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Choosing and Estimating a Poverty Line

How to measure poverty:

Define welfare measures

Choose and estimate a poverty line
Choose and estimate a poverty indicator
Once an aggregate income, consumption or non-monetary measure is defined at the household or individual level, the next step is to define one or more poverty lines. Poverty lines are cut-off points separating the poor from the non-poor. They can be monetary (e.g. a certain level of consumption) or non-monetary (e.g. a certain level of literacy). The use of multiple lines can help in distinguishing different levels of poverty. There are two main ways of setting poverty lines—in a relative or absolute way:
  • Relative poverty lines: These are defined in relation to the overall distribution of income or consumption in a country; for example, the poverty line could be set at 50 percent of the country’s mean income or consumption.
  • Absolute poverty lines: These are anchored in some absolute standard of what households should be able to count on in order to meet their basic needs. For monetary measures, these absolute poverty lines are often based on estimates of the cost of basic food needs (i.e., the cost a nutritional basket considered minimal for the healthy survival of a typical family), to which a provision is added for non-food needs. For developing countries, considering the fact that large shares of the population survive with the bare minimum or less, it is often more relevant to rely on an absolute rather than a relative poverty line. Different methods have been used in the literature to define absolute poverty lines (see Deaton 1997Ravallion and Bidani 1994, and Ravallion 1994).
    • The food-energy intake method defines the poverty line by finding the consumption expenditures or income level at which a person’s typical food energy intake is just sufficient to meet a predetermined food energy requirement. If applied to different regions within the same country, the underlying food consumption pattern of the population group just consuming the necessary nutrient amounts will vary. This method can thus yield differentials in poverty lines in excess of the cost-of-living differential facing the poor.
    • The Cost of Basic Needs method values an explicit bundle of foods typically consumed by the poor at local prices first. To this, a specific allowance for nonfood goods, consistent with spending by the poor, is added. However defined, poverty lines will always have a high arbitrary element; for example, the calorie threshold underlying both methods might be assumed to vary with age.

Alternative poverty lines are also sometimes used. They can be set on the basis of subjective or self reported measures of poverty. Alternatively, one can combine absolute and relative poverty lines. This technique allows to take inequality and the relative position of households into account while recognizing the importance of an absolute minimum below which livelihood is not possible.

Ultimately, the choice of a poverty line is arbitrary. In order to ensure wide understanding and wide acceptance of a poverty line, it is therefore important to ensure that the poverty line chosen does resonate with social norms (with the common understanding of what represents a minimum). For example, in some countries, it might make sense to use the minimum wage or the value of some existing benefit which is widely known and recognized as representing a minimum. Using qualitative data could also be useful to decide what goods would go in the basket of basic needs (when constructing an absolute poverty line). For comparisons over time, the stability and consistency of the poverty line need to be ensured.

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