The alleviation of poverty is increasingly seen as a fundamental economic objective. Poverty creates many economic costs in terms of the opportunity cost of lost output, the cost of welfare provision, and the private and external costs associated with exclusion from normal economic activity. These costs include the costs of unemployment, crime, and poor health. In addition, the poor have little disposable income, and so cannot spend and generate income for firms and jobs for other individuals.

Widespread poverty is also an important constraint preventing economic development.

There are two ways to define poverty:

Absolute poverty

Absolute poverty is poverty that is unrelated to a particular economic or social context. In other words it is a general definition of poverty which is valid at all times and for all economies. Agreeing such a definition is extremely hard to do.

One straightforward definition of absolute poverty is ‘…being unable to subsist…’ that is, unable to eat, drink, have shelter and clothing. A common universal measure of extreme poverty is .receiving less than $1.25 a day.  Extreme poverty if defined as not being able to buy enough food to survive.

Relative poverty

It can be argued that poverty is best understood in a relative way – what is poor in New York is not the same as in Mumbai.

One approach is to look at ‘deprivation’, the poor being defined as those who are deprived from the benefits of a modern economy, such as clean water and education.

The Human Poverty Index – HPI

The Human Poverty Index (HPI), which was introduced in 1997, is a composite index which assesses three elements of deprivation in a country – longevity, knowledge and a decent standard of living.

There are two indices; the HPI – 1, which measures poverty in developing countries, and the HPI-2, which measures poverty in OCED developed economies.

HPI-1 (for developing countries)

The HPI for developing countries has three components:

  1. The first element is longevity, which is defined as the probability of not surviving to the age of 40.
  2. The second element is knowledge, which is assessed by looking at the adult literacy rate.
  3. The third element is to have a ‘decent’ standard of living. Failure to achieve this is identified by the percentage of the population not using an improved water source and the percentage of children under-weight for their age.

As a region of the world, Sub-Saharan Africa has the highest level of poverty as a proportion of total population, at over 60%. The second poorest region is Latin America, with 35% of its population living in poverty.

HPI-2 (for developed – OECD countries)

The indicators of deprivation are adjusted for advanced economies in the following ways:

  1. Longevity, which for developed countries is considered as the probability at birth of not surviving to the age of 60.
  2. Knowledge is assessed in terms of the percentage of adults lacking functional literacy skills, and;
  3. A decent standard of living is measured by the percentage of the population living below the poverty line, which is defined as those below 50% of median household disposable income, and social exclusion, which is indicated by the long-term unemployment rate.

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