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Life on $2 a DayHow far does two bucks take you in India?

By Brian PalmerPosted Monday, May 18, 2009, at 6:43 PM ET

Indian votersRecent news reports about the Congress Party's election victory note that two-thirds of Indians live on less than $2 per day. How far does two bucks take you in India?

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Not far in Mumbai, but it's a living in the villages. The people who get by on less than $2 don't even qualify as being in poverty, according to the Indian government's own definition. (The national poverty threshold is set at something less than $1 per day and applies to 27 percent of the population.) The figure, which comes from a standard developed by the World Bank to measure global development, says very little about the living conditions of a particular individual in a particular place.

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Tim Harford praised a new method for measuring poverty. Brendan I. Koerner explained how the United States established its original poverty threshold. Sudhir Venkatesh reviewed William Julius Wilson's new book on race and poverty. Seth Stevenson tried really hard to like India.

India, like the United States, uses a "basket of goods" approach to define its poverty threshold. The cost of a minimally adequate diet is multiplied by a set amount to account for the cost of food and other essentials. (The United States multiplies by three, because the average American family spends one-third of its post-tax income on food.) The European Union uses a different method, based on relative income: The poverty line is set at a certain percentage of median income.

Neither of these methods works on a global scale, though, which explains why the World Bank has its own system. The "basket of goods" approach can be confusing, since every country uses different goods in their equations, based on local dietary habits. (Rice accounts for 31 percent of the calories in an Indian diet, for example, but only 2 percent in the United States.) The relative income approach tends to understate poverty in poor countries, where 60 percent of median income is still a destitute existence. For the same reason, it would overstate poverty in Luxembourg.

About 20 years ago, the World Bank established two international poverty standards: a $1-per-day benchmark for extreme poverty (representing the median among the 10 lowest national poverty lines) and a $2-per-day level that represents a "near poverty" existence in developing countries and all-out poverty in other places.

While the World Bank standards are serviceable as benchmarks for progress—if fewer people are living on $2 today than were 10 years ago, that's great—they don't give an accurate picture of poverty in an individual country. For example, nearly 70 percent of Indians still live in villages, many in rent-free ancestral homes. They won't soon buy a Nano, but they can easily feed and clothe themselves and their children. Their main worries—poor schools, contaminated water, and limited access to health care—aren't necessarily solved by a modest income hike. In contrast, a $2-per-day laborer in Mumbai would spend nearly his entire income on a modest shanty in one of Mumbai's notorious slums.

Mindful of this difference, the Indian government uses a flexible poverty line that varies with area of residence. Those who live in rural areas are considered impoverished if they makes less than 66 cents per day; the threshold for city-dwellers is 83 cents per day. India also adjusts the status for people who are cash poor but enjoy family assets, like a house or arable land.

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Explainer thanks Anirudh Krishna of Duke University and Arvind Panagariya of Columbia University.

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Brian Palmer is a freelance writer living in New York City. He can be reached at .

Photograph of Indian voters by Raveendran/AFP/Getty Images.

COMMENTS

At least according to my economics professor at the University of Michigan, the average American now spends only 1/6th of his/her income on food. The multiply times three convention is over 50 years old and comes from a time when the most Americans spent 1/3rd of income on food.

Since the government has not changed the convention, we are likely now underestimating the number of Americans below the poverty line.

-- Amyaz
(To reply, click here)

You beat me to the punch. I was going to mention the antiquated nature of the multiplier, too.

But I'd point out that there's also reason to believe that the multiplier may be too high. The fact that the average American spends a smaller portion of their income on food than they did in the mid-20th century is a mark of increasing affluence. The average American simply spends more on discretionary purchases than in the past. (Part of this is due to a decreased level of national saving.) So whether or not the current poverty level under- or overestimates poverty really depends on which form of poverty one prefers to measure: relative, how poor you are compared to your countrymen, or absolute, do you have enough money to provide the basics- food/shelter/clothing.

As one who prefers to judge poverty in absolute terms, I tend to think that a multiplier of 3 is too high, as many people who fall below the poverty line in the area in which I live have enough disposable income for items that would have been deemed luxuries in my modest (but not poor) childhood. An absolute measure is also much more dependent on local costs. It seems that this is how India chooses to calculate its levels of poverty. On the other hand, if income inequality motivates your views of poverty, then the multiplier definitely needs to be revised upwards.

-- Econ
(To reply, click here)

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