Two countries, two types of poverty

In these times in which World Bank researchers have proposed an adjustment to the famous international poverty line of $1 (€0,74) a day and per person to $1.25, it’s interesting to make a comparative analysis of the national poverty line of a developed country, Germany, and that of a less developed country (LDC), Venezuela.

Let’s begin by the German case. Since in most countries of the European Union the problem of absolute poverty - which one could vaguely consider as a state in which the basic necessities to have a decent life are not satisfied- is quite rare, national statistical agencies are more concerned about measuring poverty in relative terms. The poverty line is then calculated from the median “equivalent income”, i.e. the equivalent income of the person who is just in the middle of the equivalent income distribution of the country, when these are ordered from the lower to the greater. The equivalent income is a scale developed by the Organization for Economic Co-operation and Development that allows comparing the income of households with different amount of members. To obtain this equivalent income a weight is given to each member of the household and its total income is then divided by the sum of the weights. The main income earner has a weight equal to 1, the spouse or children older than 13 have a weight of 0.5 and that of children younger than 14 is 0.3. The poverty line is defined as a level of equivalent income of 60% of the median one. For Germany in 2005 that line was located around €850 ($1,148) monthly. The percentage of the population living in conditions of poverty in that same year was 13.2%.

In the Venezuelan case, like in most LDCs, the type of poverty measured is the absolute one. In order to construct an absolute poverty line, a basic consumption basket is defined that assures a sustainable life condition. In Venezuela, the basket is constructed under the assumption that a person needs to consume at least 2,200 calories per day of food. On the basis of household surveys, the cost of a food basket, that covers the specified amount of calories and is composed by the staple foods of the country, is calculated. Thanks to the same household surveys, it is known that the expenses on goods and services different from food are almost the same as the expenses on food in population groups that have a food consumption around the 2,200 daily calories. The basic basket of consumption, or the poverty line, is then defined as the double of the cost of the food basket. The monthly poverty line per capita in 2005 was of BsF 74.23 ($27.49-34.53; €23.3-29.26). Under this poverty line lived between 37.9% and 43.7% of Venezuelans in that year.

The housing problem and the rental market

In most western countries it is obvious that even the lowest wages paid to workers should make them able to provide a roof, food and other basic necessities to their family. Let’s focus in the ability of low income households to solve their housing problem. Those of you with experience in less developed countries know that workers with low earnings, in urban and in rural areas, have to settle most of the time in slums and shacks or huts.

One reason that explains this situation is the performance of the housing rental market. Let’s take as a reference to what happens in Germany. Most of the people in this country live in a rented room, apartment or house. The German state intervenes in the housing rental market by providing apartments with subsidized rents to low income people. If you look at most Latin American countries, the percentage of households renting their home falls bellow 15%, reflecting a small rental market. This market is also quite dualistic. This means that rent options often lie in two extremes, luxurious or shack-type housing. Because of the very bad conditions of slum dwellings it is obvious that the state should subsidize rents intended to allow poor households to live in a decent dwelling. But as the rent market for middle income families barely exists, the state should also intervene to create or promote this market. The lack of renting options for middle income families is a market failure that justifies this type of intervention. Back again to the case of western Europe, the state could provide low rent apartments by giving subsidized credits to construction companies that would build and then administrate apartment buildings. A policy like this would incentivize the housing market in general, increasing the investment rate of the economy and boosting job creation.

Another reason could be the willingness of households to live in a rented dwelling or of landlords to rent their property. One could argue that low levels of willingness from both sides could be due to the law regulating this market and whether it is respected or not. The amount of protection to the tenant doesn’t necessarily curb the rental market. Taking again the case of Germany, arguably the law in this country protects the tenant more than in the USA and still the amount of households that live on a rented property in Germany is much higher. The main problem that should be solved then should be diminishing transaction costs and ensuring an effective enforcement of the law.

Apart from wide slums around big cities, other indicator that could reflect a problem in the rental market is the fact that extended families live together in the same dwelling, as actually happens in many Third World countries. One might think this is due to cultural reasons, but in some countries this could well be due to the lack of rental options.

Mentalities should change and one shouldn’t believe that the ideal society is one in which every household is owner of its dwelling. This type of thinking is what has lead to households building shacks whenever they can and to states not being able to hold their promises of ensuring decent dwellings for everybody. An ideal society should be one in which every household has a decent dwelling, of his property or rented. Since many people won’t be able to buy a dwelling with their low or middle income and it costs less to the state (and the society in general) to subsidize rents than to give away homes for a heavily subsidized price, the rental market should be promoted in countries with high percentage of the population living in shacks and slums.