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Inter-country comparisons of poverty based on a capability approach: An empirical exercise1

Q-Squared Working Paper No. 28

Sanjay Reddy2, Sujata Visaria3, Muhammad Asali4

August 2006

SARPN acknowledges Q-squared as a source of this document: www.q-squared.ca
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Introduction

How should poverty be estimated? Amartya Sen has argued persuasively that poverty must be seen as the deprivation of basic capabilities rather than merely as lowness of incomes, which is the standard criterion of identification of poverty, where capabilities are the "substantive freedoms [a person] enjoys to lead the kind of life he or she has reason to value". Income is one instrument for attaining such substantive freedoms, but only one. Moreover, "the instrumental relation between low income and low capability is variable between different communities and even between different families and different individuals (the impact of income on capabilities is contingent and conditional)" [Sen 1999]. Sen has also pointed out that, more generally, all poverty assessment involves two component exercises: the identification of the poor (i.e. the determination of who is poor and to what extent) and the aggregation of this information to form a judgment concerning the extent of poverty in a society. A uniform identification criterion must be applied to all individuals if this exercise is to be meaningful. For example, we may define as poor all those whose money income falls below a certain level, or instead we might define as poor all those whose money income is below the level required to achieve some end (such as the attainment of basic capabilities, as Sen recommends). For an exercise of poverty assessment to be meaningful, it is necessary (although not sufficient) that it apply a single identification criterion to all individuals.

Efforts to assess poverty at the regional and global levels are as subject to this demand as are poverty assessments within the national context. Meaningful inter-country comparison and aggregation requires that a common identification criterion be applied in all countries. The predominant method in use at present for such comparison and aggregation is the money-metric approach. In this approach, the identification criterion used depends on an international poverty line (IPL) expressed in PPP dollars of a specific year and converted into poverty lines expressed in local currency units (and deemed equivalent to the IPL). Although it may appear that this approach establishes a uniform identification criterion, it may do so only in a hollow sense. As argued,by Reddy and Pogge (forthcoming), the PPP conversion factors used for this purpose do not reflect an invariant level of purchasing power over essential commodities. Therefore, existing $1 and $2 per day IPLs do not provide the uniform identification criterion that is required for the exercise of poverty assessment to be meaningful.

The money-metric IPL is inappropriate in another respect as well. A meaningful poverty line should reflect the cost of achieving basic human requirements. Although there can be reasonable disagreement about how to understand such requirements, there cannot plausibly be disagreement that a poverty line should reflect them. A poverty line is meaningful only if we can make the case that persons with incomes falling below the poverty line can be thought of as poor. Unfortunately, the IPL typically fails to reflect the cost of achieving basic human requirements, and hence a case along these lines cannot be made [See e.g. Reddy and Pogge (forthcoming)].

A fully meaningful approach to inter-country poverty comparison and aggregation would establish a poverty line for each country (or perhaps sub-national jurisdiction) corresponding to the minimum cost (in that country) of achieving a certain set of basic human requirements (or as we prefer to understand them, income-dependent elementary human capabilities) uniformly conceived across countries. The same elementary human capabilities would be used to define the poverty line in each country. The resulting poverty lines would embody a uniform identification criterion, which has the advantage of having the same meaningful interpretation in all countries. This approach would avoid using PPPs altogether, thus curing both problems with the IPL in one stroke. Conceptually, the capability-based alternative involves nothing more than the generalization of an approach that is already widely used and thought of as appropriate at the national level.

We implement such a capability-based approach to poverty assessment. We show that it is possible to use existing household survey data from three different countries (Nicaragua, Tanzania, and Vietnam) to define a uniform capability-based criterion for identifying the poor. We focus on the capability to be adequately nourished, as it is widely agreed that it is a relevant basic capability and is susceptible to operational use. We use this criterion to establish poverty lines that possess a common capability-based interpretation in all three countries and then estimate poverty in these countries. By definition, these estimates are comparable in the sense that they refer to the same (capability-based) concept of poverty in all three countries. We thus demonstrate that even with existing data sources (which have not been specifically designed with the purpose of supporting such comparisons), it is possible to implement a capability-based approach to global poverty estimation. The sense in which the approach to poverty assessment adopted here is capability-based is admittedly a limited one. It focuses on explicitly specifying a single capability (the ability to be adequately nourished) while making indirect allowance for other relevant capabilities. It also takes a rather restricted approach (based on food energy requirements) to the operationalization of that capability. Finally, no allowance is made for variations in the commodities required for achieving basic capabilities, as is ultimately required in a capability-based perspective. The approach pursued falls short of the `first best', but nevertheless, in our view, presents a superior alternative to the money-metric approach.

We contrast these poverty estimates that we obtain based on capability-based poverty lines with those based on the money-metric international poverty lines that are commonly used and show that our approach yields notably different results. We also examine how the use of capability-based poverty lines, instead of money-metric IPLs, affects cardinal and ordinal comparisons of poverty across countries and over time. Based on this exercise, we argue that there is no "quick-fix" with which to align the existing money-metric poverty lines with a capability-based concept of poverty – a simple increase or decrease in the money-metric IPL without a change in the PPPs used to convert the IPL into local currency units cannot bring about such alignment because the adjustment-required varies from country to country. A more comprehensive program of capability-based poverty line construction (and complementary survey design) offers the best way forward for inter-country poverty comparison and aggregation.

The poverty estimates produced here are not authoritative estimates of poverty in each country since the data sources and the methods of poverty line construction applied here are insufficiently refined to support the claim that the estimates are definitive. Our method of arriving at the poverty line is but one of several possible methods. Our primary aim is to construct a set of poverty lines that correspond to a uniform and meaningful criterion for identifying the poor in all the countries we study.

We have taken the methodology for poverty line construction used in the Vietnam 1993 LSMS survey as our starting point. We may infer from its adoption that the method was considered acceptable for measuring national poverty in Vietnam. This starting point is, to a degree, arbitrary. It represents one among many plasuible ways of constructing a nutritionally anchored poverty line [See e.g. Ravallion (1994)]. In order to achieve consistency in the methods used in poverty line construction, we apply this methodology of poverty-line construction to Tanzania and Nicaragua. Finally, we compare the resulting estimates with existing national poverty estimates for Tanzania and Nicaragua, and also with those from the money-metric IPL approach.

We find that the choice of approach matters a great deal. In comparing poverty estimates across countries and over time, the capability-based approach that we employ does, in some instances, give significantly different results than the money-metric approach. Both cardinal comparisons and (perhaps more surprisingly) ordinal rankings of poverty across countries are influenced by the approach used.

It is obvious that various enhancements can and should be undertaken to generate more fully adequate poverty assessments for each country (for example, through using household adult-equivalence scales). However, the desirability of undertaking such enhancements is common to all existing approaches to regional and global income poverty estimation.5 The aim of this study is to point the way to one kind of improvement that can be made when producing regional and global poverty estimates, without thereby implying that other improvements are not also desirable.

The rest of the paper is organized as follows. In the next section, we describe the conceptual content of the method that we apply and provide a diagrammatic exposition of our approach and methodology. In Section 4, we describe the methodology used in each country and the resulting poverty estimates. Section 5 discusses the implications of our analysis for inter-country poverty comparison and aggregation and presents our conclusions.


Footnotes:
  1. We are grateful to Carlos Sobrado of the World Bank, Emilian Karugendo of the National Bureau of Statistics of Tanzania, Patrick Ward of Oxford Policy Management, and the General Statistics Office of Vietnam for their help with household surveys for Nicaragua, Tanzania and Vietnam respectively. We thank Shaohua Chen for answering several questions about the World Bank's international poverty lines in these three countries. Howard Nye played a role in conceptualizing and implementing this project at an early stage. The Bureau of Development Policy and the International Poverty Center of the United Nations Development Programme provided essential support. We thank Terry McKinley for facilitating this support. We are grateful to Camelia Minoiu, Nanak Kakwani, Terry McKinley, participants of the international conference on the "many dimensions of poverty" held by the UNDP International Poverty Center, and participants in a workshop on capabilities and well-being evaluation held at the University of California at Riverside for helpful comments. Future revisions of this paper will be made available on www.columbia.edu/~sr793/intercountry.pdf
  2. For example, existing global poverty estimates based on money-metric IPLs produced by the World Bank and others have not employed household equivalent scales.


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