# 1. Introduction

The most recent estimate of monetary poverty in Armenia found that nearly 30 percent of the population lives below the national poverty threshold. However, because the Armenian social protection system provides some, though limited, basic support, monetary measures provide only a partial picture of the negative effects of poverty on well-being and the lack of positive capabilities. A multidimensional approach is therefore necessary to capture the complexity, depth, and persistence of deprivations people experience that may not be reflected in their consumption or incomes. The World Bank (WB) and the National Statistical Service of the Republic of Armenia (NSSRA) have formulated a measure of multidimensional poverty tailored to the country that uses the methodology introduced by Alkire and Foster (2007) and elaborated in Alkire and Foster (2011 a and 2011 b). Monetary measures of welfare and poverty reflect the monetary value of goods and services consumed by individuals and households. Because welfare increases with the monetary value of the items consumed, those who consume less fall to the bottom of the welfare distribution. But monetary measures of welfare rarely capture household consumption of goods and services that are not bought and sold in the market.<sup>2</sup> There are important dimensions of well-being that are not acquired in the market, and even for those that could be acquired through market mechanisms, often such markets are either nonexistent or not accessible for the poor. Moreover, consumption poverty measures cannot account for the monetary value of such aspects of household well-being as employment, health, housing conditions, or the quality of basic services, such as water supply.

Researchers in several social sciences have identified a multitude of ways to measure well-being and welfare: asking individuals about their subjective well-being, evaluating welfare through monetary measures beyond just consumption and income, and constructing often overlapping indices to account for multiple dimensions of nonmonetary welfare. Even though the methodology differs, for all measures at least two criteria must be satisfied, especially if the goal is to design evidence-based policies. The first is objectivity, which can be achieved when it is possible to compare individual situations. The second is universality within a given data set, which can be achieved by accounting for all households in the target population. Since each measure has its own strengths and weaknesses, it is widely recommended that both monetary and nonmonetary measures of poverty be used to clarify the picture of a country’s well-being and welfare (WB 2017).

Nonmonetary measures approximate the experience of poverty. They are chosen to capture quality of life and identify deprivations in specific dimensions of well-being. Based on the theory of capabilities introduced by Sen and Honderich (1985), the underlying welfare measurement reflects how individuals function and how much effective freedom they have to perform these functions. Limits on access to certain goods and services, such as health care, education, labor markets, sanitation, quality housing, and public and private services, and empowerment count directly in assessment of well-being and welfare to the extent that the capabilities of individuals are affected.

A multidimensional measure of welfare is composed of factors that constitute how people experience deprivations. It incorporates a range of indicators that capture the complexity, depth, and persistence of poverty. The approach focuses on deprivations in more than one dimension that overlap, and highlights gaps in the endowment of individuals and households that make it difficult to reduce poverty. Furthermore, the fact that the measure of multidimensional poverty is based on dimensions that link to the persistence of poverty, it helps to identify barriers to inclusive and sustainable poverty reduction, which can impact future generations. For instance, dimensions often found in a multidimensional measure are poor health, lack of education, inadequate living standards, lack of employment, poor quality of work, and the threat of violence. Among the many measures available, the most widely used is the Multidimensional Poverty Index (MPI). For example, the _Human Development Report_ of the United Nations Development Program (UNDP

> 2 More recent approaches to welfare measurement attempt to use indirect approaches to measure the monetary value of goods and services that are not exchanged in the market, such as health and education.

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