The $1/day Benchmark Fails to Enlighten

by Lindy Davies

Like many other commentators on global poverty, both Philippe Diaz (The End of Poverty?) and Fred Harrison (The Silver Bullet) frequently refer to the “dollar a day benchmark” for extreme poverty. They do so mainly because the standard is familiar to many people. Unfortunately, though, the $1 per day benchmark is neither well-understood nor meaningful. Various commentators agree on its usefulness in one area only: being well-known, it serves to focus popular attention on the ongoing problem of poverty. But, as a measure of who and where poor people are, how poor they are, and whether economic growth is alleviating or deepening their poverty, it offers little or no reliable information.

The issue is politically sensitive because the $1/day benchmark is the standard adopted by the United Nations to monitor success at achieving the Millennium Development Goal of eliminating extreme poverty and hunger: by the year 2015 to “reduce by half the proportion of people living on less than a dollar a day.” Economic growth figures compiled by the World Bank show significant progress toward this goal in many countries, but critics are highly skeptical — and other indices of poverty, such as infant mortality, life expectancy and access to clean water fail to register the expected improvement.

We are surprised that the Bank has been publishing regular income poverty statistics for fifteen years now — which are reported with six-digit precision and widely used in academic research, policy analyses, and popular media all over the world — without even a hint of public recognition of the deep flaws in their construction. It is hard not to see this fact as indicative of the low priority that has hitherto been attached to the global problem of persistent severe poverty. — Sanjay G. Reddy and Thomas W. Pogge, “How Not to Count the Poor

At first glance the standard seems palpably absurd: who can live on one dollar per day? The United States official poverty rate for a family of four is $21,200, or $14.52 per person/day. The current Federal Minimum Wage, net social security and medicare withholding, is $44.38 per 8-hour day.

However, it isn’t quite that bad. The $1/day figure is not understood as what a dollar would buy in the United States, but rather what $1 us would buy in the currency of a particular country, adjusted via purchasing-power-parity formulas. Many currencies, especially in poor countries with unstable economies, will buy considerably more goods at home than they would if exchanged for US dollars at the official exchange rate. Thus, according to the ppp rates reported by the Penn World Tables, what $1 will buy in the US can be bought with 11.9¢ in Guinea, 22.5¢ in Indonesia, 27.5¢ in China, 29.3¢ in Gabon or 37.7¢ in Uruguay. Generally, the poorer a country is, the greater will be the discrepancy between its nominal exchange rate and its “ppp price level.” Therefore, the $1/day poverty benchmark seems less poor, the poorer a country is — which is convenient, if nothing else, for reporting progress toward Millennium Development goals.

Many find fault with this scheme on the grounds that its methodology tends to understate the severity of poverty. This has to do with the nature of the “market basket” of goods chosen to calculate the domestic buying power of a nation’s money. It turns out that the goods people actually tend to buy vary drastically with region, income level, culture and climate, and therefore there is nothing even remotely resembling a universal standard.* Many critics argue that the basket used by the World Bank overemphasizes the prices of things that poor people cannot afford, such as cars, computers or stereos — thereby undervaluing the cost of their true subsistence needs and making their lives seem easier than they truly are.

That seems likely. I would suggest, however, that a deeper, more important problem with the $1/day benchmark is obscured by the debate over methodology. However one adjusts the reported numbers, they are still absurdly low. The best-case scenario for the conventional ppp formulas would be that of Guniea; its ppp price level for consumption for stretches the local currency the furthest (11.9¢ there supposedly buys what $1 buys here). OK, so that says that the poverty line in Guinea is equivalent to $8.40 per day in the US (a figure which is almost certainly overstated given Guinea’s inflation rate of 23% and climbing). In Indonesia the figure would be $4.40; in Uruguay, $2.60. Now, many of these wage-earners have dependents. Their children may not be very well-fed or well-housed, but they are managing to survive; they aren’t actually dying by the millions. They can’t be surviving solely on that level of cash income; it just isn’t possible.

These measures deal, of course, with “income poverty.” The main advantage of income as a yardstick is that the data is easy to gather. Other measures of poverty have been suggested, such as that of “consumption poverty” — but this faces the kind of thorny problems with quantification in different contexts that leads folks to stick with the old “income” benchmark. And there are more inclusive standards, such as the “Development as Freedom” approach of Amartya Sen, which factors in such seeming intangibles as happiness and capacity to pursue one’s goals. Although poverty is easy to observe anecdotally, it proves quite difficult to quantify precisely.

Fred Harrison appears to trust the standard benchmarks in The Silver Bullet, and this mars his otherwise lucid and valuable analysis. For example, he reports as good news that a rising number of people in India have surpassed the $1/day “extreme poverty” level, and now fall into the current “moderate poverty” standard of living on less than $2.15 per day, and this indicates increased social welfare.

But does it? If people’s cash income is nowhere near enough to keep them alive, then the majority of what they consume comes to them through non-cash, informal means. Under such conditions, how are we to judge the benefit of an increase, even by 100% or more, of their cash income?

Furthermore, we know that there is a large, worldwide migration of landless peasants into ill-equipped megacities. Although there are, of course, extensive informal economies in cities, it’s nevertheless likely that many people go to cities in search of employment, and that the overall statistical effect of this migration will be an increase in money wages. Will this increase improve living standards? The numbers don’t tell, but I very much doubt it.

Georgists are not oblivious to the fact that the major motivation behind these vast urban migrations is the unavailability of land in the countryside — most often driven by “Washington Consensus” policies that stress large monocrop farming of export crops. It seems to me that when we’re willing to uncritically adopt the $1/day mindset about extreme poverty, we miss an important opportunity to demonstrate a key aspect of Georgist analysis. Folks in the countryside, farming small, traditional plots, look at cash income as a luxury, something that could be done without in the lean times — not so the landless plantation laborers, or urban trash-pickers, who must trade their labor for cash, or go hungry. The current trend is for them to leave the countryside, which reduces demand for informal, non-cash goods and services, and increases their reliance on cash income. Rent-as-revenue reform would reverse this set of incentives, releasing land for use by peasants. The likely result would be a marked improvement in their well-being, albeit with little or no increase in their cash wages!

Here is a fruitful hypothesis for research: the developing world is in a massive transition from rural to urban living and from informal to monetized production. In this transition, money wage rates can be doubled or tripled and still yield a net decrease in well-being. This global transition — or, at least, the worst ill effects it generates in poor people’s lives — is primarily caused by the problems of land monopoly and wasteful taxation and is, therefore, completely avoidable and reversible. We need a better understanding of the role of informal, local, traditional economic relationships, in order to make our strongest case. Or in other words: we don’t have to wait for poverty to be counted before we can eliminate it.

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