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SOAS | 37
740
Understanding Poverty Module Introduction
MODULE INTRODUCTION
ABOUT THIS MODULE

Within the Sustainable Development Goals (SDGs) the eradication of extreme
poverty remains a central objective of international development efforts. As with the
Millennium Development Goals before them, the SDGs recognise that poverty has
multiple dimensions and that progress is needed on a number of fronts (economic,
social and political) if poverty is to be effectively tackled. Government departments,
international development agencies and non-governmental organisations (NGOs) are
thus expected to design policies and to plan interventions with a clear understanding
of how these will contribute to poverty reduction objectives in the areas concerned.
This module is aimed at development practitioners from government departments,

international development agencies, NGOs or private business who are involved in
the design of policy or interventions to combat poverty in low- or middle-income
countries. It aims to provide a sound understanding of the nature of poverty, its
causes and consequences, of trends in poverty reduction across continents and
regions of the world, and of debates as to the drivers of these trends.
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STRUCTURE OF THE MODULE

The module is broadly structured in two parts. The first seven units provide a
conceptual framework for understanding poverty and its causes (both proximate and
deeper). The final three units review evidence on trends in poverty at global and
regional level and the key factors accounting for these trends.
Part I: The first two units consider what we mean by poverty and how poverty can be
measured. The definition of poverty that we use makes a big difference to the
number of people who are considered to be poor. Unit 1 examines money-metric
definitions of poverty (based primarily on income or consumption levels), considering
the strengths, weaknesses and practical measurement challenges associated with
each. Basic numeracy skills are required to study this unit. Unit 2 examines multi-
dimensional poverty measures in a similar way, along with definitions of poverty
generated through participatory exercises with poor people. Unit 3 considers the
relationships between economic growth, inequality and poverty reduction. The focus
here is on macro-level dynamics, which shape the context in which local and
household-level poverty dynamics play out. Unit 4 begins with the sustainable
livelihoods framework and considers poverty dynamics at household level: how and
why people fall into poverty and/or get stuck in it. Whilst Unit 4 focuses on
household assets as an important determinant of poverty status, Unit 5 introduces
social relationships and differentiation, and explores how these interact with
economic factors to produce multidimensional poverty. The linkages between poverty
and the environment are explored in Unit 6. This unit highlights the dependence of
many poor households on natural capital, considers how population growth interacts
with environmental management and poverty, and considers climate change as a
huge evolving shock that will impact the livelihoods of millions of poor households.
Finally, Unit 7 considers how the exercise of power affects poverty, given that
powerlessness is often cited by poor people themselves as a key feature of the
experience of being poor. It considers the conditions under which political leaders are
likely to pursue pro-poor policies and also takes a critical look at the role of
international development assistance (aid) in poverty reduction.
Part II: Unit 8 presents available evidence on trends in monetary poverty and hunger
across countries and continents. It also examines debate on the relative incidence of
rural versus urban poverty. Projections by the World Bank indicate that the majority
of the worlds extreme poor will live in rural areas until at least 2025. However, does
the underlying definition of poverty understate the prevalence of urban poverty? Unit
9 considers drivers of observed trends in capability poverty. Finally, Unit 10
examines the SDGs. Drawing on a comparison with the Millennium Development
Goals, it considers the process by which they were developed and the content of the
goals themselves, so as to consider their potential to contribute to the eradication of
extreme poverty in the world by 2030.
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WHAT YOU WILL LEARN
Module Aims
To present the multiple dimensions of poverty and how they can be measured.
To explore both the proximate and deeper factors that trap people in poverty
or assist them to escape poverty.
To compare trends in poverty reduction across continents and regions and to

consider the key factors accounting for these trends.
To examine the impact of international interventions and initiatives on efforts

to eradicate poverty.
Module Learning Outcomes

By the end of this module, students should be able to:
demonstrate a rigorous and critical understanding of key concepts used in

international poverty debates. This includes practical issues of measurement as
well as definition
analyse both the proximate and deeper factors that trap people in poverty or
assist them to escape poverty
critically assess the impact of international interventions and initiatives, such

as international development assistance and the SDGs, on efforts to eradicate
poverty.
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ASSESSMENT
This module is assessed by:
an examined assignment (EA) worth 20%
a written examination in October worth 80%.
Since the EA is an element of the formal examination process, please note the
following:
(a) The EA questions and submission date will be available on the Virtual Learning
Environment (VLE).
(b) The EA is submitted by uploading it to the VLE.
(c) The EA is marked by the module tutor and students will receive a percentage
mark and feedback.
(d) Answers submitted must be entirely the students own work and not a product
of collaboration. For this reason, the VLE is not an appropriate forum for
queries about the EA.
(e) Plagiarism is a breach of regulations. To ensure compliance with the specific

University of London regulations, all students are advised to read the
guidelines on referencing the work of other people. For more detailed
information, see the User Resource Section of the VLE.
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STUDY MATERIALS
There is no textbook for this module, but the following has been provided:
Collier, P. (2007) The Bottom Billion. Oxford, Oxford University Press.
This is not a traditional textbook; rather, it provides a particular, high-profile, but

also controversial analysis of the causes of poverty in low-income countries and how
to eradicate it. You are invited to read selected chapters of the book as you work
through the module and are encouraged to read others at some point during your
studies. The selected chapters illustrate how economics, geography, governance and
politics combine to trap large numbers of people in poverty or to help them escape
from it. They also model an evidence-based and critical analysis of complex and
often emotive questions. That said, you are encouraged to develop your own critical
assessment of the arguments presented in the book and to develop your own
understanding of what needs to be done to tackle poverty as you work through the
module.
For each of the module units, the following are provided.
Key Readings
There are Key Readings for each unit, which are provided. These are journal articles
or extracts from major reports, Collier (2007) or other books. The notes under each
reading indicate the scope and relevance of the reading. You are expected to study
the Key Readings as they contain material which may be used in examination
questions.
Further Readings
These texts are not provided in hard copy, but weblinks have been included where
possible. Further Readings are NOT examinable and are provided to enable students
to pursue their own areas of interest.
Multimedia links
Students are encouraged to look at these and use the VLE to discuss their
implications with other students and the tutor.
References
Each unit contains a full list of all material cited in the text. All references cited in the
unit text are listed in the relevant units. However, this is primarily a matter of good
academic practice: to show where points made in the text can be substantiated.
Students are not expected to consult these references as part of their study of this
module.
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Self-Assessment Questions
Often, you will find a set of Self-Assessment Questions at the end of each section
within a unit. It is important that you work through all of these. Their purpose is
threefold:
to check your understanding of basic concepts and ideas
to verify your ability to execute technical procedures in practice
to develop your skills in interpreting the results of empirical analysis.
Also, you will find additional Unit Self-Assessment Questions at the end of each
unit, which aim to help you assess your broader understanding of the unit material.
Answers to the self-assessment questions are provided in the Answer Booklet.
In-text Questions
This icon invites you to answer a question for which an answer is

provided. Try not to look at the answer immediately; first write down
what you think is a reasonable answer to the question before reading
on. This is equivalent to lecturers asking a question of their class and
using the answers as a springboard for further explanation.
In-text Activities
This symbol invites you to halt and consider an issue or engage in a

practical activity.
Key Terms and Concepts

At the end of each unit you are provided with a list of Key Terms and Concepts which
have been introduced in the unit. The first time these appear in the text guide they
are Bold Italicised. Some key words are very likely to be used in examination
questions, and an explanation of the meaning of relevant key words will nearly
always attract credit in your answers.
Acronyms and Abbreviations

As you progress through the module you may need to check unfamiliar acronyms
that are used. A full list of these is provided for you at the end of the introduction.
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TUTORIAL SUPPORT
There are two opportunities for receiving support from tutors during your study, and
you are strongly advised to take advantage of both. These opportunities involve:
(a) participating in the Virtual Learning Environment (VLE)
(b) completing the examined assignment (EA).
Virtual Learning Environment (VLE)

The Virtual Learning Environment provides an opportunity, through the internet, for
you to interact with both other students and tutors. A discussion area is provided
through which you can post questions regarding any study topic that you have
difficulty with, or for which you require further clarification. You can also discuss
more general issues that are central or topical for your module or degree.
Additional features of the VLE include a technical area if you have any access
problems, an administrative area for any relevant queries and profile areas where
students and staff may introduce themselves.
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INDICATIVE STUDY CALENDAR
Part/unit Unit title Study time

(hours)
PART I CONCEPTUAL FRAMEWORK
Unit 1 Money-metric measures of poverty 15
Unit 2 Multidimensional poverty 10
Unit 3 Growth, inequality and poverty 15
Unit 4 Poverty dynamics 15
Unit 5 Social differentiation and poverty 15
Unit 6 Poverty and the environment 15
Unit 7 Power, politics, governance and aid 15
PART II TRENDS IN POVERTY REDUCTION
Unit 8 Trends in monetary poverty and hunger 15
Unit 9 Explaining trends in capability poverty 10
Unit 10 The Sustainable Development Goals 10
Examined Assignment 15
Check the Virtual Learning Environment for submission deadline
Examination entry July
Revision and examination preparation September
End-of-module examination October
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ACRONYMS AND ABBREVIATIONS

AKDN The Aga Khan Development Network
ALI adult literacy index
AMREF African Medical Relief Foundation
ASER Annual Status of Education Report
BRAC Bangladesh Rural Advancement Committee
BWPI Brooks World Poverty Institute, University of Manchester
CDM clean development mechanisms
CEPR Centre for Economic and Policy Research
CGD Center for Global Development
CIMMYT International Maize and Wheat Improvement Center
CPI consumer price index
CPRC Chronic Poverty Research Centre
CREATE Consortium for Research on Educational Access, Transitions and Equity
CSAE Centre for the Study of African Economies, University of Oxford
DAC Development Assistance Committee (of the OECD)
DCPP Disease Control Priorities Project
DESA (USA) Department of Economic and Social Affairs
DFID Department for International Development
DHS demographic health surveys
EADI European Association of Development, Research and Training Institutes
ECA Economic Commission for Africa
ECLAC Economic Commission for Latin America and the Caribbean
EFA education for all
EI educational index
EKC environmental Kuznets curve
EPI Expanded Programme of Immunization
EU European Union
EYS expected years of schooling for children of school entering age
FAO Food and Agriculture Organization (of the United Nations)
FNCD Food Consumption and Nutrition Division (of IFPRI)
FDI foreign direct investment
G77 group of 77 developing countries within the UN
GBS general budget support
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GDP gross domestic product

GEI gross educational enrolment index
GHG greenhouse gas
GNI gross national income
GNP gross national product
GSDRC Governance and Social Development Resource Centre
HAI HelpAge International
HCEs Household Consumption and Expenditure Surveys
HDI human development index
HDR human development report
HIPC highly indebted poor countries
HEW health extension worker
HIPC2 Enhanced Highly Indebted Poor Countries facility
HIV/AIDS human immunodeficiency virus/acquired immunodeficiency syndrome
HPI human poverty index
I PRSP Interim Poverty Reduction Strategy Paper
IAEA International Atomic Energy Agency
IBRD International Bank for Reconstruction and Development (World Bank)
ICP International Comparison Programme
ICRISAT International Crops Research Institute for the Semi-Arid Tropics
IDA International Development Assistance
IDS Institute of Development Studies
IFAD International Fund For Agricultural Development
IFI International Financial Institutions
IFPRI International Food Policy Research Institute
IHES Integrated Household Expenditure Survey
IHS Integrated Household Survey
IIED International Institute for Environment and Development
IIEP International Institute for Educational Planning
ILO International Labour Organisation
ILRI International Livestock Research Institute
IMF International Monetary Fund
IPCC Intergovernmental Panel on Climate Change
IPC-IG International Policy Centre for Inclusive Growth
IPL international poverty line
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IPU Inter-Parliamentary Union

IRRI International Rice Research Institute
ISI import substitution industrialisation
ITU International Telecommunications Union
IUCN International Union for the Conservation of Nature
IZA Institute for the Study of Labor
LCU local currency units
LDCs least developed countries
LEI life expectancy index
LIDC London International Development Centre
LSE London School of Economics and Political Science
LSMS Living Standards Measurement Survey
MDG(s) Millennium Development Goal(s)
MEA Millennium Ecosystem Assessment
MICS Multiple Indicator Cluster Survey
MMR maternal mortality rate
MoE Ministry of Education
MoH Ministry of Health
MPI multidimensional poverty index
MSF Mdecins Sans Frontires
MST Landless Workers Movement
MTID Markets, Trade and Institutions Division
NBER National Bureau for Economic Research
NEM New Economic Model
NER net enrolment ratio
NGO non-governmental organisation
NIC newly industrialised countries
NREGA National Rural Employment Guarantee Act
ODA Official Development Assistance
ODI Overseas Development Institute
OECD Organisation for Economic Co-operation and Development
OPEC Organization of Petroleum Exporting Countries
OPHI The Oxford Poverty and Human Development Initiative
PEAP Poverty Eradication Action Plan
PPA participatory poverty assessment
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PPLPI Pro-Poor Livestock Policy Initiative

PPP purchasing power parity
PRA participatory rural assessment
PRS Poverty Reduction Strategy
PRSP Poverty Reduction Strategy Paper
PRUS Poverty Research Unit at Sussex
PTR pupil teacher ratio
RCT randomised control trial
SDG(s) Sustainable Development Goal(s)
SLF sustainable livelihoods framework
SOFA State of Food and Agriculture
SSA sub-Saharan Africa
TB tuberculosis
UN United Nations
UNAIDS Joint United Nations Programme on HIV/AIDS
UNDESA United Nations, Department of Economic and Social Affairs
UNDP United Nations Development Programme
UNECA United Nations Economic Commission for Africa
UNEP United Nations Environment Programme
UNESCO United Nations Educational, Scientific and Cultural Organization
UNFCCC United Nation Framework Climate Change Convention
UNFPA United Nations Population Fund
UN-HABITAT United Nations Human Settlements Programme
UNICEF United Nations Childrens Fund
UNSD United Nations Statistics Division
UNU-WIDER United Nations University-World Institute for Development Economics
Research
US United States
USSR Union of Soviet Socialist Republics
VI vertical inequality
WFP World Food Program
WHO World Health Organization
WIDER World Institute for Development Economics Research
WRI World Resources Institute
WTO World Trade Organization
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Unit One: Money-Metric Measures of Poverty
Unit Information 2
Unit Overview 2
Unit Aim 2
Unit Learning Outcomes 2
Key Readings 3
Further Readings 4
References 5
Multimedia 7
1.0 Income or consumption poverty 8
Section Overview 8
Section Learning Outcomes 8
1.1 Income-based measures of poverty 8
1.2 Consumption-based measures of poverty 11
1.3 Assets 14
Section 1 Self-Assessment Questions 16
2.0 Poverty lines 17
Section Overview 17
Section Learning Outcomes 17
2.1 National poverty lines 17
2.2 The international poverty line 20
2.3 Adult equivalence scales 24
Section 2 Self-Assessment Questions 26
3.0 FosterGreerThorbecke poverty indicators 27
Section Overview 27
Section Learning Outcome 27
3.1 P0, P1 and P2 27
Unit Summary 31
Unit Self-Assessment Questions 32
Key Terms and Concepts 33

Understanding Poverty Unit 1
UNIT INFORMATION
Unit Overview
If we are seeking to understand poverty, then a good place to start is with
definitions. These, in turn, permit empirical analysis of factors that contribute to
poverty and interventions that might reduce it.
Defining poverty might seem a straightforward exercise, but in fact there are many
different ways of defining poverty and each of these has its own measurement
challenges.
In this unit, we consider money-metric definitions based on consumption levels or

income. Historically, these have been the dominant way of defining and measuring
poverty, due in part to their adoption by the World Bank and other major donors.
Thus, Sustainable Development Goal 1 (SDG 1) includes a target to eradicate
extreme poverty, defined in money-metric terms, much as Millennium Development
Goal 1 (MDG 1) incorporated a monetary poverty target.
However, as we will see in this unit and the next, such approaches also have their
critics. They are thus increasingly being complemented by multi-dimensional poverty
measures, not just within academia, but at national and international policy levels.
Unit Aim
To provide a detailed and critical knowledge of money-metric approaches to
defining and measuring poverty.
Unit Learning Outcomes

By the end of this unit, students should be able to:
discuss the strengths and weaknesses of money-metric definitions of poverty
explain the advantages and disadvantages of measuring poverty in terms of

consumption as opposed to income
explain and critically assess the concepts of the international poverty line,
purchasing power parity and the FosterGreerThorbecke poverty measures.
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KEY READINGS
Deaton, A. (2006) Measuring poverty. In: Banerji, A., Bnabou, R. & Mookherjee,
D. (Eds.) Understanding Poverty. Oxford and New York, Oxford University Press.
pp. 315.
This chapter covers much of the ground of this unit in a clear and accessible way. Deaton writes
freely as only a highly respected authority can, with the result that the reading includes
numerous personal insights and opinions alongside its simple presentation of basic concepts. The
one downside is that its examples, although useful, are now becoming a little dated.
Ruggeri Laderchi, C., Saith, R. & Stewart, F. (2003) Does it matter that we do not
agree on the definition of poverty? A comparison of four approaches. Oxford
Development Studies, 31 (3), 243274.
This paper considers the requirements of a satisfactory poverty measure, then reviews and
critiques four broad approaches to the identification and measurement of poverty: monetary,
capability, social exclusion, and participatory approaches. Finally, it investigates whether
different measures of poverty identify the same people as poor and concludes that different
approaches identify different people as being poor. Much subsequent work has explored this
same question and reached the same conclusion. Therefore, please note the conclusion and
dont feel that you have to spend too long on the specific examples.
Monetary approaches to defining and measuring poverty are reviewed and critiqued on pp. 247
253. Sections 3.23.4 (pp. 253262) are most directly relevant to Unit 2 of this module.
However, you may wish to read them quickly here, so as to more fully appreciate what
monetary approaches to defining poverty do not cover.
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FURTHER READINGS
Ferreira, F., Chen, S., Dabalen, A., Dikhanov, Y., Hamadeh, N., Jolliffe, D., Narayan,
A., Prydz, E., Revenga, A., Sangraula, P., Serajuddin U. & Yoshida N. (2015) A Global
Count of the Extreme Poor in 2012. Data Issues, Methodology and Initial Results.
Washington DC, The World Bank. Policy Research Working Paper 7432.
Available from: http://www-

wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/10/14/09022
4b083144b10/2_0/Rendered/PDF/A0global0count00and0initial0results.pdf
This paper represents the World Banks most up-to-date presentation of the number of people
in the world living below the international (monetary) poverty line, plus past trends in this
figure. It incorporates the outputs of the 2011 survey round of the International Comparison
Programme into global poverty estimates, entailing a new international poverty line of
US$1.90 consumption per person per day at 2011 purchasing power parity (PPP) exchange rates.
The paper is a technical read, but sheds light on the statistical issues and debates underlying
the official figures on the number of people living in extreme monetary poverty in the world.
After a helpful introduction and historical review of global poverty measurement using PPPs,
Section 3 discusses methodological issues encountered in computing global poverty estimates.
This section generally reinforces what you will learn from the main unit text, but dont get
bogged down in the minutiae of the calculations and be prepared simply to move on if you find
the going tough. (For example, you may need strong concentration to work your way through
the logic of Section 3.3!)
Section 4 then describes some debates surrounding the appropriate level for the 2011
international poverty line. Again, you dont need to worry about all the counter-proposals,
but it will help if you can understand why US$1.90 per person per day at 2011 PPPs is
considered an equivalent line to US$1.25 per person per day at 2005 PPPs.
Finally, Section 5 describes some results, which we will return to in Unit 8.
Haughton, J. & Khandker, S. (2009) Handbook on Poverty and Inequality.

Washington DC, The World Bank.
Available from: http://hdl.handle.net/10986/11985

Many of the concepts discussed in this unit are discussed in more depth in Chapters 2, 3 and 4 of
this book. Therefore, it is suggested that you use the book as additional reference material,
consulting it if you need more explanation on a particular topic or want to check whether you
have understood something correctly or not.
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REFERENCES
Beegle, K., De Weerdt, J., Friedman, J. & Gibson, J. (2012) Methods of household
consumption measurement through surveys: experimental results from Tanzania.
Journal of Development Economics, 98 (1), 318.
Castleman, T., Foster, J. & Smith, S. (2015) Person-equivalent Headcount Measures

of Poverty. Washington DC, George Washington University, Elliot School of
International Affairs. Institute for International Economic Policy Working Paper Series
2015-10.
Cavendish, W. (1999) Empirical Regularities in the PovertyEnvironment Relationship

of African Rural Households. Oxford, The Centre for the Study of African Economies.
Working Paper 9921.
Available from: http://www.csae.ox.ac.uk/workingpapers/pdfs/9921text.pdf

[Accessed 21 August 2015]
Chen, S. & Ravallion, M. (2007) Absolute poverty measures for the developing world,
19812004. Proceedings of the National Academy of Sciences, 104 (43) 16757
16762.
Chen, S. & Ravallion, M. (2008) The Developing World is Poorer Than we Thought,
but no Less Successful in the Fight Against Poverty. Washington DC, The World Bank.
Policy Research Working Paper No 4703.
Cruz, M., Foster, J., Quillin, B. & Schellekens, P. (2015) Ending Extreme Poverty and
Sharing Prosperity: Progress and Policies. Washington DC, The World Bank. Policy
Research Note 15-03.
Deaton, A. & Zaidi, S. (2002) Guidelines for Constructing Consumption Aggregates for
Welfare Analysis. Washington DC, The World Bank. Living Standards Measurement
Study (LSMS), Working Paper No 135.
Available from: http://go.worldbank.org/6791D5FAT0 [Accessed 26 May 2015]
Deaton, A. (2006) Measuring poverty. In: Banerji, A., Bnabou, R. & Mookherjee, D.
(Eds.) Understanding Poverty. Oxford and New York, Oxford University Press.
pp. 315.
Ferreira, F., Chen, S., Dabalen, A., Dikhanov, Y., Hamadeh, N., Jolliffe, D., Narayan,
A., Prydz, E., Revenga, A., Sangraula, P., Serajuddin U. & Yoshida N. (2015) A Global
Count of the Extreme Poor in 2012. Data Issues, Methodology and Initial Results.
Washington DC, The World Bank. Policy Research Working Paper 7432.
Foster, J.E., Greer, J. & Thorbecke, E. (1984) A class of decomposable poverty

indices. Econometrica, 52, 761766.
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National Academy Press (1989) Recommended Dietary Allowances. 10th edition.

Washington DC.
Reddy, S.G. & Pogge, T.W. (2005) How Not to Count the Poor. Version 6.2.
Available from: http://www.columbia.edu/~sr793/count.pdf [Accessed 26 May 2015]
Townsend, P. (1979) Poverty in the United Kingdom. London, Penguin Books.
World Bank (2015) Data. PPP Conversion Factor, GDP (LCU per international $).
[Online]. Washington DC, The World Bank.
Available from: http://data.worldbank.org/indicator/PA.NUS.PPP

[Accessed 27 October 2015]
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MULTIMEDIA
World Bank (n.d.) How is Poverty Measured? [Video]. Washington DC, The World
Bank. Duration 3:13 minutes.
Available from: http://www.worldbank.org/en/news/video/2013/09/09/how-is-

poverty-measured
This very simple video presents the basic approach to, and a justification for, measuring
poverty using a money-metric approach. It is intended as a mass communication tool, not as an
academic defence of the approach. However, as you listen, note down (a) any points that you
consider to be well made and (b) any places where the narrative seems to you to be weaker.
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1.0 INCOME OR CONSUMPTION POVERTY
Section Overview
Money-metric approaches to defining and measuring poverty focus on economic
dimensions of well-being or the standard of living. Thus, Webster's dictionary defines
poverty as the state of one who lacks a usual or socially acceptable amount of money
or material possessions. This definition of poverty focuses on the ability to purchase
or consume goods and services.
In order to measure and compare poverty, you need an indicator which allows you to
determine who is poor and who isnt. In money-metric approaches, income or (more
commonly) consumption levels are used as the indicator of well-being. This section
will discuss the advantages and disadvantages of using income- as opposed to
consumption-based definitions of poverty, including the challenges in collecting the
relevant data.
It will also briefly consider the use of physical asset holdings as an indicator of poverty.
Section Learning Outcomes

By the end of this section, students should be able to:
explain the advantages and disadvantages of measuring poverty in terms of

consumption as opposed to income
discuss the use of asset holdings as an indicator of poverty.
1.1 Income-based measures of poverty

As you work through this and subsequent sections, it may help if you have in your
mind a mental image of a less well-to-do household (rural or urban). Think about
them for a minute. Where do they live? How many people are there in the household
(adults and children)? Are they always all there? What do they do to earn a living? In
this unit and the next, we are going to think about some of the conceptual and
practical questions surrounding how someone perhaps a government programme,
an international development agency or a non-governmental organisation (NGO)
decides whether or not the members of this household should be classed as poor.
Income-based definitions of poverty take the income of an individual or household

over a defined period as the key indicator of their well-being during that period.
Can you think of strengths and weaknesses of this approach?
Income is an important determinant of what an individual or household can consume

at any given time. Income provides the means to buy food and clothes, rent housing
if necessary, and get around. It allows the household to pay school fees for its
children or buy medicines (assuming the income is high enough!). People with high
incomes have money left over to save and have a good time.
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Clearly, income is very important. Recognising this, an increasing number of countries

provide various forms of benefits (pension, unemployment benefits, carers allowance,
sick pay) to people who are unable to earn an income for one reason or another.
However, people do not always live off their current income. For example, in times of
income shortage they may draw on savings or borrow and when their income
recovers or increases they may save or repay loans. This is called consumption
smoothing, as efforts are made to ensure that consumption fluctuates less than
income.
This reminds us that income is not an end in itself. Rather, it enables people to
consume. Therefore, current consumption is generally regarded as a better (more
direct) indicator of welfare than current income.
Collecting data on incomes
There are also practical difficulties with measuring income, especially when it is the
income of less well-to-do households in poor economies. Such information is usually
collected through some form of questionnaire survey.
Can you think what some of the difficulties might be?
The module authors household receives the vast majority of its income from the
salaries of the course author and his wife. These salaries are received on a regular
basis and vary very little from month to month. By contrast, only a minority of people
in low-income economies enjoy regular and predictable incomes from wages or
salaries. Instead, they are hired as casual workers (when work is available), sell crops
to generate income or engage in petty trading or other small business enterprises. In
the case of agricultural production, petty trading and other small business enterprises,
the revenue generated has first to cover the costs of production. It is the net income
that is really available to provide income for the individual or household to live off and
also ideally to enable new investment. In the absence of detailed record keeping, it
can be difficult to remember how much revenue has been received over a specified
period. Then, the relevant production costs need to be subtracted.
There are also questions as to what should be counted as income. For example, say
that two farmers enjoy exactly the same harvest of rice. One keeps all her rice to be
eaten at home, whereas the other sells some of hers to buy flour to make chapatis.
Are their incomes the same or different?
The answer is that they are the same, but the first farmer receives her income as
non-monetised income or income in kind. However, if this is true for crop harvests,
what about housing? Suppose your neighbour goes to take a job in a nearby town.
Instead of selling his house, he rents it out and uses the rent that he receives to pay
for his own accommodation in the town. Is his income higher than yours? Again, it is
not, but this time we need to recognise that people receive imputed income from
owner-occupied dwellings.
There are many reasons why incomes may be under-reported through household
surveys. Some have already been noted above.
SOAS CeDEP 9
Can you think of others?
In addition to the reasons already mentioned:
Respondents may be reluctant to disclose their full incomes for fear that the
information might be passed to the tax authorities.
The questionnaire may not prompt the interviewer to ask about all possible
income sources. This is particularly likely where non-monetised income sources
are concerned. For example, Cavendish (1999) explored the importance of
income from the utilisation of environmental resources (eg wild foods and
medicines, fuelwood, timber) to a sample of around 200 households in southern
Zimbabwe in the mid-1990s. Some of these products were gathered and sold by
the households concerned, but others were used entirely within the household.
Cavendish estimated that the value of these products amounted to around 35%
of the total income of the sampled households in the two years of his survey.
However, data on income from such sources is often not collected by official
surveys.
The questionnaire seeks to discover household income, yet all the questions are
directed to a single respondent and he or she does not know about all the
income streams received by other members of the household.
Might you expect income data collected through household surveys to

contain any systematic biases across occupation groups? If so, what
might these be?
Answer
There are two major (potential) biases that we should note. Firstly, it appears
that wealthier households are more likely to consciously under-report their
incomes than poor households. This means that income surveys may under-
estimate the extent of inequality within a population, even if such deliberate
under-reporting makes little impact on the estimates of poverty. Secondly, as
already noted, the problems of assembling reliable data are most severe
where respondents obtain their incomes from agricultural production, petty
trading or other small business enterprises where incomes can be irregular
and record keeping may be weak or non-existent.
In countries where many people in the population receive a large share of their
income from wages or salaries, it may be easier to collect data on incomes than it is
to measure consumption. These countries tend to be middle or high-income countries.
In such countries, poverty estimates may be based on income data. By contrast, in
most low-income countries, consumption data are preferred when it comes to
estimating the number of people living in poverty.
SOAS CeDEP 10
Household versus individual data
Most surveys whether of incomes or consumption collect data for respondent

households, rather than for individuals. They then estimate the incomes (or
consumption) of individual members by dividing the recorded household income (or
consumption) by the total number of members. Members may be weighted by age
and sometimes also by gender.
Apart from the convenience of only having to talk to one household member, a major
justification for collecting income data at household level is that much income is
pooled; in other words, it is available for general household needs irrespective of who
actually earned it. However, this is rarely true for all income and there are
differences in the extent to which income is pooled across both households
(depending on the relationships and level of trust between household members) and
cultures. A much-cited stylised fact is that women put in much of the labour for the
cultivation of cash crops, but it is the men who take the crops for sale. The men then
keep most of the money, spending some of it on beer, cigarettes or even marrying
another wife. Thus, estimates of income or consumption that are based on household-
level data ignore inequalities of income or consumption within households. As a result,
it is highly likely that poverty is underestimated, with some women and children who
live in poverty due to unequal intra-household relationships overlooked by official
poverty figures.
Practically speaking, the maintenance of separate accounts within a household also

means that any given respondent (even the household head) may only have a partial
picture of the income that has come into the household (ie to all household members)
during the period that is being investigated by a survey.
1.2 Consumption-based measures of poverty

It was argued above that consumption is a better indicator of well-being than income:
incomes may fluctuate, but consumption tends to be more constant as households
can draw on borrowing or savings in times of income shortage.
Many statistical surveys of well-being and poverty, therefore, attempt to track

consumption rather than incomes. Over the past 25 years in many countries a large
investment has been made in periodic, nationally representative Living Standards
Measurement Surveys (LSMS), with particular support from the World Bank. Some of
the initial impetus for this investment came from debates over the impact of
structural adjustment. Then there was a desire to see how countries were performing
in relation to Millennium Development Goal 1. More generally, many governments
want to know what impact the policies they are pursuing are having on well-being,
poverty and inequality within their populations.
SOAS CeDEP 11
Collecting data on consumption
Consumption is measured by calculating expenditure on all goods and services, plus

non-monetised consumption (of own produced crops, housing etc), over a specified
period. Commonly, this only includes consumption of so-called private goods (goods
which, once consumed by one person or household, are not available for consumption
by another). Some argue that a better consumption indicator would be one that was
broadened to include consumption of free public goods, such as education or sanitation.
What benefits can you see from adopting this broader definition? What
problems could you envisage with it?
It has also been pointed out that low consumption is not necessarily a reliable
indicator of poverty. Social and cultural factors can also play a role in explaining low
consumption, with some households and cultures choosing to save more than others.
A big challenge with a consumption-based approach to poverty is measurement and,

specifically, recall.
Think back over everything that you have eaten over the past 24 hours. How
easy is it to remember?
How accurately could you remember what members of your household have
eaten over the past week? Is there someone else in your household who would
remember this better than you and, if so, why?
Could you remember all expenditure that you have incurred over the past
week?
Whilst people with lower consumption levels have less to remember, these questions
still illustrate the difficulties of recall. For this reason, consumption sections of major
surveys typically restrict questions to consumption over the last 24 hours or last
week. Can you think of any further difficulties that this might present?
Particularly in agrarian economies, consumption can be highly seasonal. Although we

have argued that households have ways of smoothing consumption, so that it
fluctuates less than income, financial markets are imperfect, so poor households
generally cannot fully compensate for fluctuations in incomes through savings and/or
credit. Even salaried workers may delay purchases of some items until they receive
their pay cheque at the end of the month. More dramatically, in many agrarian
economies there is a phenomenon called the hungry period or lean season, just
before the harvest, when stocks from the previous harvest are running low or are
exhausted. In such months, poor households may cut the number of meals that they
eat in a day from three to two or even one even though this is a busy time of year
for agricultural production activities.
A major implication of this is that, if recall is limited to 24 hours, a week or even a

month (for larger items), the resulting measure of consumption poverty will depend
heavily on when the interview takes place. Was it at the beginning of the month or
towards the end, before or after harvest?
Large-scale surveys can get round many of the problems caused by limited recall
simply because they cover so many households that interviews take place over the
best part of a year. However, even this may not avoid all problems (see 1.2.1).
SOAS CeDEP 12
1.2.1 Seasonality and consumption poverty in Malawi
In Malawi, the main periodic, national living standards survey is the Integrated Household
Survey (IHS). IHSs were undertaken in 1998, 2004 and 20102011. Whilst these IHSs have
generated much useful data, in the earlier rounds some observers were puzzled by the
findings relating poverty incidence to other variables, which sometimes conflicted with
common perceptions of, for example, living standards in different areas. Various
explanations were put forward for this, but an important one was as follows: enumerators
working in teams moved progressively around different areas, so they visited different
areas at different times of the year. Although the sample design provided a sample across
all seasons in each region, it was not possible to design the sample so that households in a
specific city, for example, were sampled across all seasons. There was thus a danger that
estimates of household expenditure and of poverty incidence would be biased by the time
of interview. Indeed, if month of interview was introduced into regression analyses that
sought to explain observed consumption, it consistently came out as a significant
explanatory factor, even when more common (and fundamental) variables such as
landholding size and participation in wage employment were included. Analysis that
failed to control for this effect was thus likely to generate misleading results.
Source: Dorward, A (personal communication)
Deaton (2006) reports an experimental survey in India in which:
a randomly selected half of the households got a thirty-day reporting

period [for food consumption the normal survey practice in India, but
not elsewhere], while the others got a seven-day reporting period. On
average, households reported about 30% more food purchases on the
seven-day questionnaire and only about 18% more on all expenditures
including food not such a large difference in itself, but enough to cut the
measured number of poor in India by half!
Source: Deaton (2006) p. 14.
In 2015, the World Bank is going to switch to using poverty data for India that is
based on the 7-day recall period (Cruz et al, 2015: p. 12). The impact of this change
will be dramatic, as over 100 million fewer Indians will be classified as extremely poor
as a result (Ferreira et al, 2015). This equates to a fall of more than 10% in the total
number of people in the world counted as extremely poor all because of an
apparently innocuous change in survey methodology.
Similarly, Beegle et al (2012) report the consequences of adopting several variants of

a consumption questionnaire in Tanzania. Using a $1.25 per day poverty line, their
estimate of headcount poverty in their sample was 63% where a 14-day recall period
was used for food consumption, but fell to 55% where a 7-day recall period was used.
If a household diary was used (ie food consumption of all family members was
recorded, to minimise recall problems), the estimate of headcount poverty varied
from 56% to 60%, depending on the frequency of monitoring visits by enumerators.
If just one person administered a personal diary, the estimate fell to 48%.
Furthermore, the impacts of these changes varied by household size and literacy levels.
SOAS CeDEP 13
To ensure that you have understood how recall periods affect the
estimated poverty rate, explain in your own words why reducing the
recall period for food consumption from 14 to 7 days might reduce the
estimated headcount poverty rate.
Answer
The longer the recall period, the more likely it is that a respondent will forget
particular items of food that they have consumed (or purchased in the case of
an expenditure survey). Hence, their recorded consumption (expenditure) will
be under-estimated, making them look poorer than they are.
A final issue with consumption measurement concerns a comparison of consumption

across large and small households. This is dealt with in Section 2.3.
1.3 Assets
In addition to income, the Webster's dictionary definition of poverty (cited earlier)
also highlights the importance of material possessions. Given that much thinking on
the livelihoods of poor people highlights the importance of assets, is there a case for
defining poverty in relation to asset holdings, rather than income or consumption?
You might want to consider your own answer to this question before
proceeding with the rest of this section.
Physical assets such as houses, furniture, bicycles, radios and agricultural

implements are relatively easy to identify and, for a poor household, to count as
part of a household survey.
Such asset holdings influence current consumption in a number of ways, many but
not all of which should be captured by consumption surveys. For example, use of
productive assets, such as ploughing equipment, sewing machines and vehicles,
should translate into higher income and higher recorded consumption. Similarly, if the
imputed value of housing (the biggest asset that most home owners have) is well
recorded, it should be higher for a household in a large, permanent house than for a
household in a small mud and thatch building. However, the extra well-being that
comes from having food and drink stored in a fridge as opposed to being at room
temperature and prone to go off may not be captured by consumption data.
Asset holdings may also provide a source of savings that can be drawn upon during
periods of low income. However, if a household sells productive assets to support
short-term consumption levels, it may compromise its future income and hence
consumption possibilities by doing so.
One major difficulty with defining poverty in relation to physical asset holdings is that
the relationship between physical (and especially productive) asset holdings and well-
being fluctuates over time. The reason for this is that other factors (eg economic
upswings and downturns, price fluctuations) affect the return that individuals and
households realise from their assets. Hence, a household with a reasonable stock of
SOAS CeDEP 14
assets could experience low consumption in a given period because key market prices
were unfavourable in that period, but then bounce back when prices recovered.
Looking at this positively, focusing on a households asset endowment might give a

better picture of the households medium-term consumption possibilities than current
consumption does. This, however, depends on identifying a stable and/or predictable
relationship between asset holdings and medium-term consumption (or other
indicators of well-being). As yet, little work has been done on this.
Another major practical difficulty in constructing an indicator of well-being based on

physical asset holdings is how to value them. The value of most assets depreciates
over time, so the value will be dependent on age, condition, how much second-hand
items can be sold for locally, etc. Valuation is thus extremely data demanding.
Finally, thinking on livelihoods does not focus solely on physical assets, but also on
human, social, and other forms of capital. These are equally important in determining
ones livelihood possibilities and in influencing well-being. Thus, focusing on physical
assets may fail to capture the full range of capabilities desirable for a fulfilled life. By
contrast, multi-dimensional approaches to defining and measuring poverty do reflect
the importance of multiple forms of capital to peoples well-being.
SOAS CeDEP 15
Section 1 Self-Assessment Questions
Q uestion 1
For each of the challenges below, identify whether they are associated with the
collection of data on income and/or consumption using household questionnaires in
low-income countries.
Challenge Income Consumption

Seasonality
Limited recall
Intra-household
distribution
Desire to avoid tax
Valuing own
produced food
Q uestion 2
Fill in the missing words/phrases.
A households asset endowment might give a better picture of the households

medium-term consumption possibilities than _______ consumption does, but the
relationship between asset endowment and current consumption tends to be
________.
SOAS CeDEP 16
2.0 POVERTY LINES
Section Overview
Once you have identified an appropriate indicator of well-being, if you want to
compare poverty across households, regions or countries you need a way of
determining who qualifies as poor as opposed to non-poor. Poverty lines can be
defined as cut-off points. People who fall below the cut-off point or threshold are
considered poor. This is inevitably somewhat arbitrary and there are debates about
how a poverty line should be chosen.
This section considers national poverty lines and then the particular challenges
associated with the construction of an international poverty line.
Section Learning Outcomes

summarise the steps and challenges associated with setting a national poverty
line
explain and critically assess the concepts of the international poverty line and
purchasing power parity.
2.1 National poverty lines

Most poverty lines are country-specific. The factors that are taken into account when
setting a poverty line vary considerably from country to country. This is entirely
appropriate, as a poverty line should aim to capture what it means to be poor in a
particular culture and context. (Moreover, this is true whether one is talking about a
money-metric or a multi-dimensional poverty line). However, there are common
elements to many poverty lines.
First, we need to distinguish between absolute and relative poverty lines.
Relative poverty lines have mainly been developed for industrialised or

middle-income countries. They are defined in relation to the average income or
consumption in a country; in the United Kingdom (UK), for example, the
poverty line is set at 60% of the countrys median income. Relative poverty
lines recognise that the relative position of individuals or households in society
is an important aspect of their welfare. This is because the consumption of
certain goods or services and/or participation in certain activities is considered
normal in a given society. Poor households are unable to engage in this
normal behaviour within society, because of their lack of income. Note that the
understanding of normal will vary from country to country and indeed over
time within a given country.
Absolute poverty lines are anchored in some supposedly absolute standard of

what households require in order to meet their basic needs. Most low-income
countries use an absolute poverty line, as does the USA.
SOAS CeDEP 17
2.1.1 The meaning of relative poverty
The concept of relative poverty recognises that poverty is a social phenomenon.

Townsend, an academic who has been pivotal in defining poverty and social exclusion in
Europe, expressed poverty in 1979 as being a complex phenomenon composed of both
absolute lacks of goods and services and an individual (or households) relative place in
society.
Individuals, families and groups in the population can be said to be in poverty when they
lack the resources to obtain the types of diets, participate in the activities and have the
living conditions and amenities which are customary, or at least widely encouraged and
approved, in the societies to which they belong. Their 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.
Source: Townsend (1979) p. 31.
In the remainder of this section we will focus on absolute poverty lines. The basic
steps in setting an absolute poverty line are to
determine a collection (or basket) of essential items that allow people to

satisfy certain basic needs
estimate the cost of buying that basket of essential items.
Absolute poverty lines are commonly one of two types. A given country may use both
in its poverty monitoring.
Food poverty line
This line is established by determining the cost of a food basket that satisfies some
set of minimal nutritional requirements. Households with consumption levels below
this line are unable to meet basic nutritional requirements, even if they spend all their
available income on food. This line is, therefore, considered to capture extreme
poverty (or some similar term).
There are, of course, challenges in setting this line. For example, it is difficult to
determine nutritional requirements, as the minimum food or calorie intake varies not
only according to age and gender (see below), but also according to activity. Who do
you think is likely to have a higher nutritional requirement an agricultural labourer
or a taxi-driver?
How one satisfies these requirements might also depend on the nutritional
characteristics of the local staple food, which in turn will affect the cost involved.
Non-food poverty line
This is often simply called the poverty line. It is set higher than the food poverty line,
so more people are classified as poor using this definition. In addition to food items to
satisfy basic nutritional requirements, it is assumed that the household has to incur
other basic expenditures, for example, on housing, lighting, clothing and
transportation, in order to survive. Defining essential non-food items is as difficult as
determining basic nutritional requirements. In practice, therefore, the total
SOAS CeDEP 18
expenditures of those who just satisfy basic nutritional requirements are examined. It
can then be seen how much they spend on non-food items relative to food
expenditure and this becomes the benchmark for expenditure on essential non-food
items in the poverty line.
Note that this benchmark can vary over time, as economies and societies change and
new technologies for example, mobile phones spread even amongst the poor.
Thus, in 2015 the Rwandan government is finalising its latest estimates of poverty in
the country and has realised that the poor now spend a greater share of income on
non-food expenditure than they did at the time of the last survey round. It is,
therefore, not appropriate simply to adjust the poverty line to account for inflation
since that last round. Instead, a new poverty line is being estimated from the latest
survey data.
This introduces an element of relativity even into absolute poverty lines.
In addition to setting two poverty lines, some countries have two variants
for each, one for urban and the other for rural areas. Can you think why
this might be?
Defining need is only the first step. Once you have done this, the second step is to
estimate how much it will cost to satisfy that need. Costs of living, especially food and
housing, tend to be higher in urban than in rural areas. World Bank country poverty
assessments routinely calculate separate poverty lines for urban and rural areas,
with the former typically around 30% higher, although the differential is higher in
poorer countries (Chen & Ravallion, 2007). Ideally, of course, you would calculate
different lines for multiple areas of a country, as costs of living are not uniform across
all urban or rural areas. However, as this is not realistic, having an urbanrural
distinction is a useful and feasible step.
The choice of poverty line is important not just in giving a reasonable assessment of
the incidence of poverty in a country at a given point in time. Observed trends in
poverty over time may also depend on the poverty line used. Thus, Chen and
Ravallion (2008) reported falling global poverty during 19812005 using a US$1.25
per day international poverty line (see below for a discussion of this line), but a
smaller fall and in some sub-periods a rise when a US$2 per day poverty line was
used. These differences may simply reflect different dynamics occurring in different
sectors of an economy. However, there could also be a distortionary effect: it is
sometimes alleged that governments who know that their performance on poverty
reduction is being monitored using a particular poverty line may prioritise policies that
are likely to benefit those whose incomes are close to this line, but worry less about
people whose incomes are already a little bit higher (or quite a bit lower).
One criticism of almost any poverty line including multi-dimensional ones is that it
conveys the impression that the lives of people whose consumption levels are just
below the line (who are poor) are qualitatively different from the lives of people
just above the line (who are non-poor). In practice, this is unlikely to be the case.
Indeed, the lives of people just above the line are likely to have much more in
common with the lives of people just below the line than they do with the lives of
people whose consumption levels are well above the line.
SOAS CeDEP 19
Consider the following four households: HH1 has average consumption of

50 kwacha per person per day; HH2 has average consumption of 95
kwacha per person per day; HH3 of 105 kwacha per person per day and
HH4, 250 kwacha per person per day. The national poverty line is 105
kwacha per person per day. (a) Which of these households are poor,
according to the official definition? (b) Consider HH2: in consumption
terms, which of the other three households does it most closely
resemble? (c) Answer the same question for HH3.
Answer
(a) HH1 and HH2 are poor according to the official definition, whereas HH3
and HH4 are non-poor.
(b) In consumption terms, poor HH2 has most in common with non-poor
HH3. The average consumption of HH2 is almost twice that of the other poor
HH1, but is 90% that of HH3.
(c) Similarly, non-poor HH3 has most in common with poor HH2. The
average consumption of HH3 is only around 40% of that of the other non-
poor HH4.
2.2 The international poverty line

A limitation of national poverty lines is that they do not allow for direct cross-country
comparisons or aggregations, as some lines are higher than others. For this reason
the World Bank has developed the so-called international poverty line (IPL), which is
the average of the poverty lines of 15 of the poorest countries in the world (Chen &
Ravallion, 2008; Ferreira et al, 2015). These poverty lines are made comparable by
converting them to US dollar terms using purchasing power parity (PPP) exchange
rates, which are explained below.
When the IPL was first set, it had a value of US$1.08 per person per day measured
using 1993 PPP exchange rates. In 2008, it was revised, based on a greatly expanded
data set of national poverty lines and a new (2005) set of PPP exchange rates (Chen
& Ravallion, 2008). The revised line was US$1.25 per person per day at 2005 PPP
exchange rates. Anyone whose consumption (or, where appropriate, income),
adjusted for cost of living differences across countries (the notion of PPP), was below
US$1.25 per person per day was, therefore, consuming less than the minimum
amount considered essential to satisfy basic requirements in the worlds poorest
countries.
In 2015, the World Bank has once again re-estimated the IPL on the basis of a new
set of (2011) estimates of PPP. The new line is US$1.90 per person per day at 2011
PPP exchange rates and is discussed in detail by Ferreira et al (2015).
The IPL is translated into the local currency units (LCU) of a country using the most
recent PPP exchange rate. As PPP exchange rates are only calculated infrequently, in
the intervening periods the local currency equivalent of the IPL is updated from year
to year using the domestic consumer price index (CPI).
From 2008 until 2015, therefore, the local currency equivalent of the IPL would be
calculated as follows:
IPLcurrent LCU = 1.25 PPP2005 [CPIcurrent/CPI2005]
SOAS CeDEP 20
where
PPP2005 = the 2005 PPP exchange rate of the country in question
CPIcurrent/CPI2005 = the ratio of the current value of the CPI index to its value in 2005.
The IPL was used to quantify progress towards Millennium Development Goal 1 to
halve the number of people who live on less than a dollar per day between 1990 and
2015 and will similarly be used to monitor progress towards Sustainable
Development Goal 1 (SDG 1). Periodic LSMS or other nationally representative
household survey data are used to assess the proportion of the population living on
less than the IPL and hence also trends in this figure.
Note that national poverty assessments, such as those published by a National

Statistical Office, typically assess the proportion of the population living below the
national poverty line, which may not correspond to the IPL. However, the basic data
used for both calculations are the same.
Purchasing power parity
In the early 2000s, sustained criticism of the IPL and its use by the World Bank in
monitoring progress towards MDG 1 came from Reddy and Pogge, amongst others.
Many of their criticisms focused on the PPP component of their IPL. Thus, before we
look at the criticisms in detail, we need to understand the concept of PPP.
Reddy and Pogge (2005) state that PPP exchange rates are commonly understood as:
the number of units of a countrys currency necessary to purchase the

same amount of commodities as can be purchased for one unit of the
base countrys currency at the base countrys prices
Source: Reddy and Pogge (2005) p. 9.
The prices of goods and services across countries are compared periodically through
multi-country surveys conducted by the International Comparison Programme (ICP).
As you may have noted from the previous pages, one ICP survey was conducted in
1993, the next in 2005 and the most recent in 2011.
The USA is commonly used as the base country for PPP estimates. Thus, if a similar
basket of goods is identified in country X and in the USA, the PPP conversion factor or
exchange rate for country X can be calculated as:
Local cost of basket (in LCU)/Cost of basket in USA (in US$)
Note that, when we use the term basket here, it is not the same basket as is used to
determine a national poverty line. Rather, basket simply means a collection of items,
as when a shopper goes to a market or supermarket and puts several items that they
want to buy in their shopping basket. Different baskets can be used for different
purposes!
It is important to understand why PPP exchange rates are different from more
conventional exchange rates. In the short run, the latter are determined primarily by
capital flows. However, there is a notion that their long-term equilibrium level is that
SOAS CeDEP 21
Unde
erstanding Pov
verty Unit 1
whic ch causes im
mports and exports of goods and services to balance. Th hus, if a cou
untry
is im
mporting more
m than itt exports, itts exchange rate will depreciate so as to make
m
imports more expensive in i LCU term ms and to provide an incentive ffor exporterrs to
incrrease the volumes of goods
g and services th hat they export. In thiis world of free
tradde (and assuuming that transport a nd other tra ansaction co
osts are minnimal), the US$
exch hange rate is equal to the
t local co
ost of a traded good (orr a basket o
of traded gooods)
in LCU, divided by the cost of that go od (or bask ket of goods) in the USAA (in US$). This
lookks identical to the formmula that w we have just quoted forf the PPPP exchange rate
above!
The difference between co onventional exchange rates and PPPP exchan ge rates occcurs
becaause not alll goods are traded inteernationally. If you crea
ate a repressentative ba
asket
of g
goods to re eflect the consumption
c n patterns of people in any give en place, itt will
almost certainlly include a combinati on of both tradable goods
g and services (those
whicch are traded across national
n bou
undaries) and
a non-tra
adable goodds and serv vices
(which are nott). Whilst thet price off tradable goods will tend to be e similar ac cross
developed and developing economiess (for the re easons just explained),, non-trada able
gooods and se ervices tend d to be che aper in low
w-income economies. T he main rea ason
for tthis is that labour costs (a major ccomponent of production costs) a re lower in low-
inco
ome econom mies.
Conssider the following hypoothetical basket of goodds.
Within this baskket, the coooking oil is the only fully tradable
e item. In our
stylis
sed example e, therefore
e, lets assume that thee conventio nal exchangge
rate is US$1 = 5 LCU. Mea anwhile, twwo of the other items h have tradab
ble
elem
ments (eg th he wheat ussed in bread d making iss traded an d there is an
a
international market for m managers of mobile phone ope erations), but
neith
her these ittems nor tthe green vegetables are themsselves trade ed
internationally. What
W is the PPP exchan nge rate?
Answ
wer
PPP exchange
e ratte = 18 / 5.5
5 = 3.27.
Note e that, beca

ause non-tra
adable goodds and services tend to
o be cheape
er in low-inc
come
econ nomies thann in the USA
A or other h me economies, the PPP
higher incom P exchange rate
is lo
ower (in term
ms of LCU per
p US$) tha an the convventional exchange rate
e.
As c
countries grow and incomes rise , the propo ortion of gooods in anyy representaative
bask
ket that are
e tradable also
a tends to
o rise. Thus
s, the PPP exchange
e raate tends to rise
as a proportion
n of the offic
cial exchangge rate overr time (Chen
n & Ravallio
on, 2008).
Onee of the main criticisms s advanced by Reddy and Pogge (2005) wass that the 1993 1
PPP estimates used by the e World Ban nk up to tha
at time had ulated based on
d been calcu
prices that werre representtative acrosss the econoomy as a whole, ratherr than on prices
thatt would appply to a typpical baske et of goods s and servvices consu umed by poor
p
houuseholds. Perhaps
P surrprisingly, R
Reddy and Pogge
P claim
med that the
e poor conssume
SO
OAS CeDEP 22
fewer non-tradable goods and services than wealthier households, because they
consume a large share of staple foods which are often at least partially tradable.
(Think of rice and wheat as the dominant staples in Asia.) They argued that, if PPP
conversion factors were calculated on the basis of the data collected by ICP for the all
foods or breads and cereals categories, rather than for all goods and services, they
came out 30% or more higher than the estimates actually used in converting the IPL
into local currencies. Hence, poverty levels were underestimated by the World Banks
approach.
In its 2005 survey, the ICP made a deliberate effort to collect data on the cross-
country costs of a basket of goods that was of particular importance to the poor. The
resulting PPP estimates were then incorporated by the World Bank into revised
estimates of the number of poor households across countries and regions. This switch
to 2005 PPPs added 400 million (40%) to the official estimate of the number of poor
people in the world (Chen & Ravallion, 2008), which shows how important
methodological details such as the PPP exchange rate can be in poverty calculations.
It may also provide some support to Reddy and Pogges original argument. In defence
of their work, Chen and Ravallion would respond by saying (correctly) that the quality
of the PPP estimates is improving over time.
When new PPP estimates are released, the IPL itself is also changed.
Thus, originally it was US$1.08 per person per day (at 1993 PPP
exchange rates) and was then changed to US$1.25 per person per day
(at 2005 PPP exchange rates). These changes are intended to ensure that
the purchasing power of the IPL in terms of the goods consumed by the
poor in the poorest countries stays the same, despite changes to PPP
exchange rates. Therefore, the total number of people living below the
poverty line in the 15 countries used to construct the IPL should not be
affected by changes to PPP exchange rates (Chen & Ravallion, 2008).
Why, therefore, did the total number of the poor in the world increase so
much with the incorporation of the 2005 PPP exchange rates into global
poverty estimates?
Answer
Because changes to PPP exchange rates in other countries containing large
numbers of poor people, eg China, were different from the average of the
changes in the 15 countries whose national poverty lines are used in the
estimation of the IPL.
So far, we have not questioned the assumption that it is possible to identify a basket
of goods that is of particular importance to the (global) poor. However, a moments
reflection on the diets of (poor) people in different continents shows that there is no
single basket that satisfies this condition. For example, the poor in one place may
consume rice as their dominant staple, whilst those in another place consume maize
and those in yet another place consume yams or potatoes. This adds to the
complexities of comparing prices across countries and hence of calculating a
consistent set of PPP exchange rates for use in poverty analysis.
In the 2005 ICP round, the chosen solution to this problem was to compile a basket
for each region or sub-region of the world and then to use a set of countries that were
at the boundaries of two regions or sub-regions (so-called ring countries) to check
that the prices of different regional baskets were as consistent with each other as
SOAS CeDEP 23
possible. Some, however, have criticised the workings of this approach and argue that
this led to inconsistencies in the 2005 PPP estimates one of the reasons why they
produced such big changes in the global poverty estimates.
In 2011, therefore, the ICP collected price data from each country for as many items
as possible from a global core list of 618 items (Ferreira et al, 2015: p. 8).
The 2011 PPP exchange rates are available from the World Bank website
(World Bank, 2015). Use this to look at the PPP exchange rate for your
country or a country you are familiar with.
Convert the (new) IPL into local currency terms for this country by
multiplying the PPP exchange rate by the dollar value of the IPL, ie 1.9.
Now imagine trying to live on that amount of money per day. Remember
that this includes the value of own produced food that you consume not
just what you buy. Do you think this gives a realistic picture of what
constitutes poverty in the country? If not, how can you explain this based
on the information provided in this section?
2.3 Adult equivalence scales

Having established a poverty line and collected the necessary data, an important step
in preparing data for analysis is to decide how to convert information on household
consumption into an estimate of consumption for individuals within the household.
(Note that, in this section, we assume that consumption is allocated in a fair manner
within the household, based on some indicator of need. However, in reality, men,
especially household heads, often account for an unfair share of consumption within
their households).
Two issues have to be addressed.
The first is that consumption needs vary across individuals. Thus, we noted above
that minimum food or calorie intake varies according to age and gender. Hence, if
total household consumption is simply divided by the number of household members,
irrespective of age, this will bias upwards the estimated welfare of households
composed mainly of adults relative to households with a large proportion of children
(as the latter will tend to have lower recorded consumption per head, but in practice it
will go further).
One way in which this problem can be handled in poverty assessment is through the
use of adult equivalence scales. Thus, the number of adult male equivalents in each
household is calculated, based on a system of weightings. These weightings are
commonly based on scales produced by nutritionists, although there is no necessary
reason why the weightings for consumption of non-food items should be the same as
for food.
An internet search will reveal that different scales are used by different people and
authorities. One example is presented in the table in 2.3.1.
SOAS CeDEP 24
2.3.1 An example of an adult equivalence scale
Category Age (years) Average energy allowance Equivalence scale

per day (kcal)
Infants 00.5 650 0.22
0.51.0 850 0.29
Children 13 1300 0.45
46 1800 0.62
710 2000 0.69
Males 1114 2500 0.86
1518 3000 1.03
1925 2900 1.00
2650 2900 1.00
51+ 2300 0.79
Females 1114 2200 0.76
1518 2200 0.76
1925 2200 0.76
2650 2200 0.76
51+ 1900 0.66
Source: National Academy Press (1989)
A second issue that may arise is the argument that there are economies of scale in
certain kinds of consumption. Thus, a household with just two members will need a
stove for cooking. However, a household of five might survive with the same type of
stove. Thus, it is cheaper for larger households to meet their consumption needs than
it is for smaller ones. Deaton and Zaidi (2002) suggest that this problem be
addressed by adjusting household size (in adult equivalent members) by a further
factor that reflects the share of durable items with these public good-type
characteristics in total household consumption. They observe that, in poor rural areas
where housing costs are low and most consumption consists of food, little adjustment
for economies of scale in consumption is required. By contrast, such adjustment may
be more important in urban areas where housing costs feature much more
prominently in total expenditure. However, they recognise that there is little
agreement on this issue, with the result that it may often be ignored by analysts.
SOAS CeDEP 25
Section 2 Self-Assessment Questions
Q uestion 3
No-one in the USA could live on less than US$1.90 per day. Therefore, why is the IPL
set at US$1.90 per day at (2011) PPP rates?
Q uestion 4
Briefly summarise the main challenges arising from using a monetary indicator to
measure progress towards SDG 1.
SOAS CeDEP 26
3.0 FOSTERGREERTHORBECKE POVERTY INDICATORS
Section Overview
Once a poverty line has been identified and consumption data assembled, the next
task is to assess how many people fall below that line and how many lie above it.
However, some assessments of poverty and poverty trends may also go one step
beyond this. Foster, Greer and Thorbecke (1984) derive three measures of poverty
incidence, depth and severity using the same basic data. This section explains these
three measures.
They have most commonly been used with monetary poverty data, but can be applied
more generally, for example with data on calorific intake, anthropometric data or with
certain multi-dimensional poverty indicators. All that is required is data from a
household survey and a threshold or benchmark line against which the indicator for
each household can be compared.
Please note: some students see either the formula or the spreadsheet exercise below
and decide to skip this section. You should not do this if you are serious about
obtaining a masters-level qualification in Poverty Reduction! If you struggle with
either the formula or the spreadsheet exercise, please ask a friend or even a teenage
maths student to help you.
Section Learning Outcome

explain and make use of the FosterGreerThorbecke poverty measures.
3.1 P0, P1 and P2

The three FosterGreerThorbecke measures are known as P0, P1 and P2. They are all
calculated using the following formula:
a
1 q z yi
Pa
n i 1 z
where
P= the poverty measure (a = 0, 1 or 2)

n= the number of people in the population
q= the number of people below the relevant poverty line
z= the relevant poverty line
yi = the income of person i, a person below the poverty line.
The sign means that you calculate the expression in brackets for every person from
i to q (ie all the people below the relevant poverty line) and then sum the resulting
figures. The expression in brackets captures how far the expenditure of poor person i
falls below the poverty line, as a proportion of that poverty line.
SOAS CeDEP 27
1/n means that you then divide the total by the total number of households in the
population.
In maths, X0 = 1, so for the P0 measure, you can effectively ignore the expression in
brackets. Thus, P0 = q/n. In other words, P0 simply tells you the proportion of the
population whose consumption falls below the poverty line. It is otherwise known as
the poverty headcount ratio or the incidence of poverty.
This most basic of poverty measures is a simple concept to grasp and, therefore, it is
widely used in political debate. However, it does not take notice of how poor the poor
are. If, between two years, the poor become less poor, but still have consumption
expenditures below the poverty line, the headcount ratio will not change.
As already noted, some argue that a focus on the poverty headcount ratio encourages
politicians to pursue policies that lift the consumption levels of those who are close to
the poverty line, so that they cease to be poor, whilst neglecting those whose
consumption levels are lower (the extreme poor), who are more difficult to help.
The poverty gap index (P1) is intended to address this incentive problem, by also
incorporating the depth of poverty of those who are poor. For each member i of the
population who lives below the poverty line, it measures the shortfall of their
expenditures below the poverty line, as a proportion of that poverty line. Unlike the
headcount ratio, therefore, the poverty gap index will change if the poor become less
poor, even if their expenditures remain below the poverty line.
However, P1 does not simply measure the average depth of poverty of those who are
poor. Instead, it is a composite measure that combines the poverty headcount with
the depth of poverty of those who are poor. This makes it more difficult to grasp or
explain intuitively than P0. As a result, whilst it occurs quite frequently in academic
literature, it is much less commonly used in political debate than P0.
Finally, in the poverty severity index (P2) the term in brackets in the formula is
squared, which gives extra weight to the depth of deprivation of the poorest people.
Hence, unlike the headcount ratio and the poverty gap index, the poverty severity
index will pick up changes in the distribution of income within the group of poor.
However, P2 is one step more complicated than P1. Therefore, it is also rarely used in
political debate.
Recognising that the P1 and P2 measures tend to be neglected, because they are not
intuitive, the World Bank is now exploring alternative ways of conveying the depth of
poverty. Cruz et al (2015) report a person-equivalent poverty measure first
developed by Castleman et al (2015). This allows progress in poverty reduction both
incidence and depth to be tracked in relation to a base year.
Say, for example, that you have consumption data for your country of interest for
2010 and, in that year, poverty incidence was 25% and the average poverty gap for
those who were poor was 40 pesos, ie their consumption per day was, on average, 40
pesos below the poverty line. In this case, the person-equivalent poverty measure
counts how many person-equivalents there are living below the poverty line at a
poverty gap of 40 pesos. Thus, a person living 60 pesos below the poverty line counts
as 1.5 person-equivalents and a person living 20 pesos below the poverty line counts
as 0.5 person-equivalents. When the next national living standards survey is
conducted, you count all these up (adjusting the gap for inflation in the intervening
period) and compare the answer with that obtained in 2010. Thus, even if the
SOAS CeDEP 28
Unde
erstanding Pov
verty Unit 1
headcount ratio is unchannged, but tthe average e depth of poverty haas reduced, the
pers
son-equivalent povertyy measure will show an improve ement. By contrast, iff the
headcount ratio has fallen but the dep
n slightly, b pth of pove
erty of thosse remaininng in
poverty has inc
creased, the
e person-eqquivalent poverty measure may sh ow little, if any,
improvement.
Exe
ercise: Poverty measurements
In the spreadsh heet, Unit 1 Poverty Liines Exercisse, (which is

s provided oon your e-study
guidde) are connsumption estimates
e (i n current pesos
p per month)
m for 50 hypotheetical
viduals, in each of two years ((1 and 2) when a household liiving stand
indiv dards
mea asurement survey
s was s undertakeen. The spre eadsheet also gives th he local pov
verty
lines
s for each of
o these two o years. Theere are two lines:
a lower one,
o indicating extreme
e poverty (tthis is set as
a 90 pesos per person
n per
month in year 1)
a 50% higher one (s

set as 135 p
pesos per pe
erson per month
m in yea
ar 1).
For this
t hypothe
etical popullation of 50
0 people, for each of t he two yea
ars
and each of the
e two poverrty lines, ca
alculate the following FFosterGreer
Thorbecke meassures:
the
e incidence of poverty
y (P0) as a fraction or percentage
e of the tottal
population)
the
e depth of poverty
p (P1)
the
e severity of poverty (P
P2).
Hints
X0 = 1, so for th
he P0 measu
ure, you can
n ignore the
e expression
n in bracketts.
Thuss, P0 = q/n.
For P1, for each person beloow the poveerty line, calculate the expression in
brack
kets. Then sum
s these rresults and divide the total by n.
For P2, square the expresssion in braackets for each perso on below th
he
pove
erty line befo
ore summin
ng the results and divid
ding the tota
al by n.
It is fine to do all your calcu
ulations in pesos
p per month.
m
(1) Display
D yourr answers in
n the followiing table:
Pove
erty rates by
b poverty
y line, year
r and poverty measurre
SO
OAS CeDEP 29
Unde
erstanding Pov
verty Unit 1
(2) If you only consider tthe lower poverty line and the incidence of
poveerty (P0) measure, whatt appears to
o be the trend in poverrty within th
his
popuulation between years 1 and 2?
(3) If you consider the oth her poverty
y measures and the hiigher poverrty
line, how does this picture cchange?
(4) Look
L in dettail at the data. How do you ex xplain the difference in
resullts generate
ed by the diffferent pove
erty lines an
nd measurees?
Answ
wers
(1) The
T poverty rates
r are as follows:
Pove
erty rates by
b poverty lline, year and
a poverty
y measure
(2) Iff you only consider

c the lower pove
erty line and
d the inciden
nce of poverrty
(P0) measure, it appears thaat poverty within
w this population
p iss falling (fro
om
24% in year 1 to
o 16% in yeaar 2, ie a con
nsiderable fa
all).
(3) Iff instead yo
ou use the h higher poverrty line and the inciden nce of poverrty
(P0) measure, po overty appaarently risess between year
y 1 (44%%) and yearr 2
(52%%). Thus, within
w this ppopulation the
t choice of line affe ects even thhe
direction of change in povertty over time e. Similarly, if the P1 and
d P2 measurres
of po
overty are ussed, povertyy is seen to get
g worse be etween year 1 and year 2. 2
(4) Several
S peop
ple (nos 6, 2
24, 39, 42 an nd 46) who were close tto the poverrty
line in
i year 1 manage
m to ri
rise above itt in year 2. Hence, the e incidence of
poverrty (P0) meaasure falls. HHowever, seeveral of the
e poorest peo ople in yearr 1
(nos 8, 15, 19 anda 33) exp perienced re
eal declines in consump ption betwee en
year 1 and yea ar 2, which increases the depth and a severity
ty of povertty.
Mean nwhile, a nummber of peo ople who weere just abov ve the highe er poverty linne
in yeear 1 (nos 17, 31, 45, 4 47 and 50) fall below itt in year 2, such that th he
incideence of pove
erty (P0) meeasure rises if
i the higherr poverty linee is used. Th
his
is a similar
s pheno
omenon to tthat observed by Chen and Ravallion n (2008).
SO
OAS CeDEP 30
UNIT SUMMARY
Defining poverty might seem a straightforward exercise but in fact there are many
different ways of defining and measuring poverty. The dominant approach is to define
poverty as a shortfall in incomes or consumption. This approach differentiates the
poor from the non-poor by establishing a monetary poverty line, below which people
are considered poor. The international dollar per day line is an example of such a line.
In practice, all poverty lines are somewhat arbitrary. For example, poor households
living close to the poverty line may have much more in common with non-poor
households living just above the line than they do with very poor households living
well below it.
The unit has noted a range of practical problems that are encountered when trying to
measure either income or consumption in low-income countries. There are also significant
challenges in applying an IPL, not least those associated with estimating PPP.
One conclusion that you could draw from all this is that it is a waste of time and effort
trying to measure accurately the number or proportion of people in poverty. This
would be an unhelpful conclusion to draw, as we need to have some way of assessing
whether policies to reduce poverty are having any effect. However, we should be wary
of the apparent precision embodied in official poverty statistics: for example, the
headcount poverty rate in country X fell from 52.9% in 2010 to 43.4% in 2015.
Rather, given the unavoidable uncertainties surrounding the figures, you can be more
confident that figures are identifying some sort of real effect where: (a) the size of the
change appears to be substantial; (b) it is sustained over time and (c) it is
corroborated by other pieces of information.
Finally, the unit introduced the three poverty measures originally presented by Foster,
Greer and Thorbecke (1984). One of these, the poverty headcount (P0) is widely
understood and used in debate. The other two incorporate consideration of the depth
of poverty of the poor alongside the headcount rate. This is intended to draw
attention to measures that alleviate the poverty of the worst off. However, the P1 and
P2 measures are more difficult to understand and communicate than the headcount
measure, so are much less frequently used in public debate.
SOAS CeDEP 31
UNIT SELF-ASSESSMENT QUESTIONS
Q uestion 1
What are the advantages of measuring money-metric poverty using consumption

rather than income as the main indicator?
Q uestion 2
Briefly summarise the problems associated with measuring the extent of poverty
using the headcount index.
SOAS CeDEP 32
KEY TERMS AND CONCEPTS

consumer price index An index number measuring the price of a typical basket of
consumer goods and services purchased by households within
a population. The index tends to rise over time due to
inflation.
deprivation What an individual is not having or lacking, eg education.
money-metric Monetary value of incomes, goods, and services.
SOAS CeDEP 33

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Autthor: Colin Poulton

ABOUT THIS MODULE

This module is aimed at development practitioners from government departments,

STRUCTURE OF THE MODULE

WHAT YOU WILL LEARN

To compare trends in poverty reduction across continents and regions and to

To examine the impact of international interventions and initiatives on efforts

Module Learning Outcomes

demonstrate a rigorous and critical understanding of key concepts used in

critically assess the impact of international interventions and initiatives, such

an examined assignment (EA) worth 20%

a written examination in October worth 80%.

(b) The EA is submitted by uploading it to the VLE.

(e) Plagiarism is a breach of regulations. To ensure compliance with the specific

Collier, P. (2007) The Bottom Billion. Oxford, Oxford University Press.

This is not a traditional textbook; rather, it provides a particular, high-profile, but

For each of the module units, the following are provided.

to check your understanding of basic concepts and ideas

to verify your ability to execute technical procedures in practice

to develop your skills in interpreting the results of empirical analysis.

This icon invites you to answer a question for which an answer is

This symbol invites you to halt and consider an issue or engage in a

Key Terms and Concepts

Acronyms and Abbreviations

(a) participating in the Virtual Learning Environment (VLE)

(b) completing the examined assignment (EA).

Virtual Learning Environment (VLE)

INDICATIVE STUDY CALENDAR

Part/unit Unit title Study time

PART I CONCEPTUAL FRAMEWORK

Unit 1 Money-metric measures of poverty 15

Unit 2 Multidimensional poverty 10

Unit 3 Growth, inequality and poverty 15

Unit 4 Poverty dynamics 15

Unit 5 Social differentiation and poverty 15

Unit 6 Poverty and the environment 15

Unit 7 Power, politics, governance and aid 15

PART II TRENDS IN POVERTY REDUCTION

Unit 8 Trends in monetary poverty and hunger 15

Unit 9 Explaining trends in capability poverty 10

Unit 10 The Sustainable Development Goals 10

Examination entry July

Revision and examination preparation September

End-of-module examination October

ACRONYMS AND ABBREVIATIONS

GDP gross domestic product

IPU Inter-Parliamentary Union

PPLPI Pro-Poor Livestock Policy Initiative

1.0 Income or consumption poverty 8

2.0 Poverty lines 17

3.0 FosterGreerThorbecke poverty indicators 27

Unit Self-Assessment Questions 32

Key Terms and Concepts 33

In this unit, we consider money-metric definitions based on consumption levels or

Unit Learning Outcomes

discuss the strengths and weaknesses of money-metric definitions of poverty

explain the advantages and disadvantages of measuring poverty in terms of

Available from: http://www-

Haughton, J. & Khandker, S. (2009) Handbook on Poverty and Inequality.

Available from: http://hdl.handle.net/10986/11985

Castleman, T., Foster, J. & Smith, S. (2015) Person-equivalent Headcount Measures

Cavendish, W. (1999) Empirical Regularities in the PovertyEnvironment Relationship

Available from: http://www.csae.ox.ac.uk/workingpapers/pdfs/9921text.pdf