MEASURING POVERTY

ABSOLUTE, RELATIVE AND SUBJECTIVE POVERTY

Gordana Matković

Absolute Poverty

• Absolute poverty entails the inability to meet the basic, minimum needs.

• “Ultimately poverty must be seen to be primarily an absolute notion.” “If there is a starvation and hunger then – no matter what the relative picture looks like – there clearly is poverty“

(Sen, 1983, 153; 159)

Absolute Poverty

• This is the earliest developed concept – it ties poverty to the inability to secure mere subsistence.

• First measurements – Rowntree (1902) collected data on all workers' families in York in 1899

• This concept was also applied by Beveridge to define social benefit amounts in his report

• The USA Government's official poverty lines, established in the early 1960s, are also based on the absolute poverty concept

• The absolute poverty concept is also used by the World Bank

Absolute Poverty – Measurement

• The "cost of basic needs" method – the poverty line is set by adding up the food expenditure sufficient to meet the caloric intake guidelines and the expenditure on other basic needs

• The "one dollar line" (later $1.25 PPP per person per day) was set on the basis of the poorest countries' national poverty lines• The line set at $2 PPP per person per day, as well

as the $2.5 PPP and $5 PPP lines (in the ECA region) are also used

Extreme Poverty

• Defined in relation to the "food line" – the extremely poor are those who are unable to meet the basic food needs

• In the EU, absolute poverty is also described as the extreme form of poverty – the European Commission uses the term extreme poverty "because the notion of absolute poverty does not translate very well into other EU languages" – Bradshaw & Mayhew (2010, 22)

• Certain researchers hold that extreme poverty is pronounced and sustained, persistent poverty

Absolute Poverty – Criticism

• The poverty line established on the basis of the poorest population’s consumption, rather than on the basis of minimum needs

• The nutritional minimum based on caloric intake, in particular with regard to children

• Simplistic, limited, one-dimensional concept (disregarding non-financial aspects – social, cultural)

• Obsolete concept, the idea stems from times when it was natural to think in subsistence terms

Absolute Poverty – Criticism

• "One dollar a day": pertains only to developing countries, is not the right option for the measurement of poverty worldwide– Reliance on the consumer price index and

purchasing power parity enables the inordinate influence of the prices of goods and services not used by the poor and influence of the American consumption pattern

• The higher poverty lines ($2 PPP and $5 PPP) are arbitrary

Relative Poverty – Concept

• Relative poverty entails the inability to attain a standard of living adequate from the perspective of the society in which an individual lives

• The concept is attributed to Peter Townsend – "Their (poor people's) resources are so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns, customs and activities" (Townsend, 1979, 31)

• "The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt" (Smith, 1776)

Relative Poverty – Indicators

At-risk-of-poverty rate – the share of individuals whose equivalised income after social transfers is below 60% of the national median equivalised income. This proportion of the median income represents the at-risk-of-poverty line/threshold– According to the Eurostat glossary, "this indicator does not

measure wealth or poverty, but low income in comparison to other residents in that country, which does not necessarily imply a low standard of living"

– Before the adoption of the Europe 2020 strategy, the fight against poverty and social exclusion was monitored through the at-risk-of-poverty rate.

Relative Poverty – Criticism• Criticism focuses on the indicators, rather than on the concept as such. • 60% of the median income – what standard of living (sufficient, insufficient) is

warranted by this arbitrarily set threshold? • Risk of poverty in richer societies may be equal to that in those less developed• In the new Member States, poverty is low since the poverty threshold is very

low in absolute terms, and the proportion of the population at risk is, consequently, relatively low

• Despite economic development and rise in income for all strata, the number and proportion of the vulnerable may grow and vice versa

• In times of crisis, earned income is the first to decline, which affects income distribution and median income; the poverty threshold is lowered, and individuals immediately below the threshold may exceed it, despite the fact that their actual situation has, in fact, deteriorated – relative poverty may thus decrease at the outset of a crisis

Relative Poverty – Criticism

Some criticism primarily concerns income as an indicator of poverty:• Income is only an indirect indicator of the current status • Inadequacy of income in countries characterised by a high share

of production for own use and widespread informal economy• Remittances from abroad, which are often not reported as

income; reliance on income as an indicator of standard also fails to take into account other gifts, loans, and even consumption based on earlier savings

• "Income data (though not the Nordic registers) is more or less unreliable, understated, hidden or forgotten"

(Bradshaw & Mayhew, 2010, 10; 60)

Subjective Poverty – Concept

• Subjective poverty entails individual assessment of one's material status/poverty – a complementary measure of well-being

• Already in the late 1960s, Van Praag defined the forerunner to the well-known question on the assessment of the minimum resources required for subsistence

• "Poverty is a subjective feeling of individuals" (Van Praag & Carbonell, 2005, 27)

• A complementary measure of well-being – but data are also used to test objective poverty lines, to calibrate composite social well-being indices...

Subjective Poverty – Measurement

1. Direct approach – individuals describe their material situation, grading it from "good" to "very bad"

• The EU indicator "inability to make ends meet" – scale of 5 responses, from "very easily" to "with great difficulty" – is not included among the items used for the assessment of MD, owing to the overemphasis on the subjective component

• Poverty incidence – the proportion of individuals stating that they make ends meet "with difficulty" or "with great difficulty"

2. The other approach is based on respondents' assessment of the minimum income level they need to meet their essential needs

• Poverty incidence – the proportion of individuals "below the line"

Subjective Poverty – Criticism• The most serious problems are the absence of a clear attitude and

inconsistency on the part of respondents, giving socially desirable responses

• Responses vary depending on individual and household characteristics, as well as their real income

• In line with adaptive preferences, once they become accustomed to a higher standard of living, the more affluent start judging it "by higher criteria", while under the conditions of long-term poverty, respondents tend to overestimate their status

• The subjective feeling of poverty is enhanced – in respondents who are ill or unwillingly unemployed,– when respondents' aspirations and expectations exceed their

current possibilities,– when household income is on the decline

Poverty indicators in Serbia, 2012API – Absolute poverty rateRPI – Relative poverty rateAROPE – At-risk-of-poverty-or-social-exclusion rate MDR – Material deprivation rateSMDR – Severe material deprivation rateSPI – Subjective poverty rateADMIN – Administrative poverty rate

API RPI AROPE MDR SMDR SPI PADMIN0

10

20

30

40

50

60

70

8.8

24.6

42.1 44.3

26.9

64.6

3.6

REGIONAL ASPECT

API RPI0

5

10

15

20

25

30

35

Belgrade Vojvodina South and East SerbiaŠumadija and West Serbia Serbia

BY LABOUR MARKET STATUS

API RPI0

5

10

15

20

25

30

35

40

45

50

employed self-employed unemployed pensioners

SINGLE-MEMBER HOUSEHOLDS

API RPI0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

single-member total

POVERTY LINEABSOLUTE POVERTY RISK OF POVERTY

SINGLE MEMBER HOUSEHOLDS

10223 13680

SINGLE PARENT, TWO CHILDREN

20446 21888

TWO ADULTS, TWO CHILDREN

27602 28728

CONCLUSIONS

"What we measure affects what we do; and if our measurements are flawed, decisions may be distorted."

(Stiglitz, Sen, & Fitoussi, 2009, 7)

CONCLUSIONS

1. In line with the hierarchy of absolute and relative poverty (Atkinson & Bourguignon), as long as there is a great number and a high share of individuals unable to meet even the minimum needs, the absolute poverty concept is relevant

2. The definition and monitoring of absolute poverty are also important from the aspect of the formulation and evaluation of poverty reduction policies

"Physical survival has priority, and this is the first criterion by which policy should be evaluated, but relative poverty legitimately comes next on our list of concerns."

(Atkinson & Bourguignon, 1999, 16-17)

CONCLUSIONS

3. The assessment of poverty in Serbia by consumption is still important in view of: – the scale of production for own use (its value as a

proportion of the total consumption of the poorest two deciles stands at approximately 12%)

– the importance of remittances (by the ratio of remittances to the GDP, Serbia shares the second and third ranking among European countries)

– the prevalence of informal economy (about 30% of the GDP, with the share of informal employment in total employment ranging between 17% and 20%)

CONCLUSIONS

4. Material deprivation indicators – Indicate the level of deprivation by European standards– An element of subjectivity (negative responses may

simply result from the fact that certain items are not a priority in the household budget and are not wanted by respondents)

– Still under construction

5. Several research projects show that, to identify the core of the poverty problem, it is essential to monitor several indicators

CONCLUSIONS

• The third wave of the Living Standard Measurement Survey (LSMS)?– Additional insight into poverty issues – More detailed data on consumption and a more precise

picture of poverty– Owing to separate modules on health, education and

employment status, the LSMS would provide other invaluable information as well – the burden of private health or education expenditures on the poor population's consumption, their labour market status and the like

• Matching HBS and SILC data?

Thank you!

For more information refer to: http://socijalnoukljucivanje.gov.rs/wp-content/uploads/2015/02/Measuring-Poverty-Theoretical-Concepts-Status-and-Recommendations.pdf