Tuesday, November 5, 2013

The distortions of an income-poverty paradigm

The standard definition of poverty is in the form of an income level, below which people are classified poor. Its simplicity, especially in targeting poverty elimination interventions, has proved irresistible. However, our excessive focus on poverty as income deprivation may be becoming detrimental to global poverty eradication efforts.

Consider the case of India. Most of the policies that seek to address poverty involve measures to either directly increase poor people's incomes through various income generating activities like self-employment or provide for social safety supports through various subsidies and cash transfers. I find this approach restrictive for atleast three reasons.

1. This approach has an all encompassing targeting focus. It is as though there is some line above which people become less poor or that moving people above this line achieves reduction in poverty. Lant Pritchett makes compelling arguments here and here questioning the "poverty-line" based development policy making. In any case, the current poverty line of $1.25 or even $2 per day is too low to live a dignified life.

2. It assumes that poverty is an exclusively income deprivation phenomenon. This argument assumes that once people manage to increase their incomes, they will be able to access opportunities. And if opportunities become accessible, they will grab it and ease their way out of poverty. I find this a gross simplification of a complex problem. Here is why.

Poor people suffer from a deprivation of personal and environmental endowments. Though poverty is most commonly associated with deprivation of personal endowments - wealth, income, health, education etc - poor people are also deprived from access to environmental endowments like infrastructure and various other public goods. Taken together, these twin deprivations deny them the enabling pre-requisites to live a dignified life and achieve sustainable income mobility.

Consider the example of rural areas in many developing countries. A vast majority of these villages lack even the basic public goods - roads, water and sanitation, electricity, good quality schools and hospitals, etc. Even if people living in these villages are supported with large and continuous income transfers, the absence of basic infrastructure and public goods will leave them without the capability to meaningfully access the opportunities in the modern economy. In the extreme, this argument is similar to the example of a rich man in a very poor country. There is a limit to how much money can achieve in such environments in the realization of his full potential.

So how does the poor people in urban areas, which have all these public goods, compare? This illustrates the challenge with actually realizing opportunities even when access is addressed. Poor people, living in the slums, have access to a much greater range of infrastructure and public goods than their rural counterparts. But their ability to utilize those endowments and realize the opportunities that come their way is limited. In this context, the recent research in behavioral psychology, which claims that poor people are cognitively taxed due to scarcity of money, time, and effort, holds important lessons.

3. It distorts everyone's incentives and entraps the development process in a low-level equilibrium. Governments, non-profits, and civil society at large advocate policies that seek to address poverty through augmenting poor people's incomes. All other dimensions of poverty gets relegated to the background. Individual-based policies play to the immediate urges and cognitive biases of both the recipients and politicians, and it is simpler to administer. Given the scarce resources available, it consumes most of that available and leaves little for anything else.

I am inclined to the belief that this narrow poverty line based approach has, in no small measure, albeit along with a few other factors, been responsible for the persistence of poverty. And unless we go beyond it, we are no more likely to address poverty even if we are able to achieve the new goal of eliminating poverty by 2030.

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