Definitions of extreme poverty


There are many definitions, as well as intense debates, about the exact numbers of the poor, where they live, and how their numbers are changing over time. As a matter of definition, it is useful to distinguish between three degrees of poverty: extreme (or absolute) poverty, moderate poverty, and relative poverty. Extreme poverty can be thought of as “poverty that kills,” meaning that households cannot reliably meet basic needs for survival. Households living in extreme poverty are chronically undernourished, unable to access health care, lacking the amenities of safe drinking water and sanitation, unable to afford education for some or all of the children, and perhaps lacking rudimentary shelter—a roof to keep the rain out of the hut, a chimney to remove the smoke from the cook stove—and basic articles of clothing such as shoes. Such deprivations cost lives, by the millions, every year. Life expectancy is considerably lower and mortality rates are considerably higher in countries in which large proportions of the population live in extreme poverty.

Unlike moderate and relative poverty, extreme poverty occurs only in developing countries. Moderate poverty generally refers to the conditions of life in which basic needs are met, but just barely. Relative poverty is generally construed as a household income level below a given proportion of average national income. The relatively poor, in high-income countries, lack access to cultural goods, entertainment, recreation, and to quality health care, education, and other perquisites of social mobility. They may also live outside of the “mainstream” of social life, and thus without dignity and social respect.

The map below shows which countries have more than a quarter of their population living in either extreme or moderate poverty:


map_poverty.jpg


Basic needs approach


In order to estimate the number of extreme poor, most analysts use a poverty line: a level of income below which the person is “extremely poor” by some definition. Most countries set their own poverty lines, based on the per-capita cost of a consumption basket that attempts to measure basic needs. Since the poorest people in poor countries spend most of their money on food, most of the basket used for national poverty lines consists of food, usually in terms of meeting a minimum intake of 2,000 calories (Deaton, 2004). These poverty lines are surely imperfect: they suffer from the measurement error inherent in household surveys, they are rarely updated with regards to spending on nutrition; they do not account for differences in rural versus urban calorie consumption; and they do not capture all dimensions of extreme poverty (for example, access to health care, safe water, sanitation, education, or political voice). Moreover, they can lead to undesirable policy results (a person right below the poverty line could be treated very differently from someone just above the line, despite having almost equal incomes). Governments judged solely on the number of people below the poverty line could choose to focus only on those closest to the line and ignore the poorest of the poor.

Capabilities


Finally, as Nobel Laureate Amartya Sen has emphasized in recent years, poverty is much broader than having low income; it is the absence of basic capabilities to function in society. This could include not only income poverty (involving a lack of food, clothing, or shelter), but also lack of access to public goods, social standing, and political participation. Despite these shortcomings, most dimensions of extreme poverty that people would like to improve are correlated with household income, thus making a poverty line a helpful, though rough, first approximation of poverty rates. Measures that combined household income with provisions of public goods (disease control, public health, primary education) would surely be preferable.

$1 per day


Since the late 1980s, and especially with 1990 World Development Report, the World Bank introduced a single measure of extreme poverty, income of $1 per day or less (in 1985 purchasing power parity dollars), in order to compare rates of extreme poverty across countries and to track extreme poverty over time. The $1 per day number was chosen since it corresponds roughly to the highest national poverty rate among low-income countries (around $360 dollars per year). In 2000, the World Bank used improved PPP estimates to adjust its global poverty line to $1.08 per person per day (in 1993 PPP dollars). This global extreme poverty line has been criticized by some for not being high enough and thus undervaluing the needs of the poor (Pritchett, 2003) and by others for being too arbitrary and detached from the country-specific needs of the poor (Srinivasan and others, 2004). Nevertheless, it provides a useful, albeit highly imperfect, measuring tool to look at extreme poverty around the world.

HDI


Another important indicator for poverty is the Human Development Index, published by UNDP since 1990. The UNDP sought to incorporate the multidimensional aspects of poverty into a new indicator, and to emphasize that development should expand human capabilities, particularly those that are universally valued and basic to life: to lead a long and healthy life, to be knowledgeable, and to have access to the resources needed for a decent standard of living (UNDP, 2004). The result was the HDI, which averages normalized 0-1 indexes for income per capita, life expectancy, and education school enrollment and literacy. Countries classified as “low human development” have a very strong overlap with those countries that have a high proportion of the population living under $1 per day according to the World Bank.

Where are the poor?


extreme_poverty.jpg

The most recent estimates of extreme poverty around the world (using the $1 per day estimate) were done by Shaohua Chen and Martin Ravallion at the World Bank (see table above). They estimated that roughly 1.1 billion people were living in extreme poverty in 2001, down from 1.5 billion in 1981 (Chen and Ravallion, 2004). The overwhelming share of the world’s extreme poor, 93 percent in 2001, live in three regions: East Asia, South Asia, and sub-Saharan Africa. Since 1981, the absolute numbers of extreme poor have risen in sub-Saharan Africa, but have fallen in East Asia and South Asia. In terms of proportions, nearly half of Africa’s population is judged to live in extreme poverty, and that proportion has risen slightly over the period. The proportion of the extreme poor in East Asia has plummeted, from 58 percent in 1981 to 15 percent in 2001; in South Asia the progress has also been marked, although slightly less dramatically, from 52 percent to 31 percent. Latin America’s extreme poverty rate is around 10 percent, and relatively unchanged; Eastern Europe’s rose from a negligible level in 1981 to around 4 percent in 2001, the results of the upheavals of communist collapse and economic transition to a market economy. It is worth noting that these numbers are debated heatedly; other researchers have relied on national income accounts, which tend to show somewhat faster progress in the reduction of Asian poverty, and sometimes very different estimates for the total amount of people living in extreme poverty (Sala-i-Martin 2002 and Bhalla 2002). The general picture, however, remains true in all these studies: extreme poverty is concentrated in East Asia, South Asia, and sub-Saharan Africa. It is rising in Africa in absolute numbers and as a share of the population, while it is falling in both absolute numbers and as a proportion of the population in the Asian regions.

There are some defining circumstances specific to the poorest of the poor. They are mainly in rural areas (though with a growing proportion in the cities); the rural poor tend to have fewer opportunities to earn income, have less access to education and health care, and are often more vulnerable to the forces of nature. The extreme poor face challenges almost unknown in the rich world today—malaria, famines, lack of roads and motor vehicles, great distances to regional and world markets, lack of electricity and modern cooking fuels. Women tend to be at a disadvantage compared to men, since they often have less access to property rights (land ownership, inheritance), and since they bear the physical burden of lack of infrastructure (collecting water and fuel wood at great distances). Girls have historically received less primary and secondary education than boys. Labor markets often discriminate against women, and women tend to work longer when one counts unpaid labor at home. Domestic violence continues to burden the lives of millions of women around the world (World Bank 2001). Finally, large pockets of poverty exist within many countries due to racial and ethnic discrimination, or low social (e.g. caste) status.


Consequences of Extreme Poverty


When individuals suffer from extreme poverty and lack the meager income needed even to cover basic needs, a single episode of disease, a drought, or a pest that destroys a harvest can be the difference between life and death. In households suffering from extreme poverty, life expectancy is often around half that in the high-income world, 40 years instead of 80 years. It is common that in the poorest countries of sub-Saharan Africa, of every 1,000 children born, more than 100 die before their fifth birthday, compared with fewer than 10 in the high-income world. An infant born in sub-Saharan Africa today has only a one-in-three chance of surviving to age 65.

At the most basic level, the poorest of the poor lack the minimum amount of capital necessary to get a foothold on the first rung on the ladder of economic development. The extreme poor tend to lack six major kinds of capital:

  • Human capital: health, nutrition, and skills – education – needed for each person to be economically productive
  • Business capital: the machinery, facilities, motorized transport used in agriculture, industry and services
  • Infrastructure: roads, power, water and sanitation, airport and seaports, and telecommunications systems, that are critical inputs into business productivity
  • Natural capital: arable land, healthy soils, biodiversity, and well-functioning ecosystems that provide the environmental services needed by human society
  • Public institutional capital: commercial law, judicial systems, government services and policing that underpin the peaceful and prosperous division of labor
  • Knowledge capital: the scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capital

Importantly, the poorest of the poor tend to have higher fertility rates, for several reasons. Infant mortality rates are high when there are inadequate health services, so high fertility provides “insurance” to parents that they will succeed in raising a child who will survive to adulthood. In rural areas, children are often perceived as economic assets who provide supplementary labor for the farm household. Poor and illiterate women have few job opportunities away from the farm, and so may place a low value on the opportunity (time) costs of raising children. In addition, women are frequently unaware of their reproductive rights (including the right to plan their families) and lack access to reproductive health information, services, and facilities, leading to high unmet demands for contraception in low-income countries and among poorer members of all developing countries. Finally, poor households lack the income to purchase contraceptives and family planning, even when they are available. For these reasons, high fertility rates are prevalent among families living in extreme poverty, resulting in very low investments in the health and education of each child (the quantity-quality tradeoff).

Poor and hungry societies are much more likely than high-income societies to fall into violent conflicts over scarce vital resources, such as watering holes and arable land—and over scarce natural resources, such as oil, diamonds, and timber. (United Nations, 2004). This relationship between violence and high rates of extreme poverty holds with a high degree of statistical significance. A country with a civil war within its borders typically has only one-third the per capita income of a country with similar characteristics but at peace. Moreover, poor countries—even those not in conflict—risk conflict in the future. A country with a per capita income of $500 is about twice as likely to have a major conflict within five years as a country with an income of about $4000 per capita (UN Millennium Project, 2005). In addition, low economic growth rates are associated with higher risks of new conflict; one study finds that a negative growth shock of 5 percent increases the risk of civil war by 50 percent in the following year, and that economic conditions are likely the most important determinants of civil conflict in sub- Saharan Africa (Miguel, Satyanath, and Sergenti, 2004). The most comprehensive study of state failure, carried out by the State Failure Task Force established by the Central Intelligence Agency in 1994, confirms the importance of the economic roots of state failure (defined as revolutionary war, ethnic war, genocide, politicide, or adverse or disruptive regime change). The Task Force studied all 113 cases of state failure between 1957 and 1994 in countries of half a million people or more, and found that the most significant variables explaining these conflicts were the infant mortality rate (suggesting that overall low levels of material well-being are a significant contributor to state failure), openness of the economy (more economic linkages with the rest of the world diminish the chances of state failure), and democracy (democratic countries show less propensity to state failure than authoritarian regimes). The linkage to democracy also has a strong economic dimension, however, because research has shown repeatedly that the probability of a country’s being democratic rises significantly with its per capita income level. In refinements of the basic study, the Task Force found that in sub-Saharan Africa, where many societies live on the edge of subsistence, temporary economic setbacks (measured as a decline in gross domestic product per capita) were significant predictors of state failure (State Failure Task Force, 1999). Similar conclusions have been reached in studies on African conflict, which find that poverty and slow economic growth raise the probability of conflict.

Theories of Extreme Poverty


For decades, observers have tried to explain why extreme poverty persists. Many theories have looked for single-factor explanations for a lack of economic growth, often grounded in racist beliefs (poor countries don’t grow because their cultures, races, or religions fail to promote economic growth). All of these theories were proven wrong with an increasing number of success stories of growth. However, despite the complexity of an economy and the number of things that can go wrong, single-factor explanations persist. The most common is that poverty is a result of corrupt leadership that impedes modern development.

Governance is indeed important: economic development stalls when governments do not uphold the rule of law, pursue sound economic policy, make appropriate public investments, manage a public administration, protect basic human rights, and support civil society organizations—including those representing poor people—in national decision-making. Importantly, long-term poverty reduction in developing countries will not happen without sustained economic growth, which requires a vibrant private sector. Government, therefore, needs to provide the economic policy framework and the support that the private sector needs to grow.

However, many well-governed poor countries may be too poor to help themselves out of extreme poverty. Many well-intentioned governments lack the fiscal resources to invest in infrastructure, social services, environmental management, and even the public administration necessary to improve governance. Further, dozens of heavily indebted poor and middle-income countries have been forced by creditor governments to spend large proportions of their limited tax receipts on debt service, undermining their ability to finance vital investments in human capital and infrastructure. The reasons for why is these poor countries cannot grow is not poor governance, but a poverty trap. They lack the basic infrastructure, human capital, and public administration—the foundations for economic development and private sector-led growth. Without roads, soil nutrients, electricity, safe cooking fuels, clinics, schools, and adequate and affordable shelter, people are chronically hungry, burdened by disease, and unable to save. As mentioned above, fertility rates tend to be high, preventing families from investing enough in each child. Without adequate public sector salaries and information technologies, public management is chronically weak. For all of these interlocking reasons, these countries are then unable to attract private investment flows or retain their skilled workers, and can therefore find themselves with low or negative growth. In short, they are stuck in a poverty trap.

The concept of a low-level poverty trap is a long-standing hypothesis in the theories of economic growth and development. The earliest mathematical formalization was by Nelson (1956), who put emphasis on demography. The theoretical possibility of poverty traps in the neoclassical growth model is covered briefly in the economic growth textbook by Barro and Sala-i-Martin (1998), which also discusses briefly the possible case for large-scale development assistance to overcome such traps. The connection of a low-level trap to subsistence consumption needs is spelled out in Ben-David (1998), and connections to agriculture and education are described in the World Economic and Social Survey 2000. Two recent empirical studies claiming that such poverty traps exist in poor countries are UNCTAD (2002) and Bloom, Canning, and Sevilla (2003). A close look at a poverty trap in sub-Saharan Africa is in Sachs et al. (2004).

An often-overlooked characteristic of poverty is that some countries and regions are clearly more vulnerable than others to falling into a poverty trap. While a history of violence of colonial rule or poor governance can leave any country bereft of basic infrastructure and human capital, physical geography plays special havoc with certain regions. Some regions need more basic infrastructure than others simply to compensate for a difficult physical environment. Some of the barriers that must be offset by investments include adverse transport conditions (landlocked economies, small island economies far from major markets, inland populations far from coasts and navigable rivers, populations living in mountains, long distances from major world markets, very low population densities); adverse agroclimatic conditions (low and highly variable rainfall, lack of suitable conditions for irrigation, nutrient-poor and nutrient-depleted soils, vulnerability to pests and other postharvest losses, susceptibility to the effects of climate change); adverse health conditions (high ecological vulnerability to malaria and other tropical diseases, high AIDS prevalence); and other adverse conditions (lack of domestic energy sources, small internal market and lack of regional integration, vulnerability to natural hazards, artificial borders that cut across cultural and ethnic groups, proximity to countries in conflict). Adam Smith was acutely aware of the role of geography in hindering economic development. He stressed, in particular, the advantages of proximity to low-cost, sea-based trade as critical, noting that remote economies would be last regions to achieve economics development. More recent studies have found statistical significance of these relationships between geography and economic outcome (Sachs, Gallup and Mellinger, 1998; Sachs, Mellinger and Gallup 2000; Sachs and Gallup 2001).

In the rich countries of North America, Western Europe, and East Asia, the process of massive investment in research and development, leading to sales of patent-protected products to a large market, stands at the core of economic growth. Advanced countries are typically investing 2 percent or more of their gross national product directly into the research and development process, and sometimes more than 3 percent. That investment is very sizable, with hundreds of billions of dollars invested each year in research and development activities. Moreover, these investments are not simply left to the market. Governments invest heavily, especially in the early stages of R & D. In most poor countries, especially smaller ones, the innovation process usually never gets started. Inventors do not invent because they know that they will not be able to recoup those large, fixed costs of developing a new product. Impoverished governments cannot afford to back the basic sciences in government labs and in universities. The result is an inequality of innovative activity that magnifies the inequality of global incomes. While the innovation gap is reduced in the case of some poor countries through technological diffusion, even diffusion is limited in the poorest countries, since they face distinctive ecological problems not addressed by “rich-world science” (e.g. tropical diseases and tropical farming systems), they cannot afford high-tech capital goods, and they fail to attract foreign businesses who would bring the technology with them.

Policy Responses


Theories on how to tackle extreme poverty are varied and controversial. For the most part, they can be divided into two camps: strategies that focus on promoting market-oriented economic growth, and strategies that focus on directly addressing the needs of the poor. Of course the two approaches can be combined. The Washington Consensus, a set of policy recommendations especially prevalent from 1980 to the late 1990s, embodies the first type with its focus on macroeconomic stability, greater economic openness to trade and investment, and improved environment for private business. The idea was that these policies would lead growth of the private sector, thus increasing demand for labor and thereby improving the welfare of the poor.

A second set of strategies focuses instead on providing what the poor need in order to increase their productivity. These investments in “human development” argued for directing health and education investments towards the poor, and providing social safety nets. Many of these strategies became popular in the 1990s as a reaction to the Washington Consensus. There were three kinds of critiques. One held that growth would not be achieved with market-reforms alone, because of the poverty trap. A second held that growth must in any event be combined with increased public investments, e.g. for health and education. A third, and more extreme position, held that growth per se would have adverse effects on the poorest of the poor. For example, the 1996 Human Development Report warned that in some cases growth can fail to create jobs, provide benefits and increased empowerment only to the rich, wreck cultural identities, and destroy the environment (UNDP, 1996).

Numerous studies have shown that growth does, in fact, tend to be good for the poor (Dollar and Kraay, 2002; Roemer and Gugerty, 1997; Gallup, Radelet and Warner, 1999). Yet growth may not be achievable for countries trapped in poverty, and growth may not be sufficient to enable the poorest of the poor to meet their basic needs. The emerging consensus is that both economic growth and direct investments for the poor are necessary, both to break the poverty trap and to provide vital public goods. International institutions are paying more attention than before to the possibility of poverty traps, and to the non-income dimensions of extreme poverty (e.g. health and education). Five of the eight Millennium Development Goals (the world’s time-bound and quantified targets for addressing extreme poverty) are about promoting health and education, and individual countries are giving more priority to these broader measures than ever before.

Human Rights approaches

Another dimension of the fight against extreme poverty is referred to as the rights-based approach. The guarantee that all people can live in dignity and meet their basic needs is also a basic human right—the right of each person on the planet to health, education, shelter and security as pledged in the Universal Declaration of Human Rights and various UN covenants, treaties, and inter-governmental documents (such as the UN Millennium Declaration). The human rights approach seeks to use national and international human rights accountability mechanisms to monitor action on behalf of a human right rather than a development target. Economic evaluations often measure whether a given policy action contributes to reaching a target. Conceived in terms of rights, the same evaluation would measure not only those reached by a given action—but several other considerations as well: (1) the numbers not being reached; (2) the empowerment of the poor to achieve their rights; (3) the protection of these rights in legislation; and so forth. To date, there has been insufficient effort to integrate development planning with a human rights framework, even though such integration has tremendous potential and relevance.

UN Decades of Development

Since the creation of the United Nations, the international system has been working to reduce poverty around the world, but often with results that feel short of laudable rhetoric. In January 1961, the United Nations resolved that the decade of the 1960s would be the Decade of Development. President Kennedy launched the Decade at the UN in New York. Earlier, in his inaugural address as President, he had signaled a new sense of purpose in international affairs. He declared: "To those peoples in the huts and villages of half the globe struggling to break the bonds of mass misery, we pledge our best efforts to help them help themselves." The second Development Decade resolved to emphasize measures deliberately targeted at the poor -- to help them meet their basic needs for food, water, housing, health and education. The UN held a series of international conferences: on environment (Stockholm, 1972); population (Bucharest, 1974); food (Rome, 1974); women (Mexico City, 1975); human settlements (Vancouver, 1976); employment (Geneva, 1976); water (Mar del Plata, 1977); and desertification (Nairobi, 1977). In 1978, the governments of the world came together to sign the Alma Ata Declaration that promised "Health for All by 2000", a promise the world failed miserably in delivering. The 1980s – the third Development Decade – were very difficult for developing countries as they suffered from a world-wide recession that hit the developing world and debtor countries with special force. Nevertheless, important improvements were made in some areas, such as nutrition, access to safe drinking water, and reductions in child mortality. One result was the international conference held in 1990 under the auspices of UNDP, UNESCO, UNICEF and the World Bank in Jomtien (Thailand), which set the target of 'Education for All by the Year 2000', another goal not met.

The 1990s also became a decade in which the response of the UN system to the flagging development movement was to embark on a series of global conferences. The UN Conference on Environment and Development (Rio de Janeiro, 1992) was followed by conferences on nutrition (Rome, 1992); human rights (Vienna, 1993); population and development (Cairo, 1994); social development (Copenhagen, March 1995); women (Beijing, 1995), human settlements (Istanbul, 1996). The decade ended with the landmark Millennium Summit in 2000, which resulted in the Millennium Development Goals, and the Financing for Development Conference in Monterrey in 2002, where rich countries renewed their pledge to provide 0.7 percent of their GDP in foreign aid. Also relevant was the Brussels Programme of Action for the Least Developed Countries, which suggests that they require greatly increased official development assistance, since private capital flows will not finance needed public investments. The Programme outlines several priority areas for cooperation including human and institutional resource development, removing supply-side constraints and enhancing productive capacity, protecting the environment, and attaining food security and reducing malnutrition.

MDGs

The Millennium Development Goals are the most broadly supported, comprehensive, and specific poverty reduction targets the world has ever established, so their importance is manifold. For the international political system, they are the fulcrum on which development policy is currently based. For the billion-plus people living in extreme poverty, they represent the most important means to a productive life. Besides aiming to reduce the 1990 proportion of people in extreme poverty by half by 2015, the MDGs tackle poverty in its many dimensions—income poverty, hunger, disease, lack of adequate shelter, and exclusion—while promoting gender equality, education, and environmental sustainability. Thus, while supporting the need for economic growth, the MDGs emphasize that the growth needs to be pro-poor. In 2005, the UN Millennium Project presented Secretary-General Kofi Annan with "A Practical Plan to Achieve the Millennium Development Goals,” which outlined specific interventions to address the multiple causes of poverty traps in poor countries around the world. Moreover, they emphasized that foreign aid will be needed to finance the interventions that the poor countries cannot finance themselves. In the case of well-governed poor countries, the report recommended that foreign assistance should be scaled up immediately, significantly, and on a sustained basis, consistent with the promise of 0.7 percent of GNP as official development assistance.

Prospects


There are reasons to be optimistic about the elimination of extreme poverty on the planet. Economic development has lifted more than one hundred million people out of extreme poverty in the last decade, and the pace is probably accelerating in Asia. While the population of developing countries rose from about 4 billion people to about 5 billion, average per capita incomes rose by more than 21 percent. With 130 million fewer people in extreme poverty in 2001 than a decade before, the proportion of people living on less than $1 a day declined by 7 percentage points, from 28 to 21 percent.

Despite the good news, however, Africa remains mired in seemingly intractable extreme poverty. Africa faces difficult structural challenges (very high transport costs and small markets, low-productivity agriculture, very high disease burden, a history of adverse geopolitics, and slow diffusion of technology from abroad), but in countries where governments are committed, these challenges can be overcome if addressed through an intensive program that directly confronts them. Ending the poverty trap in Africa and meeting the MDGs will require a comprehensive strategy for public investment in conjunction with improved governance. The good news is that the amount of investment required, although out of reach of African governments alone, is within the amount already promised in foreign aid by the rich countries (UN Millennium Project, 2005).

One final point is that a sustained reduction in extreme poverty requires tackling long-term challenges that the human family faces, in particular environmental challenges. Raising the incomes of billions of people around the world is surely desirable. Nevertheless the increased income will come with increased demand for food, energy, and consumer goods which may push our planet’s already-stressed ecosystems beyond what they can support. As the world works towards eliminating extreme poverty, it must do so with a conscious plan to limit the environmental burden that humanity places on the planet. Moreover, in many cases, the environmental challenges (e.g. water stress) may prove to be the biggest barriers to poverty reduction even in the short term.


Bibliography


  • Barro, Robert, and Xavier Sala-i-Martin. Economic Growth. MIT Press. 1998.


  • Bhalla, Surjit. Imagine There’s No Country—Poverty, Inequality and Growth in the Era of Globalization. Washington, D.C.: Institute for International Economics, 2002.




  • Dollar, David and Art Kraay. “Growth is Good for the Poor.” Journal of Economic Growth 7, no.3, 2002.

  • Gallup, John, Steve Radelet and Andrew Warner. “Economic Growth and the Income of the Poor.” CAER Discussion Paper No. 36, Harvard Institute for International Development.


  • Roemer, Michael and Mary Kay Gugerty. “Does Economic Growth Reduce Poverty?” CAER Discussion Paper No. 5, Harvard Institute for International Development, 1997.





  • UNCTAD (United Nations Conference on Trade and Development). 2002. The Least Developed Countries Report 2002: Escaping the Poverty Trap. Geneva.




  • World Bank. 2004. World Development Indicators. Washington, D.C.

Resources


  • Gapminder: a Graphical presentation of development statistics