Compare The Monetary and Capability Approaches to Poverty

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Compare The Monetary and Capability Approaches to Poverty.  Which Gives Us More Insight into The Role of Poverty in Understanding Development?

One of the main goals of development is to reduce poverty. In order to understand and measure development, it is important to alleviate poverty. In the recent years, different dimensions and definitions of poverty have been used in development and poverty research. There is no single definition of poverty and it has been been characterised as either “having less than an objectively defined minimum, having less than others in society or feeling that you do not have enough to get along” (Hagenaars & Vos 1998 Pg 211) As a result, the choice of a certain meaning/definition and approach has different effects on the poor (Hagenaars & Vos 1988). To measure poverty, there are four main approaches that are often used. These include, the capability approach, the monetary approach, the social exclusion approach and the participatory approach. These measurements and meanings have however been often conflicting when it comes to assessment outcomes. (Kwadzo 2015; Saith 2003). Traditionally, to measure poverty, the monetary approach has been dominant and still prevails in assessing poverty (Belhadj & Limam 2012; Lu Caizhen 2010), it is not adequate to understand the multiple dimension of poverty.It is thus important to compare it to other measures such as the capability approach as this helps to inform policy makers on more effective ways of reducing poverty, especially in developing countries.

In this essay, the monetary and capability approaches are defined, compared and later evaluated to determine which approach gives us more insight into the role of poverty in understanding development. I hypothesize that the capability approach gives us a better understanding of development.

An overview of the two approaches

  1. Capability approach

The capability approach defines poverty as the failure of an individual/household to develop ‘basic capabilities’ such as “functionings” above a certain level (Sen 1993, p.41). This approach to economic development was established by the Nobel Laureate Amartya Sen who believed that development should be looked at as the increase of human capabilities or opportunities and not the expansion of ‘means of living’ such as utility or money income (Stewart et al. 2003; Alkire 2002). In this approach, “functionings” denote part of a state of a person – to be specific the different things that they value to be or do, as opposed to how they feel or what they have (Schischka et al. 2008; Sen 1993) Examples of ‘functioning’ include; being healthy, resting, working, being literate and being respected (Robeyns 2007 Sen 1993). Capabilities include the combination of all the “functionings” that a person can achieve, and has the liberty to choose from, regardless of whether they choose to carry them out or not (Sen 1993). According to Sen, the main aim of human development is to understand the potential of humans. Sentherefore criticises mainstream development by rejecting the most common approach to measuring poverty that uses income as a satisfactory measure of the wellbeing of persons (Sen 1992).

Additionally, another important indicator used by the capability approach is the expansion of freedom. This is viewed by Sen as both the principle means and primary end of freedom to lead the kinds of lives that people want, be the person they want to be and do what they want to do (Schischka et al 2008).  Hence, if people have these opportunities and freedoms, they can select the options that they value the most. For instance, being part of a community should be an opportunity given to everyone and to belong to a certain domination/religion. But if they choose not to practice a religion and be atheists, they should be free to do so (Robeyns, 2007).

Therefore, it is important that the plan and evaluation of poverty alleviation programs focus on the freedoms created for the participants and not simply on any extra goods or commodities provided by donors. According to Robeyns (2005, 2007), the strength of this concept is its employment of multidisciplinary characters and focus on plural aspects of well-being.

  1. Monetary approach

As has been said in the introduction, the monetary approach has been adopted by most economists and so is the most commonly used measure of poverty. One of the reasons as to why this approach is favoured by economics is its compatibility with the utility maximising behaviour assumption that underpins microeconomics. This approach was developed by Booth and Rowntree in the 19th and early 20th centuries (Ruggeri Laderchi, Saith & Stewart, 2003). The monetary approach identifies poverty with a shortfall in personal or family income or consumption below a certain level of resources, usually referred to as the poverty line. It thus employs a monetary indicator and a neutral derivation of a poverty line. In short,monetray poverty is when one has less than an objectively defined amount of resources(Kwadzo 2015; Ruggeri Laderchi, Saith and Stewart, 2003).

Since this approach makes use of methods that identify poverty as a shortfall in consumption (expenditure) or income from some poverty line, it assumes that all relevant variations amongst persons can be contolled and so collects data about consumption or income as a preliminary step in measuring poverty. This means that it puts an emphasis on data from essential goods that are market purchased. As a result, it requires that the necessary market is identified to echo the levels of utility of those goods. In addition, monetary values of items that are not valued through the market such as public goods and subsistence farming have to be credited ( Kwadzo 2015; Ruggeri Laderchi, Saith and Stewart, 2003).

Furthermore, with the monetary approach, if a family/person is unable to obtain the minimum essentials for maintanence of a physical efficiency, they are considered to be living in absolute poverty (Rowntree 1902). Since the monetary approach measures well-being by expenditure or income, it is possible to standardise and generalize results for poverty trend anlaysis which as a result allow international and national comparison of poverty to be made (Ravallion 1992).


Poverty and Development

There is a clear link between health, poverty and development. All countries of the world are committed to the Millennium Development Goals (MDGs) and the current Sustainable Development Goals (SDGs). They both emphasize the importance of achieving development through poverty reduction. Improving economic growth leads to an improvement in living conditions and an increase in income for the community and individuals which improve other factors such as nutrition and housing. All these are social determinants of health. The United Nations Development Program recognises the need for development through poverty alleviation since the 1960s (Sabri 2007).

One of the major aims of development is to alleviate poverty. Hence, we have to know how to measure poverty and which dimension is most effective in measuring improvements (development). As mentioned in the introduction, poverty has different dimensions and is interrelated to other problems of underdevelopment. For example, poverty can be very different in terms of rural and urban perspectives. In urban areas, people may have access to capabilities such as education and health services but may have problems which are caused by poverty such as unhygienic conditions, poor housing, overcrowding and pollution. However, in rural areas, people usually live in safer and healthier environments and yet they do not have access to proper healthcare and education.  (Understanding poverty and development). The differences in the monetary and capability approached call for different interventions to effect development. When measuring development, statistics and figures are significant. If the main aim of development is alleviating poverty, then all governments must analyse the effects of their policies on poverty alleviation. (Understanding poverty and development)

A comparison / Differences between monetary and capability approaches.

A major contrast between the capability and the monetary approaches is that the capability approach focuses on people’s capabilities whereas the monetary approach focuses on income, consumption or expenditures (Robeyns 2007). The capability approach criticizes the principal role given to income with regards to the monetary approach in poverty measurement (Hick 2012). Although income is an essential factor and means to freedom and wellbeing, it can only serve as a rough substitute to people’s capabilities (Robeyns 2007). According to Sen, the monetary approach wholly relies on utility and thus does not include information that is not utility based from the judgement of our morals. This information could be a person’s additional physical needs because they are physically disabled. It is important to understand that people have different needs and so will require difference approaches to meet these needs in order to achieve an equal standard of living (Hick 2012). In addition, it could be the moral or social values that cause inequalities for example the notion that there should be an equal payment for women and men for the same amount of work. However, from the monetary approach perspective, this notion has no core value and so men and women should not be paid equally as long as women are happy with the lower payments that they receive.

Regarding implications of the two approaches, the capability approach proposes that in order to promote basic capabilities / improve development, there should be employment of a variety of mechanisms such as improved allocation of goods inside households, using goods and resources more efficiently to achieve better health, education and nutrition and social provision of goods and services. On the other hand, although the monetary approach recommends the instrumental development of capabilities as a way of increasing productivity and hence generating income among the poor, it puts an emphasis on the generation of money incomes as a solution (Ruggeri Laderchi, Saith and Stewart, 2003).

Furthermore, the monetary approach is looked at as a direct measurement of poverty whereas the capability approach is an indirect measurement. The monetary approach tends to focus on instances where the standards of living fall below a certain level and credits this to a deficiency of resources. On the other hand, the capability approach focuses on instances where the resources reduce below a certain level which leads to a low standard of living (Hick 2012, Berthoud and Brain, 2011).

Ruggeri Laderchi, Saith & Stewart (2003)provide a good analysis of the comparison of the two approaches of poverty. A review of their analaysis shows that for data collection, household surveys which inform the national income data are used for the monetary approach while for the capability approach, data is not usually collected. Additionally, the minimum standard in the capability approach is identified by the reference to the “functionings” or capabilities that are seen to be objectively defineable whereas for the monetary approach, external infomration is referenced. Furthermore, the capability approach leaves space for variations by placing an emphasis on how adequate something is instead of its sufficiency while there is not much sensistivity to social institutions by the monetary approach.

One of the major weakness of the capability approach is that there are problems of adding up the different capabilities whereas for the monetary approach, focusing on just utility is not adequate to measure well-being. On an international level and difficulty of comparison, surveys and price indices are compared with the monetary policy while for the capability approach, adding up the different capabilities makes it hard to compare poverty and development among countries. Nonetheless, both capability and monetary approaches are basically apprehensive of the absoulte poverty in a lot of the developing countries. They both tend to be individualistic and so they do not pay a lot of attaention to social structures and groups and often focus on access to resources of an individual (Ruggeri Laderchi, Saith and Stewart, 2003). Robeyns (2007)  defines individualistic as working with a concept of atomised individuals which means that the approaches do not put into consideration individuals as being part of the society and having connections with others. However, he argues that these claims are wrong as social structures and groups can be easily taken into account by the capaility approach.

Which approach plays a better role in understanding development?

It has been acknowledged that development is better analyzed by using multivariable methods such as the capability approach and not single variables like the monetary approach. The monetary approach examines the individual attribute of income which is not sufficient to account for the contributions of other dimensions and how they relate to each other such as health, income and education (Pinar, Stengos and Topaloglou, 2013). Traditionally,the Gross National Product per capita has been used as a measure of the development levels nationally and internationally. During the early 1980s, Sen made an observation where he showed how rankings based on GNP per capita can be different from rankings made on the basis of ‘functionings.’ For example, Brazil had a higher GNP than that of China whereas China’s HDI measured by “functionings” such as infant mortality and life expectancy was better than that of Brazil.

When measuring development, countries are ranked differently depending on the indicators that are used. One of the measures used, Gross National Product (GNP) per capita emulates the monetary approach and the Human Development Index (HDI) which have been informed by the capability approach. For example, the United Nations Development Program (UNDP) has adopted the capability approach into its measures in its Human Development Reports since the 1990 (Ranis et al. 2000). These describe the development of a country and measure it using the HDI. The HDI is a compound index of multiple measurements of well-being and poverty ranked from 0 to 1 in which a country that has the highest average achievement on the ‘functionings’ scores 1 (Caizhen 2010).  The ‘functionings’ measured by the HDI include life expectancy at birth, (2/3) enrollment rates of education and literary (1/3). It measures a country’s average achievements in three basic aspects of human development: longevity, knowledge and a decent standard of living. The education measure consists of the rate of gross enrolment and adult literacy rate(Pinar, Stengos and Topaloglou, 2013).  It also includes the adjusted GDP per capita (monetary approach) which works as a substitute for the materials features of well-being.

One of the criticisms of the HDI has been that it uses poor quality data in the creation of its fundamental components that are afflicted by severe errors of measurement. Additionally, the minimum and maximum values of each component of the HDI of countries change over time which makes it unreliable. In addition, the three components of the HDI are arbitrarily equally weighted. There is also a very close relation between these and GDP per capita which creates redundancy in the HDI. (Pinar, Stengos and Topaloglou, 2013). Nonetheless, it is important to note that the Human Development Reports include other indicators besides the statistics for human development. Every year, the report singles out a theme that is significant to development that embeds the expansions of people’s capabilities for example gender and human rights, globalization and novel technologies (Robeyns 2006). Thisdevelopment shift and tools have now been adopted by so many development scholars, regions and countries to discuss and examine development strategies, records and achievements.  (Robeyns 2005).

Although monetary poverty is useful for interpersonal comparison in poverty analysis, it fails to take into account variations in personal characteristics as well as disparities in social environment (Laderchi et al., 2003; Sen, 1985). However, the capability approach suggests a perspective where the significant measurements/dimensions for analysis of poverty offer a meaningfully broader focus and considers constraints than the monetary approach.  Potential constraints to the achievement of well-being and different dimensions such as health, disability, lack of resources, conditions at work, housing, physical exercise are considered, which are often not included in the traditional monetary approach (Hick 2012). The capability approach has been put to application in different areas including identification of the poor in developing countries, the general assessment of small scale development projects, poverty and well-being assessments in developed countries and the human development of a country (Robeyns 2006). This approach takes people’s capabilities into account when evaluating policies for development. It assesses if there are means or resources essential for these capabilities for instance good schools, presence of clean water, access to good healthcare, fundamental knowledge on health issues and protection from diseases and infections (Brighouse, 2004). Capability approach can also be used to identify the poor in developing countries, something that lacks in the monetary approach. Most quantitative studies that use the monetary approach (income poverty measure) do not identify people who are ‘functionings’ poor.


The major characteristics of the capability approach are its focus on the multidimensional aspects of well-being and its interdisciplinary character. The approach points out the means and ends, and between capabilities (freedoms) and achieved functionings (outcomes). This approach is not a solution for research on development but it can give a significant framework for such analyses. (Robeyns, 2007). One of the measures which uses the capability approach is the HPI. Its implications on policy making are such that the policies focus on the environmental effects and causes of poverty, thus aiming at not only income but also other measurements like healthcare and education. As has been shown above, there is a complexity in the definition and measurement of poverty. The two measures of poverty discussed in this essay result in different policy implications for the poor. It is important to note that although the two measures are different, they somehow overlap to show a percentage of the population that is poor.

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