Absolute and Relative Poverty

On a global scale, poverty is measured two ways: in absolute and relative terms. The focus of absolute poverty is the individual; the World Bank defines absolute poverty as having access to no more than $1.25 a day of purchasing parity power. Relative poverty measures the individual against a larger group; how much of a gap is there between those at the very bottom of the economic ladder and the rest of the cohort? Central to understanding the issue of poverty is a consideration of the solutions. The World Bank is the institution with the most responsibility for addressing global issues of poverty. Their economic philosophy has long been dominated by neoliberal thinkers who advocate for good government, based on Western style democracy, open markets and structural adjustments to the economy. As globalization has come to dominate the world economy, its effects on poverty are the subject of heated debate.

Keywords Inequality; Millennium Development Goals; Neoliberal economics; Poverty; Poverty threshold; Relative poverty; Structural Adjustment Programs; World Bank; Absolute poverty

Absolute & Relative Poverty

Overview

Poverty seems like a fairly simple, commonly understood concept, but in reality, it is not. When trying to understand the problems faced by those attempting to change the dynamics of poverty, there are three interrelated terms to consider: absolute poverty, relative poverty, and the poverty threshold. Absolute poverty is measured in individual terms; the primary focus is on those who cannot afford to meet the most basic needs of human existence. Relative poverty measures how people on the lowest rungs of the income ladder compare to the remainder of the population. The poverty threshold is a measurement of how much income is required in a given locale to meet the basics of a minimal standard of living. Adding to the complexity is the fact that not everyone agrees on which measure should be used when addressing the problems of poverty.

Two very different world views on the nature and cause of poverty are in conflict. Proponents of the absolute poverty model understand that "humans are individual beings by nature, that human individuality gives rise to organizing economic affairs on the principle of competition, which rests on the social value of individual freedom, and that holding that premise lead[s] them instinctively to embrace [the absolute] standard" (Unwin, 2007, p. 938). Those who emphasize the need to eliminate relative poverty instead see that "humans are social beings by nature, that human sociality gives rise to organizing economic affairs on the principles of cooperation which rests on the social value of teamwork or solidarity" (p. 938). Unwin suggests that people are both: individuals and social creatures. Thus, it is impossible to tackle poverty from just one or the other perspective.

Ravallion (2003) posits that the choice of focus between absolute or relative poverty as the unit of measurement is critical in forming a perception about the merits of globalization. Those who support a globalized economy tend to stress a reduction in absolute poverty while opponents look more to trends in relative poverty. If the poverty threshold is measured in proportion to mean income, it becomes a measure of inequality, and thus can show rising poverty levels even as the standard of living increases. Ravallion's position is that individual welfare can't be measured only by one's relative position and not at all one's income (2003). One additional factor that can help to form the perception of observers can be garnered by watching the reaction of once isolated people who now must deal with global forces to survive. Friedman argues that globalization can create a reactionary response from villagers, "rooted in the 'ancient forces of culture, geography, tradition and community' that fear the loss of identity" (in Merrett, 2001, p. 69).

Origins of the World Bank

The twin economic disasters of the Great Depression of the 1930's followed by World War II (1939 - 1945) led the economic powers of the day to meet at Bretton Woods, NH to create an institution that might help to stabilize the world's economy, and play a role in mitigating poverty. Out of that meeting emerged the World Bank in December of 1945. The philosophical underpinnings of the World Bank have often flowed from Washington, D.C.: "A core assumption is… that good governance, in the form of 'Western'-style liberal democracy, is essential if countries are to become economically successful" (Unwin, 2007, p. 933).

Understanding neoliberal economics is critical to grasping the philosophy that has driven development for decades, and though in retreat during the 1990's, still holds sway in the World Bank. If the goal is good government, the critical function of the newly improved government is to get out of the way of the markets, allowing them to “get the price right.” This is the central tenet of the "Washington Consensus" which grew out of the founding ideals of the World Bank (Oniz & Senses, 2005, p. 264). Inherent in a policy of a reduced role for the state is "the privatization of public enterprises and services, and government spending cuts to social services such as health care, education, social security and public housing" (Hale, 2007, pg. 149). These are referred to as Structural Adjustment Policies (SAPs); neoliberal economists see them as a necessary precursor to growth.

Further Insights

Eliminating Absolute Poverty

Jeffrey Sachs' work The End of Poverty focuses on how absolute poverty can be eliminated. Unwin strongly disagrees with his central premise, arguing that focusing on absolute poverty leads development programs to miss the more essential work on relative poverty. The U.N. Millennium Development Goals (MDG), agreed to in 2006 by leading members of the body, set targets for 2015 for dramatic declines in poverty "through interventions in education, health, gender inequality, environmental sustainability, and the creation of a new global partnership in which the private sector will have a particularly prominent role" (Unwin, 2007, p. 930). At the core is a belief that economic growth is the only path out of poverty; this is an understanding, according to Unwin, based in the need to eliminate absolute poverty, rather than reducing relative poverty.

Neoliberal Policies

Unwin's concern with economic growth is that most proponents are wedded to a neoliberal economic outlook, with an emphasis on the need for "macro-economic discipline, a market economy and an openness to the world" (2007, p. 930). Neoliberalism emerged in the 1970's, emphasizing the "primacy of individualism, market liberalism, outward-orientation, and state contraction" (Oniz & Senses, 2005, p. 263). Sachs played a significant role in the development of the goals set by the UN Millennium Project, serving as the head of the project. His message resonates with the economic elite of wealthy nations, for he argues that we can eliminate poverty without causing ourselves any great economic distress; indeed, we can do it while barely noticing the process unwind (Unwin, 2007).

Hale suggests that we must also be cognizant of another driver of the divide between the rich and poor; neoliberal SAPs have had a far more severe impact on women. The World Bank stipulates that "'targeting women can be an effective strategy for reducing poverty. Where gender differences are wide, targeting, for example, the availability of stipends so girls can attend school, may be needed to capture social gains and increase internal efficiency'" (Hale, 2007, p. 150). Tsikata and Kerrargue insist that the World Bank does "not accept that the economic policy framework is, in many instances, reinforcing existing inequalities" (cited in Hale, 2007, p. 149) that disadvantage women.

Petras and Veltmeyer (2007) use Latin America as a test case for neoliberal economic policies. These policies have dominated much of Latin America for the last two decades; two very distinct societies have resulted. In many Latin American cities, 15 - 20% of the population has a high end, developed-world lifestyle, complete with servants, private schools and clubs, gated communities and many opportunities for travel. Petras and Veltmeyer argue that this group is the sole beneficiary of the neoliberal agenda. The rest of the population faces cuts in social spending and food subsidies, often pushing rural farmers off of their land and into dangerous living conditions in the cities. Frequently, services that protect public health, such as water and sewer treatment also face cuts, or in many cases, privatization (2007).

Although Oniz & Senses (2005) tend to oppose the neoliberal prescription, they concede that it can work to alleviate poverty, pointing to South Korea and Taiwan as key examples. Within a non-protectionist, low statism model, both countries achieved employment expansion and poverty reduction. Post-Apartheid South Africa provides different view: a 2000 Poverty and Inequality Report found that two distinct countries co-exist within one. In the black South Africa, the Human Development Index (HDI) is comparable to Swaziland, while white South Africa's fits in-between Israel and Italy. Clearly, the poverty threshold will be complicated to generate in a country with such divergent standards of living (Adato, Carter & May, 2006). Further, it is obvious that the issue of alleviating poverty must still be addressed in South Africa, along with every other country in Africa.

Sachs lists eight critical causal agents of poverty; while his focus is Africa, their application is more universal. Poverty itself is the first; without income for investment, the economy stagnates. Physical geography can be a trap; because of the geography, some countries need to make extra infrastructure investments, but lack the resources to do this. Governments do not always provide the preconditions for investment, the most essential being peace and security. Cultural barriers interfere with economic development; a critical issue here is women's rights. Trade barriers can restrict development. Innovation is often missing, especially in inland areas. Finally, very poor countries are apt to have some of the highest fertility rates in the world (Unwin, 2007).

Adding to this more general list are factors more pertinent to Africa. Specifically, malaria, population density in the continent's interior, reliance on agriculture that is sustained through rain rather than irrigation, and soil that is badly depleted all complicate the situation. These factors are intractable enough that "good governance and economic reform are insufficient by themselves to enable growth in Africa" (Unwin, 2007, p. 933). Although Sachs often argues for policies that neoliberals support, he is adamant that there is not a causal link between democracy and economic growth.

The Impact of Disease

Farmer's central argument is that we have the economic and scientific resources to address many of the most common killers - AIDS, malaria, tuberculosis - yet "' the reach of science and of globalization has stopped short of bringing reasonable opportunity for survival within the grasp of the [most deprived]'" (cited in Ryan, 2008, p. 149). Farmer suggests that any analysis of needless death from illness be considered acts of 'structural violence'. He uses the term broadly, including an understanding of both absolute and relative poverty. Structural violence is a matter of ""power and connections' that can take the form of a 'lack of access to lifesaving medical resources'' (Ryan, 2008, p. 150).

Defining Absolute Poverty

The definition of absolute poverty is less than concrete. The World Bank uses a formula based on access to income of no more than $1.25 per day, measured at 'purchasing power parity'. Unwin takes issue with this concept since he sees a bias in the measure of parity in purchasing power as an indication that the US economy should be a model for the wider economy if we hope to eliminate extreme poverty. There seems to be widespread agreement that absolute poverty is decreasing; it is the rate of decrease that is contentious. Bhalla argues that rates of absolute poverty decreased so rapidly in the 1990s that the MDG of halving the 1990 'dollar per day' by 2015 was reached by 2000. The World Bank's estimates are less sanguine; they see the goal being reached by 2015 only if the rate of progress since 1990 is maintained (Ravallion, 2003).

The $1.25 a day goal itself is open for debate, with some seeing it as a measure of absolute poverty as one that is absurdly low, set to ensure that the number of poor will be artificially depressed; others, of course, argue the opposite (Ravallion, 2003). Petras and Veltmeyer (2007) suggest a disingenuous way that the goal of absolute poverty reduction is being achieved: through migrant remittances. They point out that although the absolute wealth of the family is increased, there is no way to measure the social cost of having a family member living in a foreign land for long periods of time.

Petras and Veltmeyer add another dimension to the debate; they reject the validity of using the $1.25 per day measurement as one that ignores social and historical context, and doesn't grapple with the very complex problem of measuring "living standards and poverty across societies with very different modes of production, types of societies and cultures - and radically different social definitions of basic needs and desirable conditions" (2007, p. 182). They go on to forcefully argue that the World Bank's focus on income (as difficult as that is to measure) is far too narrow when defining poverty. Instead, researchers must consider:

“… conditions that change over time, place and context such as seasonality and precarious employment practices; changes in the power of employers to fire and hire workers; the leverage of real estate speculators to displace and relocate the urban poor from their slums; the increase of livelihood-destroying cheap imports under reforms dictated by the new world economic order of capitalist development” (Petras & Veltmeyer, 2003, p. 183).

Defining Relative Poverty

There is a growing body of literature that rejects the validity of absolute poverty as a measurement all together, arguing instead that poverty is a relative notion (Unwin, 2007). The greatest poverty is found where there is the greatest difference in wealth levels. In richer countries, the poverty threshold is higher. There is also a key debate over how the poor perceive their own deprivation. Economists have long argued that people care only about what they, themselves can consume; however, a growing body of research demonstrates that relative deprivation is also critical to one's sense of wellbeing (Ravallion, 2003). When the population of a country is truly poor, "absolute consumption needs" are dominant (Ravallion, 2003, p. 745). As overall income increases, so does the standard of what is the minimum needed, so the poverty threshold increases as mean consumption goes up. Thus, Ravallion argues for a poverty threshold that is relative, rising with mean income, and shows an "empirical relationship between actual poverty lines and mean consumption across countries" (Ravallion, 2003, p. 745). Petras and Veltmeyer argue that using income alone is hardly adequate for measuring improvements in the standard of living. They cite Cuba as an example of a country with low income, but a relatively high standard of living; even the World Bank agrees that Cuba is outside of normal development standards (2007).

Inequality

Another dimension of the debate is the issue of relative and absolute inequality. Substantial research documents that open trade seems to increase incomes across the board at a relative level. For example, if one person made $1,000 and another $10,000, their new income levels, after a period of openness, might be $2,000 and $20,000. Relatively speaking, they are in the exact same place; advocates of globalization can take heart in the increase in absolute income. On the other hand, originally, there was a $9,000 wealth gap; through globalization, relative inequality has greatly increased, with the new wealth gap at $18,000. Opponents can accurately claim that the gap is growing. Clearly, the wealthier person gained substantially more from globalization (Ravallion, 2003).

Viewpoints

Has Globalization Increased Poverty?

There is a widespread perception that globalization of the economy has led to an increase in poverty, in both absolute and relative terms. Supporters of open trade argue the opposite, and both struggle to find neutral data to support their positions. The World Bank claims that in 1990, the number of people living in absolute poverty made a very modest decline (Ravallion, 2003). There is similar disagreement about the rates of relative poverty. Ravallion argues that this is due to methods and measurements that are not standardized, making any conclusions less than concrete. He suggests that a necessary first step is to agree on a definition of poverty and inequality. He writes that poverty is "about absolute levels of living - how many people cannot attain certain predetermined …needs." Inequality is about "disparities in levels of living - …how much more is held by rich people than by poor people" (Ravallion, 2003, p. 740). He also argues that confusion over the differences between absolute and relative poverty play a key role in clouding perceptions.

One further factor that is part of the debate over globalization is the question of measuring the amount of inequality within or between countries. Because the between-country measurement is weighted for population, the fact that India and China are both growing in population and in wealth has meant that this indicator shows a benefit to globalization. It was during a conversation with a CEO in India that Friedman coined his famous book title: "The World is Flat." The CEO had pointed out to him that "the playing field is being leveled," meaning that people from all over the world can compete in the information based economy that is the result of globalism (Abowitz, 2007, p. 472). Yet there is also evidence of rising inequality within countries, including China and India. Overall, while it is impossible to establish a trend in relative inequality, absolute inequality is "almost certainly rising all over" (Ravallion, 2003, pg. 743).

Tightly connected to the debate over the linkage between wealthy and poor nations is a broader question about the possibility of addressing the issue of relative poverty without significant asset reallocation. Oniz and Senses (2005) posit that growth alone can never provide significant poverty alleviation without also considering ownership structures. They see the need to challenge the "structures of power at the global level" if the World Bank is ever to become an institution capable of fulfilling its mission (Oniz & Senses, 2005, p. 265). Donor countries, most especially the United States, also garner a large share of the blame in Sachs' analysis of the persistence of world poverty. Aid packages fall short in magnitude, timing, and predictability (Unwin, 2007). He is even more forceful in his critique of U.S. policy, with its emphasis on military action "'rather than other approaches to international relations'" (cited in Unwin, 2007, p. 934). Sachs stresses that popular opposition to increased foreign aid levels must be countered by a careful explanation of its importance and potential benefits.

Unwin is convinced that it is not possible to address the root causes of absolute poverty without also attacking relative poverty. Essential to this issue is the question of responsibility: did rich nations have a role in creating the poverty found throughout the world, and if so, what is their responsibility for eliminating not just absolute poverty, but relative poverty as well? Although Sachs argues for increased foreign aid, he denies the connection:

“Many people assume that the rich have gotten rich because the poor have gotten poor. In other words, they assume that Europe and the United States used military force and political strength during and after the era of colonialism to extract wealth from the poorest regions, and thereby to grow rich. This interpretation of events would be plausible if gross world product had remained roughly constant, with a rising share going to the powerful regions and a declining share going to the poorer regions. However, this is not at all what happened” (cited in Unwin, 2007, p. 937).

Unwin sees the relationship between the rich and less developed countries as far more intertwined. Although he agrees that all economies can expand, he believes that it is still possible for the rich to create situations in poor locales where they can continue to expropriate resources and profits. Unwin sees this as critical to current economic growth models:

“Indeed, there is a strong argument that one of the key drivers for increasing total world product is very specifically through the deliberate exploitation of poor people in many parts of the world, by enforcing low labour rates, by creating unequal terms of trade, and by preventing them from engaging in the commercial economy” (2007, p. 937).

Conclusion

Understanding poverty at the global level is an immensely complex task. The problems of absolute and relative poverty are tightly intertwined. Only those most committed to neoliberal economic philosophy see the solution as a zero sum game; everyone else believes that the only solution lies in resource reallocation to some degree. There is no consensus on which side of the equation should be tackled first: absolute or relative poverty. The only agreement seems to be that the issue of poverty is a critical one. Its impact goes far beyond just those who are actually poor, and thus it is in the interest of all humankind to work toward a solution.

Terms & Concepts

Absolute Poverty: The World Bank contends that people who live on less than the purchasing parity power of $1 per day live in absolute poverty.

Human Development Index: A survey of factors such as literacy, infant mortality, and access to clean water that is used by the United Nations and other institutions when comparing countries.

Inequality: Concerns "disparities in levels of living - …how much more is held by rich people than by poor people" (Ravallion, 2003, p. 740).

Neoliberal Economics: A belief that Western style democracy, combined with free markets and an open trade policy will lead to economic prosperity (Unwin, 2007).

Poverty: is "about absolute levels of living - how many people cannot attain certain predetermined …needs" (Ravallion, 2003, p. 740).

Poverty Threshold: A measure of the bare minimum necessary to live at a basic standard of living within a given population, which varies based on local conditions.

Purchasing Parity Power: Regardless of the currency, the determination of purchasing power is based on how much can be purchased if the local currency was exchanged into US dollars.

Relative Poverty: Measures poverty based on a poverty threshold that varies with the mean income of some relevant reference group.

Structural Violence: Violence that is broadly defined to include a range of offenses against human dignity: "extreme and relative poverty, social inequalities ranging from racism to gender inequality, and the more spectacular forms of violence that are uncontestedly human rights abuses" (Ryan, 2008, p. 150).

Structural Adjustment Programs (SAPs): As envisioned by neoliberal thinkers, governments should adjust their economies by cutting social, health, and educational programs and by privatizing natural resources and services in order to allow the markets to set prices for goods and services.

U.N. Millennium Development Goals (MDG): Agreed to in 2006 by leading members of the body, sets targets for 2015 for dramatic declines in poverty "through interventions in education, health, gender inequality, environmental sustainability, and the creation of a new global partnership in which the private sector will have a particularly prominent role" (Unwin, 2007, p. 930).

World Bank: Founded in 1945 out of the Bretton Woods Conference, its purpose is to help developing countries build the infrastructure necessary to reduce poverty.

Bibliography

Adato, M., Carter, M., & May, J. (2006). Exploring poverty traps and social exclusion in South Africa using qualitative and quantitative data. Journal of Development Studies, 42 , 226-247. Retrieved September 12, 2008, from EBSCO online database, Academic Search Premier http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=19374250&site=ehost-live

Bryant, T. (2013). The politics of poverty: Shifting the policy discourse. Social Alternatives, 32, 44–48. Retrieved November 1, 2013 from EBSCO online database, SocINDEX with Full Text. http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=89863371&site=ehost-live

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Jo, Y. (2013). Psycho-social dimensions of poverty: When poverty becomes shameful. Critical Social Policy, 33, 514–531. Retrieved November 1, 2013 from EBSCO online database, SocINDEX with Full Text. http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=89409941&site=ehost-live

Merrett, C. (2001). Understanding local responses to globalisation: The production of geographical scale and political identity. National Identities, 3 , 69-87. Retrieved September 11, 2008, from EBSCO online database, Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=4275122&site=ehost-live.

Önis, Z., & Senses, F. (2005). Rethinking the emerging post-Washington consensus. Development & Change, 36 , 263-290. Retrieved September 11, 2008, from EBSCO online database, Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=17033141&site=ehost-live

Petras, J., & Veltmeyer, H. (2007). The standard of living debate in development policy. Critical Sociology, 33 (1/2), 181-209. Retrieved September 9, 2008, from EBSCO online database, Academic Search Premier http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=24475461&site=ehost-live

Ravallion, M. (2003). The debate on globalization, poverty and inequality: Why measurement matters. International Affairs, 79 , 739-753. Retrieved September 9, from EBSCO online database, Academic Search Premier http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=10390332&site=ehost-live

Rogan, M. (2013). Poverty and headship in post-apartheid South Africa, 1997-2006. Social Indicators Research, 113, 491–511. Retrieved November 1, 2013 from EBSCO online database, SocINDEX with Full Text. http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=88785751&site=ehost-live

Ryan, M. (2008). Health and human rights. Theological Studies, 69 , 144-163. Retrieved September 10, 2008, from EBSCO online database, Academic Search Premier http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=30002358&site=ehost-live

Unwin, T. (2007). No end to poverty. Journal of Development Studies, 43 , 929-953. Retrieved September 9, 2008, from EBSCO online database, Academic Search Premier http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=25729301&site=ehost-live

Suggested Reading

Dowling, J.M. (2013). Happiness and poverty in developing countries: A global perspective. Basingstoke, England: Palgrave Macmillan.

Gakidou, E., & Vayena, E. (2007). Use of modern contraception by the poor is falling behind. PLoS Medicine, 4 , 381-388. Retrieved September 9, 2008, from EBSCO online database, Academic Search Premier http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=25451516&site=ehost-live

Krishna, A., Kristjanson, P., Kuan, J., Quilca, G., Radeny, M., & Sanchez-Urrelo, A. (2006). Fixing the hole in the bucket: Household poverty dynamics in the Peruvian Andes. Development & Change, 37 , 997-1021. Retrieved September 9, 2008, from EBSCO online database, Academic Search Premier http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=23017596&site=ehost-live

Mcveigh, F. (2005). Lenin's prophecy of globalization. Sociological Viewpoints, 21, 63- 72. Retrieved September 11, 2008, from EBSCO online database, Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=20313291&site=ehost-live

Preda, A. (2007). Culture and politics in economic development /The politics of free markets: The rise of neoliberal economic policies in Britain, France, Germany, and the United States [Book Review]. British Journal of Sociology, 58 , 321-323. Retrieved September 11, 2008, from EBSCO online database, Academic Search Premier http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=25617780&site=ehost-live

Sumner, A. (2013). Poverty, politics and aid: Is a reframing of global poverty approaching? Third World Quarterly, 34, 357–377. Retrieved November 1, 2013 from EBSCO online database, SocINDEX with Full Text. http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=87786701&site=ehost-live

Wilkin, P. (2002). Global poverty and orthodox security. Third World Quarterly, 23 , 633-645. Retrieved September 11, 2008, from EBSCO online database, Academic Search Premier http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=7484750&site=ehost-live