after adjusting for cost of living)

Poverty is highly correlated with the lack of ownership of productive assets Lack of assets leads to poverty Poverty leads to the sale of assets

Poverty and small-scale agriculture are strongly correlated Bulk of the poor are either landless or near

landless

Most poor reside in the “informal” sector Mix of self-employment and low-wage labor

Self employment: Self employment: Vendors, petty traders, tea-stall owners, beggars, shoe-shine boys, garbage-sifters, load carriers, rickshaw pullers, roadside hawkers, etc.

Wage Labor:Wage Labor: often seasonal or casual, not subject to minimum wage laws

Low levels of human capital High levels of illiteracy Lack of access to credit to acquire human capital

Poverty and undernutrition are closely correlated, especially among children Muscle wastage, stunting, illness & infection Low cognitive skills and capacity to do

productive work in adults

One issue: increases in income may or may not have a significant impact on nutrition Direct nutrition supplements may have a

greater impact than an increase in income

Why is the relationship between income and nutrition ambiguous? Good nourishment is desirable, because of health

and productivity benefits By contrast, individuals may have preferences for▪ foods that taste good (meat)▪ foods that are well advertised (fast foods)▪ foods that are indicators of social and economic

attainment (canned food, expensive varieties)▪ These types of food may have little nutritional value

Nutritional elasticity: Nutritional elasticity: What is the percentage change in the consumption of calories when household budgets change by one percentage point?

Poverty affects the access that poor people have to markets Credit Labor Education Land (for cultivation)

Lack of access to these markets can have fundamental consequences for an economy

The poor have little or no access to credit markets Lack of collateral that can be put up for

loan repayment In societies where labor mobility is low,

one form of informal collateral is labor Can lead to permanent indebtedness

The poor have limited incentives to repay loans

Why do people insure?

What is needed for successful insurance? Incident against which insurance is sought must

be ▪ VerifiableVerifiable▪ Must not be subject to Moral HazardMoral Hazard

This is why “perfect insurance” is never available Example: deductibles, contingencies, etc.

Formal insurance markets often don’t exist in developing countries because of problems with verifiability and moral hazard

Example: think of crop failure:▪ What is the exact degree of crop failure?▪ Was it due to bad weather or lack of hard

work?

However, moral hazard problems are actually small for the poor Opportunity cost of labor for the poor is low Poor are unemployed or underemployed to

begin with, so cost of time is low This permits them to credibly supply more

effort

Therefore, where formal insurance is not available, informal schemes of insurance can work (example: shared labor or resources)

A very large proportion of the poor around the world are also significantly below adequate standards of nutrition

Effects of undernutrition: Muscle wastage, retardation, vulnerability

to illness & infection Lower work capacity Psychological effects: metal apathy,

depression, lower intellectual capacity, lack of motivation

Low life expectancy

Energy Input:Energy Input: periodic consumption of food Nutrition meets economics:▪ Access to food = access to income▪ For poor, access to income = returns to labor supply

(poor don’t have much capital assets)

Resting Metabolism:Resting Metabolism: energy required to Maintain body temperature Sustain heart and respiratory action Supply minimum energy requirements of

“resting tissues”

How much energy is required for adequate “resting metabolism”? FAO’s “reference man”▪ European male with a weight of 65 kg (143 lbs)▪ Energy requirement: 1700 Kcal per day

Energy Required for Work:Energy Required for Work: FAO’s “reference man” requires 400 Kcal per

day for “moderate activity.” For the poor who have to work hard in the

fields all day, this is a very conservative estimate

Some estimates of energy requirements: West African agriculture: ▪ 213 kcal per hour per hour for carrying a 20 kg log▪ 372 kcal per hourper hour for bush clearing▪ 502 kcal per hour per hour for felling a tree

“The FAO’s reference man, a European male weighing 65 kg, therefore spends most of his day rather ambiguously defined, but apparently not working very hard.”

Storage and BorrowingStorage and Borrowing Over the short/medium term, energy

deficits/surpluses can be absorbed/cushioned by the human body

A sustained, long-term deficit in the body’s energy requirements can have disastrous consequences▪ Illness▪ Incapacitating debility▪ death

Labor markets create income and access to nutrition and good health

Good nutrition, in turn, affects the capacity of the body to perform tasks that generate income

This circular argument points to the existence of “poverty traps” in developing countries

Low nutrition is capable of creating low incomes reduces possibilities for good nutrition in the future This leads to a “vicious cycle” of poverty

Several questions can be raised in this regard:

Why is the vicious cycle of low nutrition-low income not possible for the poor in rich countries?

Can’t people simply borrow their way out of the vicious cycle?

If work capacity affects future work output, why don’t employers take advantage of this and offer long-term contracts?

If long-term contracts indeed exist for other reasons, then does this affect nutritional status?

In rich countries, labor markets are tighttight Low supply relative to demand Attractive opportunities in other markets Labor markets in rich countries are very

diversified

In tight labor markets, the returns to labor are, on average, quite high, even for people with low work capacity Example: hourly income for barbers or janitors

This breaks the vicious cycle, as high wages permit adequate nutrition (even for the poor in rich countries)

Poor simply do not have access to credit markets

There may not be a way to improve nutrition for the poor without redistribution of income from the rich We have seen before that redistributing

wealth can be both economically and politically contentious

It is unlikely that an employer would offer a long-term contract, just to extract future gains from work capacity There is no guarantee that the employee will

keep working for a given employer (he/she may choose to work for another employer, or might migrate to another village)

If an employer makes a nutrition-enhancing investment, the market may bid up the wage for the employee employee will reap the entire benefits of the employer’s investment!

When nutrition is used by the employer to build up work capacity of the employee, there must be separate set of factors that sustains this contract Slave economySlave economy▪ Slaves were a valuable commodity, due to intense

competition for their services in the labor market▪ Slave diets on plantations in the US South

exceeded that for all non-indentured labor in the 19th century

IndustryIndustry▪ Positive relationship between nutrition and

productivity▪ Feeding low-paid workers well forces them to

consume a greater proportion of their wages as food

Domestic ServantsDomestic Servants▪ Servants are associated with characteristics acquired

on the job that make them costly to replace▪ “The quality of food given to domestic

servants..is..greatly superior to that obtainable by members of working-class families from which servants are drawn.” (Booth, 1903)

In poor households, if scarce resources are equally allocated, then per-capita resources are very small

This may limit total household work capacity

This fact can cause an unequal sharing of poverty within the household Systematic discrimination against some

members of the household “Lifeboat ethic”

What types of household members are discriminated against? Females (both adults and children) Old and infirm

Social institutions often form perceptions about future earning capacities Female children are seen as a financial burden,

where the institution of dowry exists Household work of adult females may be non-

monetized and hence not internalized Wage-earning females who earn less than males Medical expenses for the old and infirm who have

no future earning potential