Paper short abstract:

The way in which poverty is conceptualized and measured shapes perceptions of need in and aid allocation for countries. This paper examines discrepancies between monetary and capabilities approaches to poverty finding the two approaches differ in how they capture poverty and how they inform aid allocation.

Paper long abstract:

This paper informs need assessment and aid allocation by identifying salient dimension of poverty measurement. It does so by comparing the qualities and ramifications of two dominant approaches to poverty: monetary and capabilities. First, the paper looks at whether poverty measurement according to the capability approach (Multidimensional Poverty Index) predicts poverty measurement according to the monetary approach (international or national poverty headcount rate) for 64 developing countries by year. The analysis classifies countries into income poor and capability poor based on the sign and degree of residuals between the two measures . Next, the paper analyzes the position of these countries with respect to these two measures by employing classification tree modeling, finding that the GINI coefficient and being in Europe and Central Asian region are association with the residuals between the two measures. Finally, the analysis examines whether aid composition responds to needs described by the discrepancy between the two approaches, finding that the salient dimension of poverty is not significantly associated with the ratio of social sector aid to economic sector aid within a country and across countries. This study indicates that there are discrepancies between the capability and monetary measures of poverty in developing countries, and that using any single approach may fail to adequately inform aid allocation.