# **2.3 Poverty and welfare**

Poverty is often measured in monetary terms, such as the international poverty line of $1.90 a day. Monetary poverty captures a household’s ability to purchase goods and services, with the poverty line set to reflect a `minimum needs standard’ for existence. Monetary poverty is broadly used and has several advantages: it is straightforward to design and track, can easily be interpreted, can be compared across time and regions, and can be easily aggregated over numerous households. However, it only captures one dimension of poverty – a household’s consumption or income – and ignores other relevant development outcomes.

As a response, other metrics of poverty have been developed, such as the global MDP developed by the Oxford Poverty and Human Development Initiative (OPHI) (Alkire and Foster, 2011). It was developed to capture a broader picture of poverty based on widely available survey data, coinciding with wider recognition that poverty is a complex concept which cannot be captured using income or consumption alone (Stiglitz et al., 2009). The MDP considers individuals to face poverty if they cannot meet the basic needs deemed necessary for their existence, for example access to sufficient food and clean drinking water, access to education and other basic services, and social empowerment. In other words, the MDP intends to directly capture the households’ ability to meet these basic needs, and is thus outcome focused. This is more in line with Amartya Sen’s idea of capabilities, which reflect how individuals can convert income into achievements that improve human wellbeing (Sen, 1989). Moreover, the MDP is closely aligned with several of the UN’s Sustainable Development Goals. The other benefit of any MDP measure is that it directly captures deprivations households face and allows policies to prioritize specific deprivations. However, it is more difficult to interpret and compare across space as multiple deprivations are aggregated into one number, and the choice of what measures to include and their weight is a normative decision subject to significant debate. As such, monetary poverty is often used in practice, as it precludes one from having to make normative decisions on the type and weight of different indicators.

Adopting a monetary poverty index versus an MDP index may highlight a different number and spatial distribution of poor households. Examining this at an aggregate level, Evans _et al._ found that they are comparable at the country level – a country in monetary poverty is likely to face significant MDP and vice versa. At the individual level however, these authors instead find a significant discrepancy between monetary poverty and MDP, with limited overlap between the set of households in monetary poverty and in MDP. The 2019 Global MDP covering 100 countries showed that two-thirds of the multidimensionally poor (886 million people) live in middle-income countries (UNDP, 2019), showing that there is a misalignment between monetary poverty and MDP.

In practice, both monetary and MDP measures of poverty can be used to construct an aggregate measure of welfare, _i.e.,_ individuals’ well-being. Monetary poverty can be used to construct a welfare measure by aggregating a convex function of individual income or consumption; it is a measure of economic _advantage_ and continuously increases with economic growth _._ A welfare measure based on MDP is instead a measure of economic _disadvantage_ – once no households face a deprivation, this measure goes to zero and becomes obsolete. It could thus be argued that 8