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JOURNAL OF SCIENCE OF HNUE Social Sci., 2016, Vol. 61, No. 12, pp. 134-141 This paper is available online at http://stdb.hnue.edu.vn DOI: 10.18173/2354-1067.2016-0114 AN OVERVIEW OF THE MONETARY APPROACH TO POVERTY Nguyen Tuong Huy Faculty of Geography, Hanoi National University of Education Abstract. Poverty definition and measurement have important implications for formulating and testing hypotheses on the nature and causes of poverty. This paper reviews the relevant literature on the monetary approach that has long and widely been used to identify and measure poverty. According to this approach, a household is considered as poor if their income or expenditure is lower than the value of given poverty lines that are the absolute poverty line, the relative poverty line and the subjective poverty line. To assess poverty quantitatively, the poverty line needs to be determine before obtaining data on household’s income and expenditure. Although the monetary approach has significant methodological advantages in terms of poverty measurement, it has been criticized for its shortcomings. While the approach focuses on income, it fails to capture the important roles of public goods and services as well as self-production in fulfilling the individuals/households’ needs. The emphasis on the household as an analytical unit leads to problems of heterogeneous sizes and compositions. The approach also disregards social factors that are important in determining households’ well-being. Keywords: Poverty, inequality, income, expenditure, poverty line. 1. Introduction In spite of methodological advances in the analysis of poverty over the last four decades, a number of conceptual and measurement issues still remain to be further clarified. These include whether poverty is understood as a shortage of income or multidimensional deprivation, as an absolute or relative deprivation and whether poverty should be defined by experts and outsiders or by the poor themselves. Laderchi et al. assert that clarification of how poverty is defined is important as different definitions imply the use of different indicators for measurement, which may lead to the identification of different individuals and groups as poor and require different policies for poverty reduction [7]. Thus, poverty definition and measurement have important implications for formulating and testing hypotheses on the nature and causes of poverty. This paper reviews the relevant literature on monetary approach to poverty. The paper starts by introducing Received date: 21/5/2016, Published date:29/10/2016 Contact: Nguyen Tuong Huy, e-mail: huynguyen.hnue@gmail.com 134 An overview of the monetary approach to poverty shortly the monetary approach and then outlines briefly three different poverty lines before discussing some common issues regarding the approach. The final section of the paper draws some conclusions advancing methodological implications for those who are dealing with poverty-related studies. 2. 2.1. Content The monetary approach and its poverty lines 2.1.1. The monetary approach The monetary approach has long and widely been used to identify and measure poverty. Though originated by Rowntree’s classic studies of poverty in the late nineteenth and early twentieth century, the monetary approach is still widely used in attempts to assess poverty quantitatively [19]. According to this approach, a household is identified as poor if they earn or spend less than the value of some given poverty lines [7, 10]. The poverty line is a standard concept, since it is regarded as the aggregate value of all the goods and services considered essential to fulfill the household’s fundamental needs. Therefore, to identify and measure poverty, this approach requests the determination of the poverty line before obtaining data on household’s income and/or expenditure [7,10]. 2.1.2. The poverty lines of the monetary approach Regarding measurement of poverty under the monetary approach, there are three basic types of poverty lines. They are the absolute poverty line, the relative poverty line and the subjective poverty line. The first two poverty lines can be categorised as the objective poverty lines in relation to the last poverty line [10]. a. The absolute poverty line Absolute poverty line represents the cost of purchasing a basket of important items that allows people to satisfy the absolute thresholds of fulfilling certain fundamental needs [10]. The World Bank formulates a concept of absolute poverty line that an . . . [absolute] poverty line can be thought of as comprising two elements: the expenditure necessary to buy a minimum level of nutrition and other basic necessities and a further amount that varies from country to country, reflecting the cost of participating in the everyday life of the society [18;26]. Currently, there are two common poverty lines in wide use for assessing poverty, especially in developing countries: USD 1 per day for low-income countries and USD 2 per day for lower-middle-income countries. As used by the World Bank and sometimes the UNDP, these poverty lines are mainly used as indicators for international comparisons and global progress in poverty reduction, not for assessing poverty at the national level and for comparing poverty between regions within the country. Therefore, many countries have developed their own poverty lines reflecting different social, economic and geographical conditions that determine what is considered an acceptable minimum income or expenditure. These country or local-specific poverty lines are applied to analyse 135 Nguyen Tuong Huy poverty and to form policy and program at the country or local levels [19]. To measure poverty, the most widely utilized indicators are the headcount index, poverty gap index and squared poverty gap index. The headcount index (P0) is based on a poverty line or set of lines that are established by costing a minimum basket of essential goods for basic human survival, using income, consumption or expenditure data of non-poor households. The incidence of poverty is then calculated as the percentage of the population whose incomes or consumption levels fall below that threshold. The poverty gap index (P1) measures the depth of poverty - the degree to which the mean income of the poor differs from the established poverty line. Finally, the squared poverty gap index (P2) is used to capture severity of poverty reflecting differences in income levels among the poor [2,19]. b. The relative poverty line The practice of using relative poverty lines is based on the view that poverty should be assessed in relation to the standard of living of a specific society. According to this perception, poverty represents the inability to participate in the ordinary life of that society due to a lack of resources. Peter Townsend, a well-known proponent of the relative view of poverty, states that Individuals, families and groups in the population can be said to be in poverty when they lack the resources to obtain the type of diets, participate in the activities, and have the living conditions and amenities which are customary, or at least widely encouraged and approved, in the societies to which they belong. Their resources are so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns, customs and activities [16;15]. From this conceptual perspective, the relative poverty line is usually established as a proportion of the mean or median income or expenditure of the whole population [17]. It is not necessarily the case that absolute poverty lines are low and relative lines are high. An important distinction between absolute and relative poverty lines rests also on how their values change as the distribution changes [1]. While absolute poverty lines have dominated the practice of poverty measurement in developing countries, relative poverty lines are considered more relevant in several developed countries [9, 11]. In developed countries, the absolute notion of poverty is considered less pertinent for two basic reasons. First, the key challenge for these countries is to ensure that the whole population shares the benefits of high average prosperity, whereas less developed countries are aiming to reach basic standards of living. Second, what is regarded as minimal acceptable living standards depends largely on the general level of social and economic development, which tends to vary considerably across developed countries. c. The subjective poverty line The absolute and relative poverty lines are constructed by looking at income or expenditure objectively. In contrast, the subjective poverty approach considers that people’s perception of what constitutes the minimum necessary household budget is the 136 An overview of the monetary approach to poverty best standard of comparison for actual incomes or expenditures. In this approach, a survey of a representative sample of the population is carried out to judge the opinion of the population in order to define the poverty line [17]. In the measurement of poverty based on the subjective poverty approach, different methods have been designed to capture the population’s perception and to analyse the information gathered for deriving poverty lines. The best-known method for measuring subjective poverty is based on a minimum income question [5]. The second method, known as the Leyden poverty line, is based on an income evaluation question (ibid.). The third method, proposed by Pradhan and Ravalion [8], is based on a consumption question. They assume that individuals are able to qualitatively assess the degree of satisfaction provide by different levels of consumption and that assessments can be compared. Then Pradhan and Ravalion define the subjective poverty line as “the level of total spending above which respondents say (on average) that their expenditures are adequate for their needs” [8;464]. The data are collected by using only qualitative question. Households are asked whether the living standard of the family is “less than adequate”, “just adequate” or “more than adequate”. The same question is asked for other basic needs, such as food, housing, clothing, health care and schooling. 2.2. Merits and issues of the monetary approach 2.2.1. The approach’s major merits Monetary approach to poverty definition and measurement had and continue to have enduring popularity despite debates over the meaning of poverty moving beyond purely economic measures. It is argued this is due to the notion that economic measures are perceived as more objective and more amenable to quantification as they are tangible. In contrast, non-monetary measures are less so and rely on more tenuous and subjective proxies. In addition, it is noted that monetary data have the comparative advantage of being less expensive and faster to gather than non-monetary poverty data [14]. Furthermore, based on household income and expenditure surveys, the approach has become a useful tool for quantitative poverty analysis and policy discourse. Because it is based on nationally or locally representative samples, it allows inferences about the conditions and evolution of poverty at the different levels. Moreover, since household surveys collect information beyond monetary income or consumption, the approach makes it possible to obtain a broader picture of well-being and poverty, investigate the relationships among different dimensions of poverty, and test hypotheses on the likely impact of policy interventions [19]. 2.2.2. The approach’s major issues While the monetary approach continues to be important, it has been criticized for both theoretical and practical issues in relation to poverty concepts and measurement. Firstly, as mentioned earlier, the monetary approach views poverty simply as lack of income or consumption. Poverty happens when some persons in the society have low income that they cannot fulfill socially defined fundamental needs. However, whether or 137 Nguyen Tuong Huy not an individual actually does so can be influenced by a host of factors and lack of income is not the only kind of deprivation people may suffer [6]. Without a doubt, individuals can endure intense hardships in many aspects of life, beyond those defined as fundamental needs, regardless of possessing adequate income or commodities. Kakwani [4] argues that the command over commodities depends on the level of income. In theory, the possession and consumption of commodities and services provides people with the means to lead a better life. However, there is no guarantee that these people would actually allocate their incomes so as to purchase the basic needs bundle. This led Kakwani to conclude that “possession of commodities is only a means to an end” [4, 1]. Thus, the standard of living enjoyed by people must be assessed in terms of individual achievements that are feasible and not in terms of the means individuals possess to achieve them. In the words of Amartya Sen, “ultimately, the focus has to be on what we can or cannot do, can or cannot be” (cited in [4, 1]). For this reason, Amartya Sen has developed the idea of capabilities and functionings in his capability approach [12;13]. Another drawback of the monetary approach is that people meet their basic needs not only through monetary income but also through a variety of resources. These include subsistence production; access to common property resources and public services that cannot be purchased because markets do not exists, especially in developing countries [15]. Therefore, the use of income or its proxies, consumption and expenditure, as the indicator of well-being is inadequate as it is typically does not fully take into account such dimensions as subsistence production and the provision of public goods [7;15] Furthermore, the human’s well-being and what matters to them not only depend on their income or expenditure but also on other invisible aspects, for example dignity and self-respect [14]. From the empirical perspective, there are several issues of poverty measures based on income or consumption. First, although poverty is considered as a problem of an individual, income or consumption data are normally collected at the household level. The use of the household as the unit of analysis constitutes one of the weakness popular to identify the intra-household allotment of resources that makes it impossible to investigate poverty at the individual level [7, 19]. Another issue related to that unit of analysis is how it can be standardised by incorporating the differences in sizes and compositions of households into the measurement. Laderchi et al. argue that different demographic structures make households different both in terms of needs and in terms of ways in which those needs can be satisfied [7]. Moreover, there are several issues of contention on poverty lines. Poverty estimates based on a poverty line are highly sensitive to the construction of that line. Regarding the absolute poverty line, although it is conceptually defined as the expenditure necessary to buy a minimum level of nutrition and other basic necessities, the nutritional requirements are the most common basis for constructing an absolute poverty line [1;7]. However, variations in prices of items and basket weighting of component items, costs of living within a country, sizes and compositions of households, comparability and consistency of national household surveys and different consumption patterns make it impossible to construct a unique poverty line based on nutritional needs [7;14]. Another issue related 138 An overview of the monetary approach to poverty to the absolute poverty line is the headcount measure. Although, it is the most commonly calculated measure of poverty, it fails to reflect the fact that among poor people there may be wide differences in income levels, with some people located just below the poverty line and others experiencing poverty at a far greater distance from the thresholds. From a policy perspective, the headcount measure may lead policymakers to direct their poverty alleviation resources to those closest to the poverty line and therefore least poor [15;19]. As mentioned earlier, the attraction of the relative approach is that poverty can be assessed in relation to the standard of living of a specific society. However, it may also lead to paradoxical issues. Firstly, with rapid economic growth and constant inequality, absolute poverty may decrease dramatically as everybody’s living standard improves, but relative measures will show no change or even worsen, if the growth is unequally distributed. Conversely, if general living standards decline, relative poverty may register no change or even an improvement. Secondly, a relative definition makes eliminating, or even reducing, the incidence of poverty very difficult - or nearly impossible - according to the standard chosen. Furthermore, from a purely relative perspective, it is difficult to judge how successful an anti-poverty program is at the microeconomic level and to rank the relative merits of different strategies, since gains shared by all tend to be discounted [11]. Attempts to find a subjective basic for a poverty line also confront some challenges. Although a frequently cited advantage of the subjective approach to poverty measurement is that it is free from arbitrariness, the subjective poverty approach does not eliminate the need for the researcher to make certain arbitrary decisions, which may have a considerable impact on the results. One of these decisions is the wording of the subjective question that will be used as the way the questions are asked may change the responses significantly. Another crucial aspect is the difficulty of obtaining accurate answers from respondents. Kapteyn et al. indecate that “people in general only know approximately the level of their actual income” [5;230], and that they make systematic errors in estimating their own income. Moreover, variations in culture and needs make it impossible to compare subjective poverty over time and across societies. These suggests that subjective poverty is not inevitably an substitute to objective poverty, but relatively is supportive [10,17]. 3. Conclusion Despite the fact that the monetary approach has significant methodological advantages in terms of poverty measurement, this approach has been and continues to be modified in response to its shortcomings. While the approach focuses on the ability, showed by income, to satisfy different bundles of needs, it disregards social factors that are important in determining individual achievements in basic dimensions of human well-being. The approach also fails to capture the important roles of public goods and services as well as self-production in satisfying the individuals’ and households’ needs. The emphasis on the household as the unit of analysis leads to problems of heterogeneous sizes and compositions. Obviously, several efforts have been paid for constructing poverty lines based on the approach to identify the poor and non-poor. However, as Laderchi et al. stated, there has been no theory differentiating the poor from the non-poor [7]. The 139 Nguyen Tuong Huy monetary approach’s shortcomings should be, therefore, taken into account when one deals with poverty-related studies. REFERENCES [1] Foster, J. C., 1998. Absolute versus relative poverty. 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