Extreme Poverty – Definitions

Can you imagine living with only 2 dollars per day? Would you be able to live a happy life sleeping on the street, skipping meals, and trying to survive throughout the day?

Probably not.

This series of blogposts tries to convey a better understanding of extreme poverty. First, we will concentrate on the definition and measurement methods. After having a broad overview over the basic tools, we will then discuss potential causes and summarize the data about the evolution and demographics of extreme poverty. In the end we will assess existing poverty-reduction strategies and find out about future measures which should be taken.

This post handles the definition and measurement methods for poverty which include the:

  • International poverty line
  • Poverty headcount ratio
  • Poverty gap index
  • Absolute poverty gap
  • Multidimensional poverty index

So, let’s dive in and concretize these methods.

Extreme poverty is defined by the International Poverty Line (IPL). Using this threshold, people are considered to live in extreme poverty if their income or consumption is below 1.90 int.-$ per day. The IPL is provided by the World Bank and is based on National Poverty Lines (NPL). These lines are calculated by estimating the cost of basic consumption needs in the local context, which means that poverty lines of developed countries differ greatly from the one’s of poor countries. A closer examination of NPLs has shown, that 15 of the poorest countries in the world use roughly the same value for their poverty thresholds. To monitor its efforts in helping the poorest people of this planet, the World Bank therefore set the focus to these countries and calculates the international poverty line as the rounded mean of the mentioned 15 NPLs.

It is important to note, that the 1.90 int.-$ are based on the so-called Purchasing Power Parity (PPP). PPP rates are determined by the International Comparison Program (ICP) and get calculated by comparing similar baskets of goods in different countries. The underlying theory is, that with a given amount of money, you should be able to buy the same amount of goods in any country in the world. As market exchange rates underlay speculation and inflation effects, there are huge differences in the cost of goods in different countries when you are using these common rates. In some countries in Asia for example, you could live far cheaper than in Germany. That means, that the Euro is a stronger currency than some of the Asian one’s, which gets reflected in the market exchange rates.

By converting your money using PPP rates, in contrast, you can buy the exact same amount of goods in any country in the world. PPP rates are independent from speculation influences and therefore constitute a stable alternative to the common market exchange rates and allow us to compare prices on a global, reasonable scale. If you look for a better understanding of Purchasing Power Parity, I would encourage you to watch this YouTube video or to have a look at this short summary of the topic.

Below you can see an example for both approaches: Two similar baskets of goods, one in the US for $5 and one in Europe for 3€. Using market exchange rates you get different prices than the real ones: If $1 equals 0,84€ you would expect the basket to cost 4,2€ in Europe. This difference, caused by e.g. speculation and inflation effects, can be balanced by calculating the PPP rate between USD and EUR based on the different prices of the baskets.

 

Example to illustrate the difference between market and PPP exchange rates.

 

To reflect changes in the cost of living and to adjust to new PPP prices, the IPL must get updated from time to time.  The current line is based on 2011 PPP prices and is valid since October 2015.

So, to sum it up: the international poverty line is our first tool, with which we can identify people who live in extreme poverty on less than 1.90 int.-$ per day. Independent from the country they live in, these people are barely able to buy one meal per day, not to mention their need for shelter, clothes, and other vital needs.

As it is very difficult to imagine how people in extreme poverty must live, I suggest visiting the Dollar Street at Gapminder.org. Invented by Anna Rosling Rönnlund, these collections of photos from over 264 homes in 50 countries allow you to directly compare living conditions from a wide range of income levels and to get a glimpse of what poor people must bear.

Now that we have defined extreme poverty, let’s try to find out how to measure its occurrence and intensity.

The most intuitive way to do that is to simply count the people living below the IPL. This number divided by the total population of the examined country or area constitutes the Poverty Headcount Ratio, the share of people living with less than 1.90 int.-$ per day. In the map below, you can see the World Bank estimates of the extreme poverty headcount ratio, country by country. By moving the slider or clicking the buttons below the map you can also explore the changes over time and plot the available data in a chart. All the charts in this entry refer to a great article about extreme poverty on “Our World in Data” by Max Roser, a web publication with the aim to give a global overview and to image long term developments of our world through scientific data.

 

 

As this blogpost is only about the understanding of the necessary tool set, we won’t examine this chart in detail, but relocate its discussion to the next part of this series.

The headcount ratio tells us nothing about the intensity of poverty, but only about its occurrence. To develop a deeper understanding of the situation in a specific country we therefore need another intensity-measuring tool: the Poverty Gap Index. To calculate this index, we first look at all the people in extreme poverty and determine the daily amount of money necessary for them to reach the poverty line. The sum of all these shortages, divided by the total population returns the average shortfall from the IPL. Dividing this shortfall by the IPL-value of 1.90 int.-$ we obtain the poverty gap index, the mean percentage of the IPL which poor people are missing to live above the poverty line.

The map below shows you available World Bank estimates for the poverty gap index, again country by country.

 

 

If we only take the sum of all the shortfalls from the IPL, we obtain the Absolute Poverty Gap as the daily amount of money necessary to lift all people in extreme poverty above the IPL. Using this tool, we can calculate a rough approximation of the cost of ending extreme poverty. According to Chandy et al. (2016) the yearly amount of money required to eradicate extreme poverty is close to 90 billion US dollars and is thus far less than the US military spending in 2015, which amounts to about 600 billion US dollars. That shows us that ending extreme poverty is no delusive dream, but within feasible reach.

You can explore the yearly cost of closing the country-specific absolute poverty gaps in the map shown below.

 

 

By now we already have different measurement tools to monitor the occurrence and the relative as well as the absolute intensity of extreme poverty. The problem is, that all our tools are based on income and consumption, which is a rather narrow way to examine a topic as complex as poverty. To broaden our examination, we should consider using the Multidimensional Poverty Index (MPI) published by the Oxford Poverty & Human Development Initiative (OPHI).

The MPI covers the same three dimensions as the Human Development Index (HDI): living standards, health and education. Each dimension includes several weighted indicators of possible deprivation (e.g. Years of Schooling, Child Mortality, Nutrition, Electricity). People who suffer deprivations in 33% or more of these weighted indicators are considered MPI poor. The index shows the number of people who are in such multidimensional poverty and includes the number of deprivations per household.

Being published in the Human Development Report of the UN Development Programme (UNDP) since 2010, the MPI currently covers about 1.5 billion people in over 100 developing countries. As an invaluable complement to income-based measurement methods, the MPI helps the UN to strategically allocate their efforts in addressing the Sustainable Development Goals (SDGs).

In comparison with our previous tools we can identify a positive correlation between the multidimensional and the income approaches, but do also realize the clear necessity of measurement methods above the economic level. As you can see in the chart below there are many countries at the same level of income poverty rates, while differing greatly in terms of multidimensional poverty (e.g. Congo and Chad or Swaziland and South Sudan).

 

 

As poor people themselves describe poverty as being multidimensional, it is important to bear in mind that poverty is more than living below a simple threshold of 1.90 int.-$.

However, we have a rough overview of all kinds of measurement methods and we can define poverty in the sense of an income-based as well as multidimensional approach. It is time to apply these tools to learn more about its evolution over the time and its present demographics.

This will be the topic of the next post.

 

Sources and further information:

An in-depth analysis of global extreme poverty:

  • Max Roser and Esteban Ortiz-Ospina (2017) – ‘Global Extreme Poverty’. Published online at OurWorldInData.org. Retrieved from: https://ourworldindata.org/extreme-poverty/ [Online Resource]

World Bank:

  • Poverty Overview – The World Bank (2016). http://www.worldbank.org/en/topic/poverty/overview

Purchasing Power Parity (PPP):

  • PPP (Purchasing Power Parity) Exchange Rates. Youtube (2015). https://www.youtube.com/watch?v=S5xqBK6s4bI
  • International Comparison Program (ICP) – The World Bank. http://www.worldbank.org/en/programs/icp

Databases for personal research on countryspecific data:

  • UNdata – A world of information. http://data.un.org/Default.aspx
  • PovcalNet – The World Bank. http://iresearch.worldbank.org/PovcalNet/home.aspx

Dollarstreet and Ted-Talks from Gapminder:

  • Dollarstreet – Gapminder. http://www.gapminder.org/dollar-street/
  • TED Speaker Hans Rosling – TED. https://www.ted.com/speakers/hans_rosling

Multidimensional Poverty Index and Sustainable Development Goals:

  • Global MPI – OPHI Oxford Poverty & Human Development Initiative. http://ophi.org.uk/multidimensional-poverty-index/
  • Sustainable Development Goals – United Nations. https://sustainabledevelopment.un.org
  • Atlas of Sustainable Development Goals 2017 – The World Bank. http://datatopics.worldbank.org/sdgatlas/

High-quality articles on global poverty:

  • Global Poverty – The Brookings Institution. https://www.brookings.edu/topic/global-poverty/
  • Christine Zhang, Laurence Chandy, and Lorenz Noe, (2016), “The global poverty gap is falling. Billionaires could help close it” The Brookings Institution. https://www.brookings.edu/blog/up-front/2016/01/20/the-global-poverty-gap-is-falling-billionaires-could-help-close-it/

 

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