What is... | May 10, 2016

What is the poverty line?

When we can’t afford to buy the latest phone or an expensive gadget, we can feel poor. But genuine poverty is when you don’t have enough money for basic human needs such as food, clothing, clean water or a place to live.


This is where the poverty line helps. It is a measure describing the minimum level of income that a person needs to live and separates the poor from the not-so-poor. Many people think poverty is only a problem of developing countries. However, Eurostat figures suggest that even in Europe in 2014 some 24.4% of the population were at risk of poverty or social exclusion.

National poverty lines differ widely across the globe. In some places, the threshold might be set at around $1 per person per day – in others, the poverty line could be at $40 per person per day. These huge differences occur because the cost of living varies substantially in different parts of the world.
 

Origin of the idea
The poverty line concept was popularised by Charles Booth, a UK-based shipping magnate and social reformer who did not believe the view that people were poor because they shied away from work or because they were lazy. Booth studied the lives of poor people in London from 1889-1903 to work out the amount of money required to keep from starvation. He found that the very poor had less than this amount – perhaps due to irregular work, sickness or from needing to support a large number of young children.

Where to draw the line
In 1990, the World Bank came up with a global poverty threshold of a dollar a day by reviewing poverty line figures from the world’s poorest countries against purchasing power parity (PPP) exchange rates, which allows us to compare prices across countries. In 2008, the World Bank revised the figure to $1.25 and the threshold was further updated in 2015 to $1.90. The World Bank believes that the share of global population living in poverty has been declining and it is expected to have fallen below 10% in 2015.

It’s not all relative
Poverty lines can be set at absolute or relative poverty levels in a country. Relative poverty is when those who are worse off most people cannot take part in normal activities in their society. Absolute poverty is when people are unable able to meet basic needs of nutrition, clothing and shelter. When this happens, people’s health can suffer or their life may even be in danger. There are many different ways to do the actual calculation. One popular strategy is to value a basket of typical food items at local prices and to add an amount for non-food items. Another way is to work out the cost of the amount of food needed to meet a person’s nutritional needs.

Complex issues
Researchers and policy makers often look for ways to help people manage money when they are in poverty. For example, Abhijit Banerjee, an economics professor at MIT and co-author of award-winning book Poor Economics, has pointed out that even though Kenyan farmers know fertilisers will increase crop yields they still don’t use them. One problem, Banerjee says, is that they don’t buy fertiliser right after harvest time, when they have the money. By the time the planting season arrives, their money is gone. In one 2009 study, selling the farmers full-price vouchers straight after the harvest boosted fertiliser use by 50%.

Different needs
Many popular methods for measuring poverty also don’t incorporate differences in needs based on individual circumstances, or other factors such as differences between countries or age groups.It is easy to see that the poverty line concept doesn’t tell a full story. Poverty is more than a number, and many factors must be taken into account when measuring human welfare.

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eZonomics team
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