Problems of Measuring Poverty

By: Bikal Dhungel 

There are over seven billion people in the world. Out of this, about 2 billion are regarded as rich, or at least they live in high income countries. The next three billion are in middle income countries, which is again divided into two parts, upper middle income countries and lower middle income countries. The next two billion are called poor. This 'poor' is according to the definition of high income countries.

How do we determine this 'Poor' or define 'Poverty' is an issue of discussion. In most of European countries, people earning less than 60% of the average income are considered as poor. In the developing countries, there is no such figure but normally the institutions like World Bank and IMF use the $1.25 per day threshold. Those below this income are poor. But in general, developing countries call 'rich countries' assuming that everybody living there are rich. Of course they are richer than an average individual in developing countries but in terms of purchasing power of their income, almost one fifth of Europeans are poor. Some regions have higher numbers and some have lower.

Concerning developing countries, as I mentioned above, the $1.25 is also measured in monetary terms. That means, if a person has enough lands to support him and his family and no problem of hunger but if he does not sell his crops and has no cash, he is regarded as poor. Additionally, the purchasing power parity of the currencies itself differ in many places. With $1, you can buy a loaf of bread in the US whereas it can buy much more in other countries. The difference between the poverty in developing countries and developed countries is that, if you have no cash in the US, you are likely to starve because over 95% people are not farmers, or they do not grow their own foods. So, they have to buy it. In contrast, most poor countries have a very high level of subsistence farmers. Though they do not have cash, they should not worry for foods. Same sort of problem arises when measuring unemployment rates in developing countries. Normally, the husband goes to work, wife cares about the households and take care about the children etc. She works full time in household but does not get paid. But this is a work too. The story looks bit different in rich countries. Both husband and wife works, a third person is hired to take care of the child and perhaps another person for cooking purposes etc. At the end of the day, it is almost the same thing. Only the work of a lad in rich country was valued monetarily but not with the woman in a poor country. So, in the statistics, she will appear as unemployed.

Leaving the issue of money aside, the next challenge is about non-monetary indicators. How is poor health rated ? It is likely that poor health will turn into a financial burden in the future pushing someone into a poverty trap. How is education valued ? Should these indicators, basically called Human Capital included in measuring poverty ? The answer is yes and no. One can measure poverty for the short term based on the figures about poverty headcount ratio or number of unemployed people today and for a longer term which also includes human capital indicators. In practice however, it is more difficult to agree on which method to choose. While doing household surveys, households will be chosen and the data are taken for the whole household and often the average will be calculated. But taking an average can be dangerous because in practice, not all the members of the family are equally rich or poor. When it comes to extended family living under one roof, it becomes more difficult. It is not necessarily true that all member of household have equal welfare. Same is true for a country. We take per capita income as an indicator about the welfare of a nation, but this might not represent the true story. Within the US, the per capita income of Maryland is twice as much as Mississippi. If you put half of your body in a 70 degree water, which is almost boiling and half inside a zero degree refrigerator, your average body temperature will be 35%, which seems to be absolutely normal. So, we have to be careful with averages.

Coming back to the issue of poverty, the term 'income' should be defined before we measure who is poor and who is not. All income cannot be translated into monetary terms. When we go further, we should also consider the possibility of poverty due to poor health, lower level of education or air pollution that is sure to cause negative impact on health in the future. It is also not true that world class institutions like the IMF and World Bank are not aware of this issue. They know it very well, that is why there is always two calculation of GDP, one real GDP and one based on Purchasing Power Parity. The read GDP of Nepal is $743 but the GDP based on Purchasing Power Parity is $2310, over three times more. So, when evaluating the poverty of a nation, these factors should be taken into account.