Saturday, January 19, 2008

Relative and Absolute Poverty

When Jim Bolger famously claimed that there was no poverty in New Zealand he was echoing a common conservative talking point in which it is argued that, because we don't see deprivation matching that in the Third World, we aren't home to people who are truly poor.

As a version of the claim has been made again recently (this time as part of John Minto Hate Week and with the United States as the target country) I think it's worth having a quick look at poverty measures and the debate about its absolute and relative definitions.

While I'm not a statistician I've delved into this subject fairly thoroughly (indeed, I've given lectures on poverty measurement in the past); yet even I still find succinct explanations hard to give. This is, in part, because measuring poverty requires you to define poverty and - like so many elements of development - while we can all recognise poverty when we see it, rigorous, resilient definitions prove surprisingly elusive. Definitional consensus is, as this Google search shows, unlikely in the near future.

In order to keep things clear I am going to start by discussing poverty definitions first and then move on to the poverty lines that follow from them. (Click here to read the rest of this post...)

I will finish by discussing alternatives to monetary poverty measures.

Absolute Poverty
The standard definition of absolute poverty revolves around a set of basic needs. One is said to be absolutely poor if they do not have the means to meet this basic set of needs. In it's most minimal conceptualisation this set of basic needs is often equated with the basic nutritional requirements for survival, or more 'generously' adequate health. More 'generously' still shelter and other elementary necessities are often added into the equation.

An interesting exercise to try for yourself is to assume that our purpose as concerned citizens is to quantify suffering stemming from material deprivation (presumably because we want to reduce it). Starting with this assumption and considering only those aspects of wellbeing that can conceivable be altered by material means (so excluding things such as whether one's government respects human rights or not) try and list the basic needs that ought to be quantified in defining absolute poverty.

Here's my own list based on minimal requirements: nutritional needs; warmth and shelter; basic medical care; money to catch the bus to see one's relatives and have some sort of social existence; some small amount of savings so I am not worrying where my next meal will come from; an element of security.

Yours is probably different. Indeed, amongst all the absolute measures of poverty out there, there is no one formula. And this is part of the trouble with defining poverty in an absolute sense. The term absolute poverty sounds scientific and certain, yet this belies the fact that it is ultimately underpinned by value judgements which are anything but.

Relative Poverty
English researcher Peter Townsend provides us with the textbook definition of the alternative to absolute poverty - relative poverty:

Individuals, families and groups in the population can be said to be in poverty when they lack the resources to obtain the types of diet, participate in the activities and have the living conditions and amenities which are customary, or are at least widely encouraged or 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 and activities. (Source: This PDF of the first chapter of Ruth Lister's book Poverty)
Townsend is often credited with bringing to prominence the idea of relative poverty; yet, as is so often the case, Adam Smith got there years before:
By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.
There is a strong case to be made for a relative rather than an absolute definition of poverty. As I noted above, despite the appearance of objectivity, absolute definitions of poverty are themselves the products of value judgements - relativities, if you will.

It might plausibly be possible to use the developing science of happiness to come up with set of basic needs based on factors scientifically shown to lead to reduced suffering. But, if we were to do this, and if current research is to be believed, the first thing we would probably stumble across is the next argument in favour of a relative definition of poverty. Simply put this is that human beings are inherently social creatures and our own wellbeing is inextricably linked to our ability to participate in society around us and act within societal norms. If we don't have the means for at least minimal participation then we will suffer through loneliness, ostracism and loss of opportunities. Moreover, the necessities required for normal social participation change as society changes. To illustrate this, consider the following: once upon a time, only the wealthy had telephones. Society accordingly, reflected this fact, and one could participate in it with relative ease without one. Now, only the poorest do not have phones and once again, society reflects this - if you don't have ready access to a phone a surprising number of things become remarkably difficult (contacting friends and family, making appointments, making inquiries, seeking work...). Things that not only would be easy if you had a phone, but also if you lived back in the days when no one else had one.

Given that humans as social creatures suffer when excluded from society around them and given that our purpose stated above was to quantify material deprivation which leads to suffering it seems reasonable then that our concept of poverty should include the want for resources to allow us to normally be part of society around us.

Even those totally unconcerned with the wellbeing of others may still find it prudent to be concerned with relative poverty. Social exclusion, after all, contributes significantly to crime. Minimising it, it would seem, is even in the interests of the wealthy.

There are other arguments - including those based around fairness and justice - which might also lead us to relative definitions of poverty lines but, to me, the points above are sufficient to make me a supporter of a relative definition of poverty. This isn't to say that there aren't problems with relative poverty measures though. And it's measures that I now turn to.

Poverty Lines
Actually measuring poverty accurately is a tricky business, but - fortunately for us - defining poverty lines is easy enough.

All you need to do is work out the dollar value of your poverty line and then declare anyone who earns less than this poor.

Ok, so actually it's not that easy. You also have to choose whether you are going to use an income poverty line (if you earn less than it you are poor) or a consumption one (if the dollar value of the goods you consume is less than the line you are poor). This difference is particularly important in subsistence economies where people may earn little but still have an adequate lifestyle through the goods they gather from the land.

Then you have to decide whether your line is to be person or household based. And, if you're using households you'll have to worry about something dreadful called household equivalence ratios.

Finally, you'll also have to take into account the fact that in different places different goods will have different costs. The large variation in housing costs between regions in New Zealand is the reason why our government's low income lines are calculated based on income after with housing costs removed. The World Bank's gyrations over purchasing power parity reflect their attempt to control for the differing costs of goods in different countries.

Phew! And these are only the most basic issues.

Absolute Poverty Lines

Once you've accounted for everything listed above, constructing an absolute poverty line is relatively easy. Define your necessities, price them and, viola, you have a poverty line. Between locations this poverty line should only be adjusted to reflect differing costs of necessities (and possibly to reflect differences in needs such as those that exist between rural and urban dwellers) . Over time, the poverty line should only be inflation adjusted (possibly on the CPI/possibly on the prices of the necessities in question).

Relative Poverty Lines

Relative poverty lines are constructed, as their name suggests, by choosing a level of income (or consumption) relative to a society's average income (or consumption). Most typically the type of average chosen is the median. A figure one commonly sees is 60% of median income. The value of the line is rarely arbitrary; often the percentage chosen will be based on other research about the costs of minimal social participation (this is what Stephens and Waldergrave did in their research on poverty in New Zealand). Over time, this poverty line is then moved as the median moves.

The Problem(s) with Relative Poverty Lines

Relative definitions of poverty are better than absolute ones, in my opinion. But relative poverty lines are not without their faults.

First up, they are more easily dismissed by those who, for ideological reasons, don't want to believe the poor exist.

They are also meaningless for comparisons between countries with significantly different median incomes (comparing a poor by somewhat equal country such as Vietnam with a wealthy but unequal society such as the US, for example, could produce farcical results)**.

Similarly, they don't give credit for long run increases in GDP (and median incomes). If Germany's median income was to double over 20 years but its distribution of wealth was to stay the same you would see no decrease in poverty measured via a relative poverty line. I'm in favour of measuring poverty in relation to societal norms but it does also seem that some credit needs to be given to overall improvements in the standard of living.

And, paradoxically, if during a recession, median incomes fall but distribution is unchanged a relative poverty line will record no rise in poverty. This can't be right.

So what are we to conclude then - should we discard relative poverty lines. No, they still have their uses. One, ideal, solution is to use both sorts of lines. Carefully analysing the two so that they compliment each other's weaknesses. Maybe you'll get lucky and find poverty dropping under both measures. Or - if this isn't possible - use the tool most relevant to the task you are involved in. Or use whatever measure you have, but beware of, and upfront with, it's limitations.

Beyond Monetary Poverty Measures

"Money," Cindi Lauper once wrote, "changes everything". Unfortunately, alas, money measures, on the other hand, don't quantify everything. And there's a good case to be made about the limitations of quantifying poverty using monetary measures at all. It's too detailed to go into here and now, but I do want to point out that much recent research has gone into ways of measuring poverty in terms of outcomes rather than incomes.

Some examples of this are the UNDP's Human Poverty Index and New Zealand's Economic Living Standards Index. Amartya Sen's work on conceptualising poverty as capability deprivation is a related theoretical framework. In the long run, I think improvements in poverty measurement will come through these initiatives (not that they are without their problems).

And Finally
Lets be done with some poverty measurement silliness.

1. The New Zealand government's low income lines are not relative poverty lines. They are absolute ones. The appear to be relative because they are shown in the Social report as percentages of median income in 1998. However, for subsequent years, they have only been adjusted for inflation, they haven't been adjusted to reflect changes in median incomes. As such they should be properly considered an absolute poverty line. Particularly as the 60% figure is close to other research on what a family needs to earn in NZ to avoid experiencing deprivation.

2. Relative poverty lines aren't just measures of inequality, and poverty could be eliminated under these measures. Relative poverty lines are similar to inequality but they aren't (unlike true inequality measures) impacted on by changes in distribution of incomes over the median level. This means that you could (simply by raising the wages of those earning under 60% of the median wage) eliminate relative poverty while still having society wide inequality (differences between the median and the top and among those above the median).

3. If Bill Gates moved to a country with a relative poverty line, poverty levels would not discernibly increase. Or at least they wouldn't if the poverty line was based - as almost all are - on a percentage of the the median income. All he would do would be to shift the line by one person.

Some Links

Poverty Terms Defined
Lister's Book (Chapter 1, poverty definitions)
Krugman on Relative Poverty
New Yorker Article (not yet read but looks good)

*I cut a whole heap out from this section of the post to try and keep things simple. If you want more you may be interested in the following: Alan Botton's Status Anxiety; better analysis can be found in Richard Layard's Happiness [these speech notes may be ok] and Richard Wilkinson's the Impact of Inequality [review here].)
**Note, however, that John Minto never did this despite what David Farrar and Owen McShane would have you believe.

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