Abstract
Poverty is the most distressful characteristic of economic underdevelopment. Poverty and underdevelopment are closely associated, and poverty reduction is by now an integral part of poor countries’ development strategies as well as the overriding goal of international development assistance. As reflected in the quote from the World Bank’s PovertyNet that opens this chapter, poverty can be associated with a multitude of different factors. In all its dimensions, poverty has manifold implications for the behaviour of people and for the way in which an economy functions. Both the multi-dimensional nature of poverty and the heterogeneity of those defined as poor have made the operationalisation of poverty in development economics and policy an inherently difficult task. Related problems of measuring poverty in its various dimensions pose additional challenges.
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Notes
- 1.
Source: World Bank, PovertyNet website: http://go.worldbank.org/RQBDCTUXW0 (permanent URL).
- 2.
Overcoming poverty was first named as the key goal of the World Bank by Robert McNamara, then president of the bank, in his annual meeting speech in Nairobi in 1974. James Wolfensohn, who took office as the bank’s president in 1995, renewed the institution’s focus on poverty reduction, which has since then been embraced by most international and bilateral development institutions. More recently, international commitment to global poverty alleviation was reinforced by the international agreement of the Millennium Development Goals (MDGs) as part of the road map for implementing the UN Millennium Declaration adopted at the UN Millennium Summit in New York in September 2000. The goals include halving the proportion of population in extreme poverty between 1990 and 2015. See Table 2.1 for further details on the MDGs.
- 3.
A radical plea for the rehabilitation of poverty as a positive value can be found in the book Poverty, Wealth of Mankind by Beninese economist, politician and UN official Albert Tévoédjrè (1978).
- 4.
Among those low-income countries for which data are available, this headcount index ranges from around 30% of population below the national poverty line in Benin (1999), Ghana (2006) and Uganda (2004) to around 70% in Madagascar (1999), Sierra Leone (2004) and Zambia (2004).
- 5.
The 1.25 U.S. dollars per day line measures absolute (or extreme) poverty. The figure of 1.25 U.S. dollars a day was chosen because it is very close to the mean of the national poverty lines for the poorest 15 countries in terms of consumption per capita (i.e., 1.27 U.S. dollars per day at 2005 PPP prices). According to this standard, people are counted as poor if their daily consumption expenditure has less purchasing power than 1.25 U.S. dollars had in the United States in 2005. It has previously been set at 1 U.S. dollar per day at 1993 PPP, and the MDG 1, which tracks progress in absolute poverty reduction through 2015, is still based on this older international reference line. The revision of the absolute poverty line to 1.25 U.S. dollars followed the availability of updated PPP estimates after a new round of international price surveys in 2005. While also after the revision national poverty lines remain the same in local currency units, the incidence of poverty in the world is found to be higher than past estimates have suggested, as the 2005 price survey data suggest that past PPPs had implicitly underestimated the cost of living in most developing countries. The 2 U.S. dollars a day reference line counts poverty as defined by standards more typical of middle-income countries. It represents the median poverty line found amongst developing countries at 2005 prices. For more technical details on the methodology behind these poverty calculations, see Chen et al. (2008) as well as Chen and Ravallion (2008). For a critical assessment of the World Bank’s approach to poverty measurement see Pogge and Reddy (2005).
- 6.
See Laderchi et al. (2003) for a comparison of results from different approaches to poverty measurement.
- 7.
Africa’s leading mobile operator is Zain Group (formerly Celtel), which has about 20 million subscribers in 15 countries in Africa south of the Sahara. It employs around 8,000 people directly, but indirectly provides jobs to around 170,000 people in Africa who resell prepaid airtime or operate telephone bureaus (The Economist 2007a).
- 8.
In Africa, mobile telephony and the various support services that have become available with it has unleashed a wave of wealth-creating entrepreneurship, even among some of the poorest people. In Malawi, for instance, the Malawi Agriculture Commodity Exchange (MACE), an independent government-sponsored organisation, makes prices on a wide range of agricultural commodities from main national markets available to small-scale farmers on a daily basis through a short messaging service.
- 9.
It has yet to be noted that the important function that internal traders perform by connecting small-scale producers to markets can have a downside if producer–trader relations are characterized by an asymmetric distribution of power. This can happen, for instance, when only one buyer faces many sellers and thus uses his monopsony power to drive prices down. This is a frequent characteristic of the coffee sector where small-scale farmers in remote locations depend on local middlemen who purchase their raw coffee at a fraction of its value (these middlemen are hence known as “coyotes” in Latin America). In situations like these, fair trade schemes can provide a way to correct such market failures. By cutting the middlemen out of the supply chain, alternative trade organisations provide small-scale produces with direct access to domestic and international markets at predetermined prices that are set to guarantee farmers a living wage.
- 10.
See Sect. 4.2.2 for a more detailed analysis of the approach to micro-lending adopted by Grameen Bank.
- 11.
See their article “The Fortune at the Bottom of the Pyramid” (published in Strategy+Business, Issue 26, 2002). Both further developed the idea separately in Prahalad (2010) and Hart (2007).
- 12.
As Murphy et al. (1990) show, this effect is less significant at the aggregate level, however. They argue that the effect of education on individual productivity will only translate into economic growth if educated workers engage in productive activities. It does not if they use their skills, for instance, for rent-seeking activities or for getting employed in the informal sector.
- 13.
This has important effects also at the aggregate level: malaria alone is estimated to reduce GDP growth rates by 0.5 per year on an average in sub-Saharan Africa, and in the countries hardest hit by the HIV/AIDS epidemic (such as Botswana, Zimbabwe, South Africa and Lesotho), the average lifespan was cut short by more than ten years (World Bank 2002).
- 14.
See Kanbur and Squire (2001) for a discussion of the empirical literature on both the effects of health and education on income and on the interrelations between health and education.
- 15.
- 16.
The concept of social capital originally emerged within political science and sociology. Notable contributors have been James Coleman (1990) and Robert Putnam et al. (1993).
- 17.
While the essence of the concept of social capital is widely accepted, several authors question its denotation as capital, because many of the characteristics of physical capital do not apply to social assets (e.g., divisibility, non-negative value, the possibility for establishing ownership, depreciation from use, etc.). However, similar qualifications could easily be made also with regard to the widely accepted notion of “human capital”.
- 18.
For a comparative discussion of both concepts, see Narayan (1999).
- 19.
Consumption expenditure is generally viewed as a more adequate welfare indicator than income. However, income data are more widely available than data on consumption levels. In such cases, the preferred approach for estimating consumption levels used by the World Bank and other international organisations is to multiply income data by the share of aggregate private consumption in national income obtained from national accounts data (World Bank 2001a).
- 20.
This view has been challenged by studies which show that income usually explains very little of the variations in non-money metric welfare indicators. See, for instance, Appleton and Song (1999).
- 21.
It has recently been raised to 1.25 U.S. dollars at 2005 PPP following the availability of improved price survey data on the basis of which international price comparisons used in poverty accounting are being made. For further details, see footnote 5 above.
- 22.
The neglect of income distribution actually represents another serious shortcoming of GNI per head as poverty indicator. Advances in the generation of data on income inequality in recent years have made it possible to construct well-being measures that combine average income with some measure of inequality [see, for instance, Grün and Klasen (2003) and Deininger and Squire (1996)]. Above that, as has been suggested most prominently by Amartya Sen, the uneven distribution of incomes may have an independent negative effect on the aggregate well-being of the poor if economic inequality is in itself considered as a dimension of poverty.
- 23.
In order to better anticipate the characteristics of poor households in future poverty estimations, efforts are being made in the framework of the International Comparison Program (ICP) to prepare data that reflects expenditure patterns of poor people that can be used to compute specific “poverty PPPs”. The ICP, which was initiated in 1968 by Irving Kravis, Alan Heston and Robert Summer on behalf of the World Bank, regularly produces internationally comparable price levels, expenditure values and PPP estimates based on national surveys that price nearly 1,000 products and services.
- 24.
As Kanbur (2003) notes, a way to overcome this conceptual weakness could be to find a meta-concept of well-being that is determined by the components of the HDI. Amartya Sen’s “capability approach” provides a leading attempt in this direction.
- 25.
See World Bank (2001a) for a discussion of the complexities involved in measuring vulnerability.
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Altmann, M.P. (2011). Poverty. In: Contextual Development Economics. The European Heritage in Economics and the Social Sciences, vol 8. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-7231-6_2
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