In order to understand poverty one must be able to identify exactly what it is, in the oxford dictionary the definition of poverty is ‘the condition of being extremely poor’. But then one must question what is defined as poor? I will be looking at two approaches of this question, the first is the ‘monetary approach’ and the second is the ‘capabilities approach’. I will also be analysing two different measures of poverty, ‘absolute’ and ‘relative’ and to conclude which is a more accurate or a more suitable instrument in poverty measure.
The monetary approach is probably the most common method of understanding poverty. It is highly used by economists and is significantly connected with microeconomic theory. Utility maximisation is the base for this approach and the main instrument used is a poverty line; this sets a threshold where if income or consumption is below, people are then classified as poor. An example of this would be the ‘dollar a day’ where any income below $1 a day is classified as poor. This approach suggests that income or consumption is equivalent to well-being. In developing countries measuring welfare with consumption would be more appropriate than using income, as income is a small component and would be an overestimate. There is plenty of data which can be analysed at household levels. However, poverty is an individual phenomenon where individuals are situated within households. After assuming some measurements between income and consumption, data at the household level can be changed to an individual level by using empirical tools which are ‘equivalence of scales’. Since this approach portrays well-being with income or consumption it may not be suitable as the world is more complex. Human interaction and social behaviour varies significantly which means there are many critiques to this approach. This approach is strongly linked to utility, and utility on its own may not be enough to measure welfare. Overall the monetary approach poses some restrictions and limitations to understanding poverty. Income alone cannot be used as a measure in the real world, social relations are not included and there are many different types of welfare not being considered. These negative aspects make the monetary approaches of understanding poverty quite misleading. Work by Amartya Sen (1992) states that welfare is not limited to obtaining utility, even though it is very important there are other aspects that also have important parts. Another critique is that according to microeconomics, people always have different preferences. Another is that utility maximisation is limited, finally poverty is multidimensional and for it to be seen from a monetary view is also makes it limited.
Since ‘Sen’ criticised this approach, arguing that the possession of commodities does not necessarily mean welfare and this depends on personal or social characteristics, he pioneered the ‘capabilities approach’. This suggests that well-being can be measured by one being able to reach certain goals. Where in this approach, monetary situations are ’one of the many’ factors which are related to well-being. Everywhere in the world is different, therefore well-being is dependent on a person’s ability to achieve these goals. The commodities or wealth people have or their mental reactions (utility) are an inappropriate focus because they provide only limited or indirect information about how well a life is going (Alkire, S., 2002). An example of this would be a standard bicycle, it has the characteristics of transportation but the question is will it actually provide this transportation? This is dependent on the characteristics of the user of the bicycle. It does make one’s life easier by increasing mobility; however this will be of no use for a person without legs (Sen, A., 1992). The ability to reach a goal using a commodity is called a ‘functioning’, this is not the same as capability. The difference is that capability is the potential to achieve; however on the other hand functioning is when one actually does achieve (Basu, K., 1987). Sen argues that individual welfare is about capability, this is different from the monetary approach of utility maximisation and the possession of commodities. The greatest thing about Sen’s approach is its flexibility, this allows a researcher to use it in many different contexts (Alkire, S., 2002) meaning there is no certain list of capabilities in order to have a good well-being. The capabilities approach has also has quite a few criticisms, one of these is that it is not easy to identify the basic capabilities which are needed for one not to be in poverty, the main criticism to this point is that Sen has not stated a list of the capabilities needed to define well-being (Nussbaum, M., 1988). Another issue brought about by Thomas Pogge is ‘how should capabilities be weighed against each other and non-capability concerns?’ (Pogge, T,. 2002). Another problem is that in order to measure capabilities there would be the need of a significant amount of information and in many cases the indicators are not available (Clark, D,. 2005). Despite the limits of this approach, it is still a very good theory and contributes significantly to understanding poverty.
The approach one uses to define poverty is very important as the type of approach taken can have a huge effect on empirical studies and the understanding of poverty determinants. There have been significant differences in past empirical studies on poverty; this is due to the approaches that have been taken resulting in different outcomes. Some claim that poverty in the developing world has declined (Deaton, A,. 2002). While on the other hand there are others which argue that poverty in developing countries has in fact increased (Ravillion, M., 2003). The different approaches of poverty can identify different things; the monetary approach can identify a lack of income or consumption, while the capabilities approach can identify a lack of public services. There are many advantages and drawbacks to both the approaches, however if one wants to find out how macro-economic variables can affect well-being then it would be more suitable to define poverty using the monetary approach (which is an absolute measurement of poverty). This is because there is a vast amount of data to analyse from, Deaton (2005) states that the methods are very clear and simple (such as dollar a day poverty line) and one would be able to facilitate comparisons across time and countries.
There are many conflicts and debates over the measurement of poverty, is it absolute or is it relative? According to a report by ‘Shaohua Chen and Martin Ravallion’ the approach of relative poverty measurement has been more common in the Western European region. The poverty line is set at a constant proportion of the country’s mean or median income. On the other hand the approach of absolute poverty measure has been adopted in wealthier countries such as the US and other developing countries. This is more of a monetary approach and as previously stated this is where one can employ the World Bank’s dollar a day poverty line. One can observe and understand the difference in two ways, the poverty line selected can be a substitute of well-being, or the selected poverty line can be seen as a social norm. However it is obvious that the social norms between wealthier societies are completely different to those of a poor one, in this case poverty is then relative. On the other hand a lower poverty line in a poor society is no longer consistent; this means that two people with the same well-being can be totally different depending on their location. Moreover, the use of an absolute rather than a relative poverty line seems to be more relevant in the case of developing countries, where large parts of the population survive on low levels of consumption (Coudouel et al., 2002).

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