Tuesday, October 17, 2006

Poverty: Concepts, Measurements and Reduction Strategies *)

This paper aims to give very basic things about poverty. I chose this particular topic because I came from engineering background. I am lack of economic or even social terminologies during my study, so I am afraid of making wrong assumption or even wrong summary of poverty in my country. I hope that this will be a good start for understanding poverty.

Basically, poverty has many dimensions. It has to be looked at through a variety of indicators: levels of income and consumption, social indicators, and indicators of vulnerability to risks and of socio/political access. It is also time-dependent and geographic-dependent.

If we ask somebody about what poverty is, the answer can vary: poverty is hunger; poverty is lack of shelter; poverty is being sick and not being able to see a doctor. Others may answer: poverty is not having access to school and not knowing how to read, or poverty is not having a job, is fear for the future, living one day at a time. Everybody has their own answers to this.

The World Bank’s 2000 World Development Report defines poverty as an unacceptable deprivation in human well-being that can comprise both physiological and social deprivation. Physiological deprivation involves the non-fulfillment of basic material or biological needs, including inadequate nutrition, health, education, and shelter. A person can be considered poor if he or she is unable to secure the goods and services to meet these basic material needs.

Measuring Poverty

Basically, counting the poor is both complex and straightforward at the same time. A person is considered poor if his or her consumption or income level falls below some minimum level necessary to meet basic needs. This minimum level is usually called the "poverty line". If we could accepts narrow definition of poverty line only as consumption as a certain level, it is easy. Poverty is then straightforward: those with the consumption below the line are considered as “poor” and the rest are “non-poor”. In fact, setting the poverty line is a complex exercise as it requires answer to many questions: food commodities, level of calorie, securities, access to medical facilities, educational attainment, physical well being, etc.

A common method used to measure poverty is based on incomes or consumption levels. 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. As time goes, the future measurements of poverty line takes into account other dimensions of poverty.

To compute a poverty measure, usually three considerations are needed: (1) defining the relevant welfare measure; (2) selecting a poverty line – that is a threshold below which a given household or individual will be classified as poor; and (3) selecting a poverty indicator– which is used for reporting for the population as a whole or for a population sub-group only.

A definition of welfare includes what so-called ‘relative’ poverty, which is having little in a specific dimension compared to other members of society. This concept is based on the idea that the way individuals or households perceive their position in society is an important aspect of their welfare. The overall level of inequality in a country, region or population group – and more generally the distribution of consumption, income or other attributes – is also in itself an important dimension of welfare in that group. Inequality measures can be calculated for any distribution—not just for consumption, income or other monetary variables, but also for land and other continuous and cardinal variables.

Furthermore, insecurity is an important component of welfare and can be understood as vulnerability to a decline in well-being. Vulnerability is then defined here as the probability or risk today of being in poverty or to fall into deeper poverty in the future. It is a key dimension of welfare since a risk of large changes in income may constrain households to lower investments in productive assets--when households need to hold some reserves in liquid assets--and in human capital. High risk can also force households to diversify their income sources, perhaps at the cost of lower returns. Vulnerability may influence household behavior and coping strategies and is thus an important consideration for poverty reduction policies.

However, vulnerability is difficult to measure: anticipated income or consumption changes are important to individuals and households before they occur—and even regardless of whether they occur at all—as well as after they have occurred. The probability of falling into poverty tomorrow is impossible to measure, but one can analyze income and consumption dynamics and variability as proxies for vulnerability. Such analysis could be replicated for specific non-monetary variables likely to fluctuate, e.g. health status, weight, asset ownership, etc.

In the 1990s, the World Bank began to conduct poverty assessments on a regular basis. The primary target of these activities was to identify the main poverty problems within a country and to link the policy agenda to issues of poverty. These poverty assessments included quantitative data such as poverty lines, social and demographic characteristics of poor people, and their economic profile. In order to complement this statistical data with an assessment of poverty by the poor people themselves, the World Bank also developed the Participatory Poverty Assessment (PPA).

The methodologies used in the PPAs vary. Depending on the number of field researchers used, field work ranged between 10 days and 8 months in the field (average 2-4 months); sample sizes ranged from 10 to 100 communities and cost between $4,000 and $150,000. They are most often conducted by an academic institution or an NGO, in collaboration with the respective government.

Two assumptions make the participatory approach different. First, it assumes that the research methodology applied will engage the respondents actively in the research process through the use of open-ended and participatory methods. Second, participatory research assumes that the research process will also empower participants and lead to follow-up action. This puts special ethical demands on researchers who use participatory methods for policy research. These ethical responsibilities include a serious, long-term commitment to the people who give their time and information to the researcher.

Poverty Reduction Strategies: Millennium Development Goals (MDGs)

The strategies for reducing poverty are based on macroeconomic issues, because economic growth is the most important factor influencing poverty. Macroeconomic stability is essential for high and sustainable rates of growth. Similarly, some factors had been identified by the World Bank and the International Monetary Fund (IMF) as sources of growth. They include macroeconomic stability, trade, regulatory reforms, agriculture, health, education, expenditure, infrastructure, and tourism. Hence, macroeconomic stability should be a key component of any poverty reduction strategy.

As a matter of fact, the flows of trade and capital that integrate the global economy may bring benefits to millions, but poverty and suffering persist. Responding to such concerns, governments and international development agencies have begun to reexamine the way they operate. In September 2000, 189 countries signed the Millennium Declaration, which led to the adoption of the MDGs.

The MDGs are a set of eight goals for which 18 numerical targets have been set and over 40 quantifiable indicators have been identified. The goals are (1) eradicate extreme poverty and hunger; (2) achieve universal primary education; (3) Promote gender equality and empower women; (4) Reduce child mortality; (5) Improve maternal health; (6) Combat HIV/AIDS, malaria, and other diseases; (7) Ensure environmental sustainability; and (8) develop a global partnership for development.

Although each goal is important, they should be viewed together as they are mutually reinforcing. Achieving them will require building capacity for effective, democratic, and accountable governance, protection of human rights, and respect for the rule of law.

The World Bank’s Global Monitoring Report 2004 suggested areas for particular attention for the three main groups of actors involved. For developing countries, the priorities are (1) improving the enabling climate for private sector activity; (2) strengthening capacity in the public sector and improving the quality of governance; (3) scaling up investment in infrastructure and ensuring its effectiveness; and (4) enhancing the effectiveness of service delivery in human development.

On the other hand, the priorities for developed countries includes (1) sustaining stable and strong growth in the global economy; (2) ensuring a successful, pro-development and timely outcome of the Doha Round; (3) providing more and better aid; and (4) improving policy coherence for development.

Whereas the priorities for international financial institutions are (1) refining and strengthening institutional roles in low-income countries; (2) furthering progress on the results agenda; and (3) improving selectivity and coordination of agency programs.

According to projections by the World Development Indicators Report 2004, poverty rates will fall fastest in East Asia and the Pacific outside of China, but the huge reduction in the number of people below the $1 a day line in China will dominate global totals. In Europe and Central Asia and in the Middle East and North Africa, where poverty rates measured at $1 a day are low, a continuation of current trends will cut poverty rates to half their current levels. South Asia, led by continuing growth in India, is likely to reach or exceed the target. But growth and poverty reduction are proceeding more slowly in Latin America and the Caribbean, which will not reach the target unless growth picks up. The most difficult case is Sub Saharan Africa, where poverty has increased since 1990 and will, on present trends, fall very slowly in the next 11 years, unless there is a major change in prospects.

However, poverty is a multidimensional problem that goes beyond economics to include, among other thing, social, political, and cultural issues. Therefore, solutions to poverty cannot be based exclusively on economic policies, but require a comprehensive set of well-coordinated measures.

1. Ames, Brian, et.al, Macroeconomic Policy and Poverty Reduction, The IMF and The World Bank, August 2001.
2. http://en.wikipedia.org/
3. http://www.imf.org/
4. http://www1.worldbank.org/prem/poverty/voices/reports.htm#cananyone
5. http://www.worldbank.org/poverty/
6. http://povlibrary.worldbank.org/library/
7. Staffs of the World Bank and the IMF, Poverty Reduction Strategy Papers—Progress in Implementation, The International Monetary Fund and The World Bank, September 20, 2004

*) International Technology and Management 4E (ITM) – 70671
Professor NAKAMURA Shuzo

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