How do we define poverty?

Every country has people living in poverty. Here we will distinguish between people living in extreme poverty, moderate poverty, and relative poverty¹ . A person in relative poverty has consistent access to the basic necessities of life, while those in extreme or moderate poverty do not.

Extreme Poverty

People in extreme poverty are the poorest people in the world. They have a total income that is calculated to be less than around $1 United States Dollars (USD) per day² . The actual meaning of this number and term is that these are people who can at best barely meet their minimal needs for survival. These people often have the ability to feed themselves minimally and have some chance of surviving from year to year. This is termed subsistence living. Those people that earn more than $1 a day are generally able to meet their basic needs and are considered to be in moderate poverty, not extreme poverty.

Why one dollar per day?

$1 per day was the approximate economic value needed to acquire the necessities of life, as calculated by the World Bank. The $1 per day figure has been re-analyzed recently by the World Bank and they have refined it to $1.25 in 2005 dollars³ .

Constant danger

A person in extreme poverty is far more likely to die of exposure, starvation, disease or violence than their relatively or moderately impoverished counterparts. Their survival even year-to-year is uncertain. A crisis, such as illness, crop failure, or inclement weather poses a serious threat to a person in extreme poverty.

Poverty trap

If a region is caught in extreme poverty, they generally cannot climb without help up to the bottom rung of the ladder of economic development. The vast majority of regional resources are tied up providing for basic human needs. Only very small amounts of money are available for other pursuits such as policing, health care, and running a functional government that can deal with regional disputes, border conflicts, etc. For more information, see our post on what keeps communities trapped in extreme poverty.

There are a number of myths about poverty that are useful to read about. Also, there are a number of societal issues that can hamper development.

Require external help

Since they are caught in the poverty trap, these regions generally require external investment to help them reach the bottom of the ladder. These investments can come in the form of official development assistance, charitable donations, direct foreign development or ownership of productive assets (mines, farms, factories), or loans, such as micro-finance.

Some groups in the world have experimented with the creation of micro-finance systems. These systems use a basis of external investment to run banks in the poverty-stricken areas of the world. Some of these micro-finance systems have been very successful, despite a chronic lack of funding from the developed world⁴ .

Extreme urban poverty

Extreme poverty is not limited to rural areas. There are cities in the world that have large numbers of people living in extreme poverty. In these cases, people are often fleeing unproductive rural farmland. They come to the city hoping for opportunity and wealth. Sometimes all they find is a large number of people trying to do the same thing as they are. When poor urban populations suddenly swell, it introduces tremendous stresses on the local infrastructure. Food, clean water, and warmth can become very difficult to come by.

Cities in general have greater available resources than rural areas, but they also have the accumulated effects of human dwelling. Many possible sources of water will be polluted by human use, leading them to be undrinkable. Poorly built shanties and homes can be serious fire hazards in the case of a dry spell. Addressing urban extreme poverty requires similar efforts to those employed for rural poverty, but with several additional advantages and disadvantages. Urban infrastructure can serve more people for less money than equivalent investments in rural areas. However, this same infrastructure is also under tremendous strain when thousands of people are looking for ways to survive.

Moderate Poverty

The lives of the moderately impoverished are in less danger than those in extreme poverty. People in moderate poverty generally have access to the basic necessities of life, but they do not have much if any disposable income beyond that. They generally lack the wealth to educate their children, save for their future, and invest in improving their infrastructure. Moderate poverty may not be marked by a constant struggle for survival, but it is nonetheless a state in which it is very difficult for society or individuals to progress.

The World Bank has been using the figure of $2 USD per day to define moderate poverty. People whose income is below $2 per day, but above $1 per day, are considered to be in moderate poverty. Incomes above $2 per day may still be in relative poverty. We will discuss relative poverty in the next section. Interesting note: If Vision of Earth were a person, it would be crossing into the realm of moderate poverty as of October 2010 in terms of dollars-per-day earned. Suffice to say that it is not the pursuit of money that is driving our efforts to conduct research and contribute to our society. 🙂

Relative Poverty

Relative poverty is defined in comparison with other people in the area. In an affluent country like Canada, the ‘low income cut off’ is used to estimate the prevalence of relative poverty. This Canadian number can be estimated as about half of the median income for the region.

People living in relative poverty can still lead decent lives. This depends on the effectiveness of the infrastructure in the area that they live. For instance, in Canada we have publicly funded health care that is quite effective per dollar invested by taxpayers. It is thus possible for a person to access effective health care here for very low (or zero) cost. Charitable organizations such as a food banks are often very effective at delivering the basic needs of life to people in need who live in developed countries.

Living in a wealthy city can also make it relatively easy to meet one’s minimal needs. Homeless people in affluent nations often successfully beg enough money to meet their basic needs and use public facilities such as restrooms since they often have no alternative. A relatively impoverished person does not have the income required to access much recreation, entertainment, or education, if any at all. It is also true that their social mobility is limited. That is, a person born into relative poverty may have some difficulty climbing out of this state. Areas that have very high-paying but low-skill jobs such as Alberta, Canada, are places that make it very easy for the relatively poor to earn their way quickly into being above average wage earners. This is the exception rather than the rule however. Generally it is the case that in order to be hired at a high-paying job, one either has to be skilled, be working in a remote area, to ‘know a guy’, or be working at a relatively dangerous job.

Measuring Poverty

While we have mentioned a number of the qualitative hallmarks of poverty, it is also important to develop quantitative tools and metrics to study poverty and develop anti-poverty strategies. As previously mentioned, the World Bank uses the value of $1.25 USD in 2005 as the threshold between extreme and moderate poverty. Relative poverty is often defined as having income below a certain amount per adult or child in a household, as compared to the societal average. These values see a wide regional variations, largely due to differences in local costs for services and rent or differing definitions on what it means to be poor.

In developed nations those in poverty can be divided into the homeless and the working poor, who have jobs and likely homes of some kind, but live below their local ‘poverty line’. Here is an example chart for Canada in 2006. These numbers are for ‘low income cut off’, which is often used as a measure of poverty in Canada, despite Statistics Canada not originally intending that it be used as such. Housing and rental price changes are very strongly related with the measures of relative poverty in rich nations. This is because for a poor person or family, their housing is generally most of their month-to-month expense. There are some problems with setting a definite value for the poverty threshold⁵ . Firstly the negative effects of poverty tend to be continuous rather than discrete. That is, someone earning just above the poverty threshold might be no better off than someone just below the threshold. Secondly, the same low income can affect different people in different ways. Different people have different lifestyles, accumulated debts, social support, and practical skill sets.

Defining a specific income level for poverty in the developed world is thus a complicated task. Statisticians and social scientists rely on averages that will provide some meaningful data on the quality of life of people with various income levels. These averages may wipe away some of the personal details of poverty, but they do give us something with which we can measure our progress as a society.

Alleviating Poverty

It is important to note that the methods for helping people achieve a higher standard of living are different depending on which form of poverty they are suffering from. What works for fixing extreme poverty is generally basic infrastructure investment combined with additional spending on education, innovation, health care, and governance. However, for people in relative poverty, these systems generally already exist. Investment needs to be in different areas. In the case of moderate poverty, some of the basic infrastructure exists, but is of low quality or availability.

Solutions tailored to the case at hand are always necessary for the effective development of wealth. This post is the first of our articles on the subject of Ending Poverty. This entire effort was inspired by the excellent book on the subject by Jeffrey Sachs. This is a highly recommended read to anyone who is interested in humanitarian efforts.

1. Jeffrey Sachs. The End Of Poverty. Excerpt available from Google Books. [↩]
2. Estimates given by the World Bank. Poverty Analysis. World Bank. [↩]
3. Dollar a Day Revisted, World Bank Econ Rev (2009) 23 (2): 163-184. [↩]
4. One of the major groups doing this sort of work is Kiva Micro-finance. Make a difference today by donating to them. [↩]
5. Wikipedia article for poverty threshold [↩]