Chapter 1
What Is Poverty?

Most people have an idea of what it means to be poor. We think of conditions like hunger, homelessness, preventable diseases, unemployment, and illiteracy as elements of poverty. Those and other issues will be covered later in this book. However, from a social and economic standpoint, poverty is a complex topic that can be difficult to describe in objective terms. Most governments and social service agencies have their own definitions of poverty, including how it is measured and who is considered poor. This chapter will explain the means used by the United States and the international community to define and measure poverty.

DEFINING AND MEASURING POVERTY INTERNATIONALLY

Because being poor differs dramatically across countries, experts have had a difficult time establishing concrete terms to discuss it. Since the publication of its Human Development Report (1997), the United Nations has defined poverty as the "denial of choices and opportunities most basic to human development—to lead a long, healthy, creative life and enjoy a decent standard of living, freedom, self-esteem, and the respect of others." This definition takes into account nearly all aspects of human experience—personal, political, social, and financial. Not all attempts to define the condition of being poor are as inclusive. More typically, the focus has been on the economic side of poverty—how much money people make compared with other people. Since the mid-1990s agencies have recognized that poverty affects more than a person's income and consumption habits, leading to expanded definitions—also called composite indicators—used by the United Nations, the World Bank, and others.

Absolute and Relative Poverty

The most common way for governments and organizations to explain poverty is to break it down into two facets: absolute poverty and relative poverty. In general, absolute poverty means that a person's basic subsistence needs (for food, clothing, and shelter) are not being met. Relative poverty, on the other hand, typically means that a person's needs are not being met in comparison to the rest of his or her society. Gordon M. Fisher, in "Is There Such a Thing as an Absolute Poverty Line over Time?" (http://www.census.gov/hhes/poverty/povmeas/papers/elastap4.html), offers this explanation of the two terms:

an absolute poverty line is one which is constructed as an estimate of families' minimum consumption needs; this is done without reference to the income or consumption levels of the general population. In the same context, a relative poverty line is one which is set as a fraction of the median or mean income or consumption of the population as a whole (generally with appropriate adjustments for family size).

In other words, the measurement of absolute poverty considers whether a family can afford a specified amount of goods and services that are necessary for basic living in the country, city, or village in which they live. The measurement of relative poverty compares a family's financial situation with that of the rest of the population group to which they belong.

At the United Nations World Summit for Social Development in 1995, the governments of 117 countries signed the Copenhagen Declaration, which defined absolute poverty in these terms:

Absolute poverty is a condition characterised by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education, and information. It depends not only on income but also on access to social services.

In 1979 researcher Peter Townsend defined relative poverty as "the absence or inadequacy of those diets, amenities, standards, services, and activities which are common or customary in society" (Poverty in the United Kingdom).

But as David Gordon and Paul Spicker, editors of The International Glossary on Poverty (Comparative Research Program on Poverty of the International Social Science Council, 1999), point out, much of the discussion of absolute versus relative poverty is a matter of semantics—people's interpretations of the meanings of words—when in reality the two concepts are more similar than different.

PROBLEMS WITH ABSOLUTE AND RELATIVE POVERTY DEFINITIONS

Critics say that the concepts of absolute and relative poverty are not objective and depend too heavily on individual judgments of what it means to be poor. Ivan P. Felligi, Chief Statistician of Canada, argued in On Poverty and Low Income (1997, http://www.statcan.ca/english/research/13F0027XIE/13F0027XIE.htm) that there really is no "internationally accepted" definition of poverty, largely because the international community has yet to agree on whether poverty should be defined and measured across countries or within them. Felligi noted that the idea of absolute poverty is particularly problematic: "Before anyone can calculate the minimum income needed to purchase the 'necessities' of life, they must decide what constitutes a 'necessity' in food, clothing, shelter, and a multitude of other purchases, from transportation to reading material." For example, a donkey might be a necessity for a family living in a remote village in Africa but would be useless to a family in an American inner city; a tent might be the ideal shelter for a nomadic family, whereas those who live in one place require a more permanent structure. In a city with adequate public transportation, a person would not necessarily need a car, but those living in rural areas might not have any other options for transportation.

Additionally, Felligi pointed out that definitions of poverty can change over time within a single country. Living conditions that were acceptable in previous centuries and even decades are now considered inhumane; everyone in the United States agrees that indoor plumbing and electricity are basic necessities, yet as recently as the mid-twentieth century these things were luxuries to many Americans. Similarly, according to Felligi, a person who is considered rich in one country might be seen as abysmally poor in a wealthier country.

Composite Poverty Indicators

Composite poverty indicators allow for a broader explanation and measurement of poverty because they take into account factors not directly related to a family's income or larger economic forces such as a country's gross domestic product (GDP; a country's total income and economic output). Although GDP is often used to measure a nation's standard of living (the availability of goods and services to a country's citizens), many experts contend that it is not an adequate way to explain poverty because it measures only the consumption of material goods.

Using composite poverty indicators allows those who study and track poverty to consider factors other than income and possessions, instead examining a person's overall quality of life.

THE HUMAN POVERTY INDEX

In its Human Development Report 1997 the United Nations Development Program added another element to the standard definitions of poverty: the Human Poverty Index (HPI). Rather than relying solely on the terms absolute and relative poverty, the UN Development Program uses the concepts of "income poverty" and "human poverty." Under income poverty fall the terms "extreme poverty" and "overall poverty." Extreme poverty is the inability to meet basic food needs, which are defined by minimum calorie requirements. Overall poverty is the inability to afford basic needs other than food, such as shelter, clothing, and energy, along with food. The concept of human poverty is further broken down into direct and indirect effects of poverty on human life. Direct effects of poverty on people include illiteracy, hunger and malnutrition, shortened life spans, illness or death from preventable diseases, and poor health of pregnant women and mothers. Indirect effects include a compromised or total lack of access to essentials such as energy, sanitation, clean drinking water, health care, transportation, and communication services.

The Human Poverty Index frequently is divided into two measures. HPI-1 is used to measure absolute poverty in less developed countries. Its variables are: the percentage of a population likely to die before the age of forty; the percentage of people over age fifteen who are illiterate; the percentage of children under age five who are underweight; and the percentage of people without access to public and private services such as health care and clean water.

HPI-2 is used to measure relative poverty in industrialized (more developed) countries. It focuses on the same variables as HPI-1, but with adjustments to the conditions of the poor living in wealthier countries. HPI-2 measures: the percentage of people likely to die before the age of sixty; the percentage of adults living with functional illiteracy (a degree of illiteracy that does not allow people to function at a basic level in reading and writing); and the proportion of people living with long-term unemployment and below the poverty line, which is set at 50% of the median disposable household income. Additionally, HPI-2 examines the social alienation that can accompany persistent unemployment and poverty.

OTHER COMPOSITE INDICATORS

Other commonly used composite poverty indicators are:

• The Human Suffering Index (HSI) ranks the levels of suffering experienced by poor people in the areas of life expectancy; calorie intake; supply of clean water; child immunization; enrollment in secondary school; per capita gross domestic product; inflation rate; access to communications systems; technological development; civil rights; and political freedoms.
• The Physical Quality of Life Index (PQLI) combines measurements of life expectancy, infant mortality, and literacy rates.
• The Human Development Index (HDI) measures poverty using a combination of life expectancy, literacy, and amount of education, along with the domestic purchasing power of GDP (how much citizens of a country are able to buy based on the country's gross domestic product). Like the Human Poverty Index, the Human Development Index was devised by the United Nations Development Program, but its purpose is to measure how well a country is progressing toward development, whereas the Human Poverty Index measures the level of poverty and suffering experienced in a country at any given time.

Poverty Measurements Used by the World Bank

The World Bank is an international organization of member nations whose goal is to reduce poverty and increase development in poor countries. It is divided into two distinct groups: the International Bank for Reconstruction and Development, which focuses on middle-income countries and those with good credit, and the International Development Association, with a focus on the very poorest countries, which may be deeply in debt to other nations. The World Bank provides lines of credit, loans, and grants so that poor countries can improve infrastructure (roads, bridges, waterways, etc.), communications, health care, and education.

Like many international institutions, the World Bank uses its own terminology to define and measure poverty:

• Incidence of poverty: The percentage of a country's population that cannot afford basic necessities (a "basket of goods and services"). This is also known as living below the poverty line—an income level below which a person is unable to meet basic needs (see below for more information on poverty lines).
• Depth of poverty: How far below the poverty line the poor population lives; also called the poverty gap.
• Poverty severity: Measures how poor the poor are. In other words, poverty severity (also called the squared poverty gap) measures how far below the poverty line individuals and households are, with more consequence given to those at the very bottom.

VULNERABILITY TO POVERTY

An important facet of the World Bank's measurements is tracking how likely people are to fall into poverty or to fall deeper into poverty today. The World Bank Web site explains why keeping track of vulnerability to poverty matters: "Vulnerability may influence household behavior and coping strategies and is thus an important consideration for poverty reduction policies." For example, if a farmer and his or her family lives on the brink of poverty at any time, "The fear of bad weather conditions or the fear of being expelled from the land they cultivate can deter households from investing in more risky but higher productivity crops and affect their capacity to generate income." This fear and its resultant behaviors can influence the wider economy of the community and the nation, as a farmer who avoids planting high-yield crops might affect prices, consumers' buying habits, and the market overall.

According the World Bank, a number of incidents can trigger a descent into poverty, and these incidents can occur at several socioeconomic levels. At the individual level are unexpected events like major illnesses or deaths within the household, which can lead to financial ruin when medical bills cannot be paid or if it is the main breadwinner who becomes ill or dies. At the community level are things like environmental damage due to pollution that causes unsuitable working conditions or local social problems like rioting and crime. Larger trends at the macroeconomic level include national or international incidents like natural disasters and war, which also effect people's level of vulnerability to poverty. A family that is already experiencing financial instability can easily fall into poverty under any of these circumstances, and the more people there are living on the brink of poverty, the less stable the local, national, and international economies will be.

While vulnerability to poverty is difficult to measure and track, the World Bank uses such monetary indicators as income and consumption, as well as nonmonetary indicators like health status, weight (to determine whether minimum calorie requirements are being met), and how many financial and nonmonetary assets a person or family has.

POVERTY LINES AND THE DOLLAR-A-DAY STANDARD

A poverty line is a level of income below which a person cannot afford the bare minimum to exist: an amount of food sufficient to fuel the human body, clothing appropriate to a person's living and working conditions, and suitable shelter to protect from the elements. Governments determine their countries' poverty lines by calculating the annual average cost of basic necessities for an adult to function. Because these costs differ substantially across countries, it is impossible to set a single international poverty line. Additionally, measurements of poverty depend in part on household surveys that are issued and analyzed by government agencies. According to Don Sillers of the U.S. Agency for International Development (USAID), many governments fail to take poverty surveys regularly and use inadequate survey methodologies, and there can be problems with the way the data are analyzed and presented ("National and International Poverty Lines: An Overview," 2005, http://www.povertytools.org/Project_Documents/Poverty_lines___An_Overview_1_4_06.pdf). Therefore, in order to measure poverty at the international level, the World Bank developed the dollar-a-day standard in 1990, which assumes an income for those living in "extreme poverty" of $370 per year, or about a dollar per day.

National Poverty Lines

According to Sillers, national poverty lines are defined by "identifying a minimally acceptable diet," meaning the most basic number of calories on which the human body can function. Once that number is determined, analysts calculate the cost of obtaining this minimum amount of food at the current market price. The cost of necessary items other than food is then added to the equation, the total of which forms the poverty line.

However, as Sillers pointed out, several factors complicate measurements using poverty lines. It is difficult to compare poverty in different nations because wealthy, middle-income, and low-income countries have varying notions of what percentage of income is or should be spent on food and nonfood items. Also, what constitutes an "adequate diet" is a subject of debate. People living in poor countries tend to exist on a much less varied diet than those living in richer countries, where a reliance on more expensive prepackaged food is usually assumed.

The second problem with measurements using poverty lines is that countries may estimate two separate lines, one for urban and one for rural households, which may skew measurements because of assumptions about how much each group spends on necessities. Other problems include disparities that result from countries basing their household surveys on income rather than on expenditures (income—how much people make—is considered more difficult to measure than expenditures—how much people spend), and adjustments for price changes are not always correctly applied to poverty lines, causing them to drift over time, which makes it more difficult to track changes in poverty.

One Dollar per Day

The international dollar-per-day poverty standard was developed by the World Bank for its 1990 World Development Report in order to provide a single global measurement. To account for exchange rates and differences in prices and gross domestic product (GDP), the World Bank had to set a level that would be relevant in underdeveloped, developing, and developed countries despite immense differences in the meaning of poverty around the world.

Generally speaking, earning a dollar per day or less means that a person in any country is living in "extreme poverty," which means that that person cannot afford to buy even the most basic human necessities. However, "one dollar a day" is not a literal amount of money. Rather, it means a dollar a day at purchasing power parity in 1985 prices. Purchasing power parity (PPP) is a way to measure the value of currency that allows economists and poverty researchers to compare the standards of living in different countries while accounting for differences in both wages and costs of living. In general, PPP refers to the goods and services that a currency has the power to buy, typically expressed as a "basket" or "bundle" of necessary items. PPP measures how much the same basket or bundle of goods and services costs around the world; allowing for exchange rates, the PPP number in each country should allow people to purchase the same basket of goods and services that a U.S. dollar can purchase in the United States. As with absolute poverty (see above), critics of PPP point out that one problem with the measure lies in the notion of what is and is not a necessity: a product or service considered a staple in one culture may be a luxury in others. Nevertheless, most researchers agree that purchasing power parity is, to date, the best way to examine poverty at the global level.

Because the dollar-a-day standard was conceived in 1990, currency values of 1985 were used as a baseline. By 1993 the value of the U.S. dollar had changed, so that "one dollar a day" was actually equal to $1.08 per day. Nevertheless, the term "dollar a day" is still used because it is simpler and easier to remember. To measure "poverty"—as distinguished from "extreme poverty"—the World Bank uses a two-dollars-per-day standard, meaning that anyone earning less than two dollars per day is living in poverty. In this measurement the concept of purchasing power parity is the same, but the two-dollars-per-day standard allows researchers to study the poor in slightly less impoverished countries while still using the PPP standard.

POVERTY THRESHOLDS AND GUIDELINES IN THE UNITED STATES

Governmental agencies in the United States tend to avoid using the term "poverty line" because they consider it ambiguous. Instead, U.S. officials divide poverty measurement tools into two categories: thresholds and guidelines. The U.S. Census Bureau issues poverty thresholds, which are statistical measurements used to track the total number of people living in poverty in the United States. Poverty guidelines, on the other hand, are issued by the U.S. Department of Health and Human Services (HHS) and are used for the administrative purpose of determining eligibility for certain federal social programs and services, including Head Start, Medicare, AIDS Drug Assistance Program, the National School Lunch Program, and the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), among many others.

Poverty thresholds are calculated and issued by the Census Bureau in September or October of the year following the year that they measure. This is because they are based on the Consumer Price Index (CPI) and the Current Population Survey (CPS), the results of which are not known until the end of the year in question or the beginning of the following year. Poverty guidelines are published early in the year in the Federal Register by the Department of Health and Human Services. They are based on price changes over the preceding year. The guidelines are a simplified version of the thresholds, although at the time of their respective publications thresholds and guidelines are considered equally accurate.

History of the Poverty Threshold

In 1961 the U.S. Department of Agriculture (USDA) created four food plans that could be applied to the food buying patterns of American families. The Economy, Low-cost, Moderate-cost, and Liberal food plans were based on the food spending habits of U.S. households. They were developed by estimating the least amount of food necessary to meet nutritional requirements at specified prices. The Economy plan, now called the Thrifty food plan, has been updated several times over the years—most recently in 1999 by the USDA's Center for Nutrition Policy and Promotion—to allow for revisions in nutritional guidelines and changing food prices. These food categories are used to determine where households fall on the poverty threshold.

The poverty threshold was developed in 1963 Mollie Orshansky of the U.S. Social Security Administration. Orshansky's measurement was based on the USDA's Economy food plan. According to the USDA, the Economy plan was "designed for temporary or emergency use when funds are low" because it was based on the least amount of food at the lowest possible cost. Orshansky formulated calculations for families based on their size (how many people living in a household), the sex of the head of the household, how many family members were children, whether the families were farmers or not, and the age of the head of the household (specifically, over sixty-five or under). At the time, it was assumed that American families spent about one-third of their income on food, so Orshansky multiplied the numbers on the Economy food plan by three to come up with the poverty thresholds. Orshansky's calculations resulted in a matrix containing 124 different poverty thresholds for each different household variable.

In 1981 the matrix was reduced from 124 thresholds to forty-eight when some of the distinctions were eliminated or revised. For example, the farm and nonfarm categories were changed so that all households were measured by the criteria of nonfarms. Gender differences were cut by averaging male- and female-headed households together, and the size of the largest households considered was increased from seven people to nine.

CONTROVERSIES OVER U.S. POVERTY MEASUREMENTS

In the paper "Reconsidering the Federal Poverty Measure" (University of Maryland School of Public Policy, Welfare Reform Academy, June 14, 2004), Douglas J. Besharov and Peter Germanis discuss problems with the use of thresholds and guidelines, noting two commonly cited failures of the measurements:

1. The method of measuring poverty in the United States does not take into account all forms of income—specifically, the federal poverty threshold does not count noncash forms of aid, such as food stamps, Medicaid, school lunch programs, housing assistance, and the State Children's Health Insurance Program. Nor does it recognize the Earned Income Tax Credit, the monetary value of assets such as houses, or income brought into a household by non-family members, such as a mother's boyfriend.
2. The current poverty threshold calculation that assumes spending on food accounts for one-third of a household's budget most likely fails to reflect more contemporary household spending patterns. In the early 2000s food spending was estimated to be one-seventh of a household's income. Additionally, the calculation has not been accurately updated to reflect the costs of other current needs such as child care and higher taxes.

Besharov and Germanis write that many commentators believe a more accurate picture of poverty could be gained by measuring household consumption of certain goods and services rather than household income, while others argue that neither income nor consumption measurements can provide insight into the physical and emotional aspects of living in poverty and that, instead, "well-being" indicators—similar to the composite indicators discussed above—should be used.

In 2002 the Census Bureau began including "alternative estimates" in its publications on poverty, largely in response to the 1995 National Academy of Sciences/Committee on National Statistics' (NAS/CNSTAT) Panel on Poverty and Family Assistance, which concluded that the U.S. method of measuring poverty "no longer provides an accurate picture of the differences in the extent of economic poverty among population groups or geographic areas of the country, nor an accurate picture of trends over time" (Measuring Poverty: A New Approach, National Research Council, 1995). The Census Bureau's 2003 report Alternative Poverty Estimates in the United States: 2003 examined the new measures of income and, more specifically, the recommendations of the NAS/CNSTAT panel report, in comparison with the old measures. In June 2004 the National Academy of Sciences hosted a Workshop on Experimental Poverty Measures, which examined issues including the role of childcare and medical expenses, home ownership, and demographic and geographic differences in assessing poverty. As of 2005, U.S. government agencies still relied heavily on the traditional poverty measures, although some, such as the Census Bureau, included alternative measures in their research to gain a broader view of poverty in the United States.

CLASSIFYING COUNTRIES BY LEVEL OF ECONOMIC DEVELOPMENT

In addition to the above definitions and measurements of poverty, countries are classified by how "developed" they are economically. During the cold war—the period of escalating tensions between the United States and the Soviet Union that lasted from the 1950s until the Berlin Wall was dismantled in 1989—the terms "first world," "second world," and "third world" came into use. Originally, third-world countries were those that did not align themselves with either the first-world United States and its Western allies or the second-world Soviet Union and other Eastern bloc countries. Over time, however, the term "first world" came to refer to those countries that were industrialized and relatively wealthy, while "third world" was used to describe countries that were poor, indebted to other nations, and not industrialized.

With the end of the cold war and the dissolution of the Soviet Union in the late 1980s and early 1990s, the term "second world," which was rarely used to begin with, was abandoned. "First world" came to refer to all countries that are industrially and technologically developed, while "third world" described poor countries that are largely undeveloped. However, the idea of a third world was considered derogatory—as if poor countries were hopelessly removed from the rest of the world when in fact their people make up at least two-thirds of the planet's population.

Instead, academics and researchers began using the terms "developed," "developing," and "underdeveloped" to describe rich, industrialized countries, countries whose economies are expanding, and those that remain poor and without large-scale industry or technology, respectively. Still others prefer "least developed countries," "majority world" or "two-thirds world" when discussing countries that belong to the poorest segment of the global economy. The term "fourth world" is sometimes used to describe either the very poorest social or economic groups within underdeveloped countries or indigenous or marginalized people within any country.

As there is still no widespread consensus about which terms to use, this book will give preference to "developed," "developing," and "underdeveloped" to discuss the three main categories of world economic development.