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Chapter 8

What is poverty?

Measuring poverty

Empirical facts on poverty

Functional impact of poverty

Poverty 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 line
▪ Minimum nutrient levels for an adequate diet (price of food or consumption of
calories)
▪ Cost of shelter (rent) and clothing
 Income-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): number of people below
the poverty line, i.e., number of individuals i
such that y  p
i
Headcount Ratio (HCR): gives an idea of the
relative incidence of the poor
HC
HCR 
n
where n is the size of the population


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?
PGR 
 yi  p
p  y 
i
nm
 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



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 : IGR 
 yi  p
p  y 
i
pHC
Income shortfall is divided by the total income
required to bring all poor people to the poverty line

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: Vendors, petty traders, tea-stall
owners, beggars, shoe-shine boys, garbage-sifters,
load carriers, rickshaw pullers, roadside hawkers, etc.

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: 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
▪ Verifiable
▪ Must not be subject to Moral 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: 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: 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:
 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 for carrying a 20 kg log
▪ 372 kcal per hour for bush clearing
▪ 502 kcal 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 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 tight
 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 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
 Industry
▪ Positive relationship between nutrition and productivity
▪ Feeding low-paid workers well forces them to consume a
greater proportion of their wages as food
 Domestic 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