What Is Poverty? - Poverty Lines And The Dollar-a-day Standard

A poverty line is a level of income below which a person cannot afford the bare minimum to exist: an amount of food sufficient to fuel the human body, clothing appropriate to a person's living and working conditions, and suitable shelter to protect from the elements. Governments determine their countries' poverty lines by calculating the annual average cost of basic necessities for an adult to function. Because these costs differ substantially across countries, it is impossible to set a single international poverty line. Additionally, measurements of poverty depend in part on household surveys that are issued and analyzed by government agencies. According to Don Sillers of the U.S. Agency for International Development (USAID), many governments fail to take poverty surveys regularly and use inadequate survey methodologies, and there can be problems with the way the data are analyzed and presented ("National and International Poverty Lines: An Overview," 2005, http://www.povertytools.org/Project_Documents/Poverty_lines___An_Overview_1_4_06.pdf). Therefore, in order to measure poverty at the international level, the World Bank developed the dollar-a-day standard in 1990, which assumes an income for those living in "extreme poverty" of $370 per year, or about a dollar per day.

National Poverty Lines

According to Sillers, national poverty lines are defined by "identifying a minimally acceptable diet," meaning the most basic number of calories on which the human body can function. Once that number is determined, analysts calculate the cost of obtaining this minimum amount of food at the current market price. The cost of necessary items other than food is then added to the equation, the total of which forms the poverty line.

However, as Sillers pointed out, several factors complicate measurements using poverty lines. It is difficult to compare poverty in different nations because wealthy, middle-income, and low-income countries have varying notions of what percentage of income is or should be spent on food and nonfood items. Also, what constitutes an "adequate diet" is a subject of debate. People living in poor countries tend to exist on a much less varied diet than those living in richer countries, where a reliance on more expensive prepackaged food is usually assumed.

The second problem with measurements using poverty lines is that countries may estimate two separate lines, one for urban and one for rural households, which may skew measurements because of assumptions about how much each group spends on necessities. Other problems include disparities that result from countries basing their household surveys on income rather than on expenditures (income—how much people make—is considered more difficult to measure than expenditures—how much people spend), and adjustments for price changes are not always correctly applied to poverty lines, causing them to drift over time, which makes it more difficult to track changes in poverty.

One Dollar per Day

The international dollar-per-day poverty standard was developed by the World Bank for its 1990 World Development Report in order to provide a single global measurement. To account for exchange rates and differences in prices and gross domestic product (GDP), the World Bank had to set a level that would be relevant in underdeveloped, developing, and developed countries despite immense differences in the meaning of poverty around the world.

Generally speaking, earning a dollar per day or less means that a person in any country is living in "extreme poverty," which means that that person cannot afford to buy even the most basic human necessities. However, "one dollar a day" is not a literal amount of money. Rather, it means a dollar a day at purchasing power parity in 1985 prices. Purchasing power parity (PPP) is a way to measure the value of currency that allows economists and poverty researchers to compare the standards of living in different countries while accounting for differences in both wages and costs of living. In general, PPP refers to the goods and services that a currency has the power to buy, typically expressed as a "basket" or "bundle" of necessary items. PPP measures how much the same basket or bundle of goods and services costs around the world; allowing for exchange rates, the PPP number in each country should allow people to purchase the same basket of goods and services that a U.S. dollar can purchase in the United States. As with absolute poverty (see above), critics of PPP point out that one problem with the measure lies in the notion of what is and is not a necessity: a product or service considered a staple in one culture may be a luxury in others. Nevertheless, most researchers agree that purchasing power parity is, to date, the best way to examine poverty at the global level.

Because the dollar-a-day standard was conceived in 1990, currency values of 1985 were used as a baseline. By 1993 the value of the U.S. dollar had changed, so that "one dollar a day" was actually equal to $1.08 per day. Nevertheless, the term "dollar a day" is still used because it is simpler and easier to remember. To measure "poverty"—as distinguished from "extreme poverty"—the World Bank uses a two-dollars-per-day standard, meaning that anyone earning less than two dollars per day is living in poverty. In this measurement the concept of purchasing power parity is the same, but the two-dollars-per-day standard allows researchers to study the poor in slightly less impoverished countries while still using the PPP standard.