Putting a price tag on poverty

September 4, 2008

Tanim Ahmed*, NewAge, September 4, 2008. Dhaka, Bangladesh

Poverty is not merely a bundle of economic goods with price tags upon them. It is not merely so much rice, so many pencils or paracetamol. It arises out of the lack of one’s ability to effectively participate in social life or the lack of one’s voice in political representation. It arises from one’s sense of insecurity. It arises from the desperation and frustration of not being able to provide for one’s children. It arises from the sense that one is deprived of the opportunities to live a better, or in this case, a more human life.


Photo: NewAge

TO BEGIN with an oversimplified example, let us assume that human well-being is measured by their ability to pay for haircuts – the more haircuts one is able to pay for the better off one is. A haircut would cost around $10 in New York and about Tk 20 in Dhaka. It would mean that two persons with the same earning, for instance $10 or Tk 700 per day, would have distinctly different purchasing powers. One would be able to pay for one haircut while the other 35. Since haircuts are the basis of well-being, the Bangladeshi would be 35 times better off than the American. Needless to say, it does not work out that way.

Well-being does not depend on the number of haircuts but a host of other more essential services and commodities. Services, as one would find in the case of haircuts, boot polishing or plumbing, are comparatively far costlier in developed countries than they are in poor countries like Bangladesh, especially when compared to the proportional differences in prices of other commodities like food and clothing. In other words, between rich and poor countries, prices of commodities vary less than those of services, i.e. purchasing power would not vary as much in case of those commodities as it would for services in the United States and Bangladesh.

Before even going into the latest poverty figures released by the World Bank on August 26 and what it implies, one must first question the benchmark for poverty expressed in purchasing capacity called Purchasing Power Parity. The much popular ‘dollar a day’ was expressed in this purchasing capacity terms across the world and meant to be equivalent to the purchasing capacity of $1 in the United States – the base country – in 1985, changed to $1.03 in 1993 and, according to the latest study, $1.25 in 2005. The question is what the equivalent of $1.25 in takas meant to purchase.

The bundle of choice for households or individuals in dire poverty would be distinctly different from those better off. The poor spend a high proportion of their income on basic needs whereas those better off spend a lesser proportion on such items with a substantial portion of their incomes purchasing services. But such benchmarks are derived from national accounts and a more general pattern of consumption in different countries. There are two obvious problems here. Even in Bangladesh’s case, although services contribute about half the GDP consumption pattern of individuals or households living in poverty would hardly reflect such a trend. Secondly, the poor buy commodities in much small quantities that would naturally mean that they end up paying more in the long run – buying a few hundred milligrams of cooking oil instead of a five-litre pack for instance.

Another recent study by the Asian Development Bank strives to capture that precise difference attempting to arrive at a more balanced poverty benchmark for Asia. It shows that the bottom 30 per cent of the Bangladeshi population spend 65.6 per cent of their household expenditure on food and drink while the average household spends just over half. In purchase power terms $1 dollar translates into about Tk 14 according to general consumption patterns but it is about Tk 25 according to household consumption patters. What it means is that the poverty benchmark translates into a higher purchasing power when considered on the basis of general consumption but far lower when considered on the basis of household consumption. When Tk 14 is considered equivalent to the ‘dollar a day’ benchmark, it means that an individual would be able to procure enough commodities and services to escape poverty spending Tk 14 every day. In the other case it would mean that the individual requirement to escape poverty would be Tk 25.

The two figures could make substantial difference as regards the number and percentage of poor people in Bangladesh and challenge the government’s claimed progress in poverty reduction, especially in the context of Millennium Development Goals. It is not that attainment of these UN development goals would mean substantial improvement in the economic system that inherently breeds poverty, but the new statistics and benchmarks would certainly cause governments to revise their statistics and review their supposed progress based on this new information.

A new working paper from the World Bank, ‘The Developing World Is Poorer Than We Thought, But No Less Successful in the Fight against Poverty’, by two of its economists, Shaohua Chen and Martin Ravallion, revised the previous poverty benchmark to the equivalent of $1.25 in 2005 in the United States, instead of the $1.03 in 1993. This revision saw the number of poor people increase from about 879 million, as reported by the World Bank earlier, to almost 1.4 billion. That is a difference of over half a billion people living in extreme poverty.

As other estimates and analyses point out, revision of these benchmarks by small margins result in huge differences in the numbers and as Sanjay Reddy, an assistant professor of economics at Columbia University in the United States, points out, such a difference in result with slight changes in the benchmark would render the benchmark itself ‘unfit for use’ in most cases pertaining to economic statistics. According to analyses, if the benchmark is revised upwards to $1.45 in 2005, which is closer to $1.03 in 1993 in terms of prices, then the number of poor increases to 1.72 billion. If the year 2005, on the other hand, is taken back to 2003, the developing world’s poverty reduction rate shows substantial deterioration so as not to favour the claim made in the World Bank paper.

Then, of course, there is the factor of China and India that skews the overall poverty figures substantially and make allowances for the claim of having attained substantial poverty reduction, although sub-Saharan Africa’s number of poor have increased by all estimates. The Asian Development Bank’s set the poverty benchmark at an equivalent of $1.35 in 2005 in purchasing power, which according to the Key Indictors of the Asia and the Pacific 2008 is Tk 22.64 in 2005.

The general contention of most critical analyses regarding the World Bank’s poverty estimates is that it undercounts poverty and thereby projects a rosier picture of poverty. Critics, therefore, make the claim that poverty estimates should be made in a more inclusive manner taking into consideration a wider variety of data to make it more robust and acceptable.

Another point that must be made is that the global context has gone through significant transformation in the past two years with fuel and food prices rising phenomenally and inflation increasing markedly. During this time currencies have seen their purchasing power decrease and cost of living rise. In the case of Bangladesh, these months have also seen a perceptible increase in employment that could only mean further decrease of real wages.

Regardless of all the analyses and estimates and regardless of the robustness of whatever estimates are employed to ascertain poverty around the world, these estimates would necessarily concentrate on the precision of a certain bundle that should allow one to escape poverty. The central debate then would revolve around the precision of that bundle and its market price and how best to translate that value into a globally acceptable unit such as the purchasing power parity. The value of PPP dollars then would require further revision. However, this bundle would typically include ‘needs’ or ‘necessities’ that are tradable in the market; items that have a price tag to be more precise. Thus, it would include food, shelter, clothing, medicine and books but not such things as security or happiness or leisure, which should be considered as crucial when ascertaining even dire poverty.

The very proposition that an individual’s degree of happiness be included as a factor for assessing dire poverty might well be summarily dismissed considering that it is a luxury that not even the rich might claim to have. Let us consider the advertisement of a Bangladeshi mobile operator that captured the imagination of many. In ‘din bodlaise’ – roughly meaning ‘times have changed’ in English – the young boy in monochrome grows up to inherit the livelihood of his forefathers who were fishermen, but does not have to sell his catch to the parasitic middleman and therefore is ostensibly better off.

That young boy in monochrome had wanted to visit the fair and by evening, after his father had sold the entire catch for a paltry sum, realised that it was not to be. The look on his father’s face told him a visit to the fair was out of the question. It appears he tears himself away from the fireworks that shoot off the fairgrounds as night settles and his father tugs his hand. In the next generation that young boy, now a man, having sold his catch for a good price, takes up his young son – who has stood first in his class by the way – in his arms declaring that they would visit the fair that evening.

Poverty is not merely a bundle of economic goods with price tags upon them. It is not merely so much rice, so many pencils or paracetamol. It arises out of the lack of one’s ability to effectively participate in social life or the lack of one’s voice in political representation. It arises from one’s sense of insecurity. It arises from the desperation and frustration of not being able to provide for one’s children. It arises from the sense that one is deprived of the opportunities to live a better, or in this case, a more human life.

Agencies and organisation such as the World Bank and Asian Development Bank will continue with their exercise to attain a better estimate for poverty and demonstrate how the market works to alleviate their poverty, if only to vindicate their work and justify their existence. Critics would dissect their methodology to prove them wrong. But that entire exercise is limited to putting a price tag on poverty. However, the question for governments must be one of principle – how they regard poverty. As an institution that serves the citizens and must look towards the welfare of the common people, attainment of a price tag must not suffice.

*Tanim Ahmed: tanimahmed@gmail.com