Problems with Income (or Expenditure) Level as a Poverty Indicator

While income level appears relevant, the practicality of using it as a poverty indicator is limited by its reliability, cost effectiveness, timeliness, and comparability across countries. Information on income and expenditure is laborious and expensive to collect, particularly in undeveloped rural areas where the majority of the poor in Asia resides. Generally income information is obtained through sample household surveys, during which households are asked to answer detailed questions on their spending habits and sources of income for each of the income earning family members. Such surveys are not only costly but the quality of the data obtained varies. In a subsistence economy where monetary exchange is limited, collecting accurate income or expenditure data from a household is extremely difficult, if at all possible.

Even in areas where monetary exchange is well developed, detailed information on consumption, income and expenditure cannot be accurately obtained through household interviews, which is the common method of obtaining such data. In addition, because prices vary across time and place, the local currency adjustment, the aggregation and calculation of data are generally problematic. The problems generated by spatial and temporal cost of living adjustments make comparisons across countries and geographical areas difficult. The commonly used procedure-conversion by exchange rates into a key currency such as US dollars is known to underestimate the level of economic welfare in developing countries relative to that of developed world. The reason is that market exchange rates are supposed to reflect PPP with respect to tradable goods alone. Since the prices of non-tradable goods are normally low relative to tradable in developing countries, market exchange rates tend to underestimate the purchasing power of local currencies for a wide range of goods and services (Hayami, 2001; Ahmed, 1992).

To reduce the level of complexity, consumption per person was often used to estimate income. However, this method may overstate the extent to which poverty is associated with large family sizes (Bidani et. al, 2001). Income data available through government surveys are also not based on accurate recording, but rather on extrapolations from interpolation between surveys and censuses. Thus, income is not always the most reliable poverty indicator, particularly in the context of rural household.

Timeliness of data is also a serious constraint. Although all governments routinely collect income data, the complex nature of data gathering/calculation is time consuming. Very often, it takes years before official release of data. Long bureaucratic procedures in requesting and obtaining such data means it is generally too late for designing timely interventions.

Because a poverty indicator is used as a basis for resource allocation for donors and governments among countries and regions, comparability across nations and geographical areas is a very important qualification. On this basis, using income or expenditure as poverty indicator is rather problematic. The Summers and Helston (1988) recalculation of income per capita using an approach based on PPP shows that income or expenditure figures must be treated with a good deal of caution. For example, PRC, India, and Pakistan are all ranked fairly closely under conventional national income measures, whereas in their calculation the income per capita of Pakistan is more than 50 percent above that of India and the income per capita of PRC is more than twice of Pakistan.

Within a nation, the problems associated with method of deriving poverty line often led to more than one poverty lines and unsettle debates on which poverty line to adopt for resource allocation decisions. For example, there are national poverty line, provincial poverty line, district poverty line, etc, all of which are different than international poverty line used by donors. This has been causing substantial level of apprehension, nationally and internationally.

In addition to weaknesses in reliability; timeliness and cost effectiveness; and comparability across nations and geographical areas, other shortcomings of income level as a poverty indicator are that it does not reveal inequality within the household (Haddad et. al, 1997; Behrman, 1997) and that it does not taking into account the multi-dimensional nature of poverty i.e. health and community well-being, etc. Given all of these shortcomings, income level seems impractical for measurement of poverty or for monitoring the progress of rural development projects and programs.

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Comment(s)

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1. Choco
   (posted 01 May 2010 / 02:19:03 AM)
   
   is poverty line:
   -less that $1.25/day per adult, or
   -less than $1.25/day per person in the household (including children), or
   -less than $1.25/day per household?
   
   What a loophole in the definition! Clarity required please!
2. naveen
   (posted 17 December 2008 / 08:35:28 PM)
   
   This information explain clearly about the malnutrition and poverty,
   Most poor people who battle hunger deal with chronic undernourishment and vitamin or mineral deficiencies, which result in stunted growth, weakness and heightened susceptibility to illness.
   
   Poor children are the most prone to this and are often the victims to malnutrition, deficiencies, diseases and ultimately deaths caused by hunger.
   
   Today our world is home to 6.6 billion people. The United States is a part of the high-income group of nations which has a population of around 30 crores
3. ms.gilor araneta -tino
   (posted 02 April 2008 / 05:39:12 AM)
   
   Conditions tagged as underweight or underheight has been a problem for a longtime. If we dig further poverty is one cause. I am glad that the schools here in the Province of Albay are recipients of the Food for the School program. In its simple way, this is a BIG solution, RICE ON THE TABLE of every family. I'mm sure that this will help increase the nutritional status of our schoolchildren.