Inclusive Poverty Index without a Poverty Line in the Tradition of Engel

This chapter is about an alternative approach to measure poverty, focusing on the basic methodological challenges in poverty measurement rather than dealing with the often debated data-related issues. In 1857, Engel studied the consumption and production pattern in the Kingdom of Saxony, employing an unorthodox scientific procedure at a time when neither statistical regression nor established economic theory existed. His methods resembled in many ways the present-day econometric modeling with nonparametric regression. He used this approach to study the living conditions of the poor in terms of the consumption of essential commodities using most of their income. Unaware of his work, Sitaramam, Paranjpe, Kumar, Gore, and Sastry (SPKGS), and Kumar, Gore, and Sitaramam (KGS) used a similar method to study the consumption pattern, focusing exclusively on the main food item in India (cereals), and used it to estimate consumption deprivation—the shortfall of actual consumption of cereals from the community’s perceived maximum desired level. The connecting thread between Engel’s and the KGS studies was the Engel curve for the necessity. They described it as “a poverty index without a poverty line.” The outline of this new paradigm was developed in two articles, over a span of 13 years. Unfortunately, this unconventional approach, that of a notional poverty without a benchmark poverty line, initially faced massive intellectual roadblocks. This initial “equilibrium” KGS model later served as the launching pad of the “dynamic” Chattopadhyay-Krishna Kumar-Mallick (CKM) model that analyzed poverty through a stochastic dynamic agent-based market exchange model for assets and commodities with the KGS consumption pattern embedded therein as a description of “common knowledge” about community’s consumption pattern. Based on a tacit notion of poverty pertaining to a low-income category of the population who spend all of their income and are left with no savings (an Engel-like notion of poverty), they estimated the time profile of income and cereal consumption distributions and cereal consumption deprivation of that population. This approach is reminiscent of Engel’s data-based approach and led to the first inclusive poverty index (viz. poverty without any exogenous poverty line). This article traces the evolution of this CKM method, starting from the Engel–KGS origin, and explains the shortcomings of existing econometric approaches.