Ray Chapter8 Poverty

Chapter 8
What
is poverty?
Measuring
Empirical
poverty
facts on poverty
Functional
impact of poverty
Poverty Line
A critical threshold of income, consumption, or access to
goods and services below which individuals are declared

to be poor.
A minimum level of acceptable economic participation
in a society
Consumption or Nutrition-based poverty line
Minimum nutrient levels for an adequate diet (price of food or

consumption of calories)
Cost of shelter (rent) and clothing
Income-based poverty line
Legally declared minimum wage

Arbitrary threshold: say, 60% of mean income in a society
Overall expenditure versus item-by-item

consumption
Should we compare the characteristics of a
consumption basket with a benchmark basket?
Or, should we compare consumption expenditures with a
minimum threshold?
Nutrition levels may not rise with income (demand for canned
foods or fast foods)
Income simply represents the capacity to consume, not
consumption itself
However, income or expenditure-based poverty lines are
easier to use, given constraints imposed by available

data
Absolute
versus Relative Poverty
What is an acceptable level of participation in
a society?
Owning a TV may be deemed socially necessary in one

country, but not another
Similar examples can be motivated for cars, higher
education, leisure, etc
Constituents of a poverty line may vary widely across
countries, making comparisons difficult
Poverty should be evaluated relative to
prevailing socio-economic standards in a

society
Temporary
or Chronic Poverty?
We must be careful to distinguish between
structural or chronic poverty and

temporary poverty
Unanticipated shocks can push people
temporarily below the poverty line (natural
disasters, disease, poor rainfall, etc)
Policies to deal with temporary poverty can be
very different from those required for chronic

poverty
Households or Individuals?
Available expenditure data is often at the household level
Should we divide total household consumption
expenditures by number of individuals in the household?

This gives an idea of average or per-capita expenses
Problems:
Allocation of expenditures within the household are skewed
Discrimination against females and elderly (gender and age
bias)
Large households typically have more children, who consume
less than adults
Fixed costs of setting up or running a household
Poverty
lines are always an

approximation to a very fuzzy
threshold
Sustained
deprivation can be insidious:

effects are often felt at a later point of
time
However,
the poverty line gives us a

starting point to study poverty
Some
notation:
y denotes income or expenditure

Subscripts i, j,, refer to individuals
p denotes the poverty line, converted to
a common currency
For nutrition-based poverty lines, p represents
the money required to attain the minimum
calorie threshold
the mean income in the economy is m
Headcount
(HC): number of people

below the poverty line, i.e., number of
individuals
that
y i such
p
i
Headcount
Ratio (HCR): gives an

idea of the relative incidence of the
poor
HC
HCR
n
where n is the size of the population
Fails
to capture the extent to which

income falls below the poverty line
People near the poverty line are less
poor than those far below it
Can lead to problematic policy decisions:

Policies are systematically biased in favor of
individuals very close to the poverty line,
because they offer the biggest bang for the
buck (politically)
The
PGR is a measure of the average

shortfall of income from the poverty line
How much extra income or consumption, on
average, is required to get ALL poor people

to the poverty line?
PGR
yi p
p y
i
nm
Division by mean income: an idea of how
large the poverty gap is relative to the

resources that must be used to close the
gap
One problem with the PGR:

In societies with high inequality (where
average income is high), the PGR looks
very small even though there may be a lot
of poverty
IGR
yi p
p y
i
An alternative :
Income shortfall is divided by the total

income required to bring all poor people to
the poverty line
pHC
Size of households below the poverty line typically

tend to be larger than the average family size for
the economy
Number of children per family is highly correlated

with poverty
Burden of poverty falls disproportionately on the young
Affects childhood nutrition and education: long-term
consequences for the economy
Women are disproportionately represented as heads

of poor households
Absence of a principal male earner is closely related to
poverty
This trend is widespread in Africa, Latin America, and
South and East Asia
Poverty
in rural areas is significantly

higher than that in urban areas (even after
adjusting for cost of living)
Poverty
is highly correlated with the lack

of ownership of productive assets
Lack of assets leads to poverty
Poverty leads to the sale of assets
Poverty
and small-scale agriculture are

strongly correlated
Bulk of the poor are either landless or near
landless
Most poor reside in the informal sector

Mix of self-employment and low-wage labor
Self employment: Vendors, petty traders, teastall owners, beggars, shoe-shine boys,
garbage-sifters, load carriers, rickshaw pullers,
roadside hawkers, etc.
Wage Labor: often seasonal or casual, not

subject to minimum wage laws
Low levels of human capital

High levels of illiteracy
Lack of access to credit to acquire human capital
Poverty
and undernutrition are closely

correlated, especially among children
Muscle wastage, stunting, illness & infection
Low cognitive skills and capacity to do
productive work in adults
One
issue: increases in income may or

may not have a significant impact on
nutrition
Direct nutrition supplements may have a
greater impact than an increase in income
Why is the relationship between income and

nutrition ambiguous?
Good nourishment is desirable, because of health
and productivity benefits

By contrast, individuals may have preferences for
foods that taste good (meat)
foods that are well advertised (fast foods)
foods that are indicators of social and economic
attainment (canned food, expensive varieties)
These types of food may have little nutritional value
Nutritional elasticity: What is the percentage change

in the consumption of calories when household
budgets change by one percentage point?
Poverty
affects the access that poor

people have to markets
Credit
Labor
Education
Land (for cultivation)
Lack
of access to these markets can

have fundamental consequences for an
economy
The
poor have little or no access to

credit markets
Lack of collateral that can be put up for
loan repayment
In
societies where labor mobility is low,

one form of informal collateral is labor
Can lead to permanent indebtedness
The
poor have limited incentives to

repay loans
Why
do people insure?
What
is needed for successful insurance?
Incident against which insurance is sought must
be
Verifiable
Must not be subject to Moral Hazard
This
is why perfect insurance is never

available
Example: deductibles, contingencies, etc.
Formal
insurance markets often

dont exist in developing countries
because of problems with verifiability
and moral hazard
Example: think of crop failure:
What is the exact degree of crop failure?
Was it due to bad weather or lack of hard
work?
However,
moral hazard problems are

actually small for the poor
Opportunity cost of labor for the poor is low
Poor are unemployed or underemployed to
begin with, so cost of time is low

This permits them to credibly supply more effort
Therefore,
where formal insurance is not

available, informal schemes of insurance
can work (example: shared labor or
resources)
very large proportion of the poor

around the world are also significantly
below adequate standards of nutrition
Effects of undernutrition:
Muscle wastage, retardation, vulnerability
to illness & infection

Lower work capacity
Psychological effects: metal apathy,
depression, lower intellectual capacity, lack
of motivation
Low life expectancy
Energy
food
Input: periodic consumption of
Nutrition meets economics:

Access to food = access to income
For poor, access to income = returns to labor supply
(poor dont have much capital assets)
Resting
Metabolism: energy required to
Maintain body temperature

Sustain heart and respiratory action
Supply minimum energy requirements of
resting tissues
How
much energy is required for

adequate resting metabolism?
FAOs reference man
European male with a weight of 65 kg (143 lbs)
Energy requirement: 1700 Kcal per day
Energy Required for Work:

FAOs reference man requires 400 Kcal per
day for moderate activity.

For the poor who have to work hard in the
fields all day, this is a very conservative
estimate
Some
estimates of energy requirements:
West African agriculture:

213 kcal per hour for carrying a 20 kg log
372 kcal per hour for bush clearing
502 kcal per hour for felling a tree
The
FAOs reference man, a European

male weighing 65 kg, therefore spends
most of his day rather ambiguously
defined, but apparently not working very
hard.
Storage
and Borrowing
Over the short/medium term, energy
deficits/surpluses can be
absorbed/cushioned by the human body
A sustained, long-term deficit in the
bodys energy requirements can have
disastrous consequences
Illness
Incapacitating debility
death
Labor
markets create income and

access to nutrition and good health
Good
nutrition, in turn, affects the

capacity of the body to perform tasks
that generate income
This
circular argument points to the

existence of poverty traps in
developing countries
Low nutrition is capable of creating low incomes reduces

possibilities for good nutrition in the future
This leads to a vicious cycle of poverty
Several questions can be raised in this regard:

Why is the vicious cycle of low nutrition-low income not possible
for the poor in rich countries?
Cant people simply borrow their way out of the vicious cycle?
If work capacity affects future work output, why dont employers
take advantage of this and offer long-term contracts?
If long-term contracts indeed exist for other reasons, then does
this affect nutritional status?
In rich countries, labor markets are tight
Low supply relative to demand

Attractive opportunities in other markets
Labor markets in rich countries are very diversified
In tight labor markets, the returns to labor are,

on average, quite high, even for people with
low work capacity
Example: hourly income for barbers or janitors
This breaks the vicious cycle, as high wages

permit adequate nutrition (even for the poor in
rich countries)
Poor
simply do not have access to

credit markets
There
may not be a way to improve

nutrition for the poor without
redistribution of income from the rich
We have seen before that redistributing
wealth can be both economically and

politically contentious
It
is unlikely that an employer would offer

a long-term contract, just to extract
future gains from work capacity
There is no guarantee that the employee will
keep working for a given employer (he/she

may choose to work for another employer, or
might migrate to another village)
If an employer makes a nutrition-enhancing
investment, the market may bid up the wage
for the employee employee will reap the
entire benefits of the employers investment!
When
nutrition is used by the employer

to build up work capacity of the
employee, there must be separate set
of factors that sustains this contract
Slave economy
Slaves were a valuable commodity, due to intense
competition for their services in the labor market
Slave diets on plantations in the US South
exceeded that for all non-indentured labor in the
19th century
Industry
Positive relationship between nutrition and productivity
Feeding low-paid workers well forces them to consume
a greater proportion of their wages as food
Domestic Servants
Servants are associated with characteristics acquired
on the job that make them costly to replace
The quality of food given to domestic
servants..is..greatly superior to that obtainable by
members of working-class families from which
servants are drawn. (Booth, 1903)
In
poor households, if scarce resources

are equally allocated, then per-capita
resources are very small
This
may limit total household work

capacity
This
fact can cause an unequal sharing

of poverty within the household
Systematic discrimination against some
members of the household

Lifeboat ethic
What types of household members are

discriminated against?
Females (both adults and children)
Old and infirm
Social institutions often form perceptions about

future earning capacities
Female children are seen as a financial burden,
where the institution of dowry exists

Household work of adult females may be nonmonetized and hence not internalized
Wage-earning females who earn less than males
Medical expenses for the old and infirm who have
no future earning potential

Ray Chapter8 Poverty

Uploaded by

Copyright:

Available Formats

Ray Chapter8 Poverty

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ray Chapter8 Poverty

Uploaded by

Copyright:

Available Formats

Chapter 8

A critical threshold of income, consumption, or access to

goods and services below which individuals are declared

A minimum level of acceptable economic participation

Consumption or Nutrition-based poverty line

Minimum nutrient levels for an adequate diet (price of food or

Income-based poverty line

Legally declared minimum wage

Overall expenditure versus item-by-item

consumption basket with a benchmark basket?

Or, should we compare consumption expenditures with a

However, income or expenditure-based poverty lines are

easier to use, given constraints imposed by available

versus Relative Poverty

What is an acceptable level of participation in

Owning a TV may be deemed socially necessary in one

Poverty should be evaluated relative to

prevailing socio-economic standards in a

We must be careful to distinguish between

structural or chronic poverty and

very different from those required for chronic

expenditures by number of individuals in the household?

lines are always an

deprivation can be insidious:

the poverty line gives us a

y denotes income or expenditure

the mean income in the economy is m

(HC): number of people

Ratio (HCR): gives an

where n is the size of the population

to capture the extent to which

poor than those far below it

Can lead to problematic policy decisions:

PGR is a measure of the average

average, is required to get ALL poor people

Division by mean income: an idea of how

large the poverty gap is relative to the

One problem with the PGR:

Income shortfall is divided by the total

Size of households below the poverty line typically

Number of children per family is highly correlated

consequences for the economy

Women are disproportionately represented as heads

in rural areas is significantly

is highly correlated with the lack

and small-scale agriculture are

Most poor reside in the informal sector

Wage Labor: often seasonal or casual, not

Low levels of human capital

and undernutrition are closely

productive work in adults

issue: increases in income may or

greater impact than an increase in income

Why is the relationship between income and

and productivity benefits

Nutritional elasticity: What is the percentage change

affects the access that poor

of access to these markets can

poor have little or no access to