Poverty Measurements Economic growth does not necessarily reduce poverty. It depends on how income is distributed within a country. To measure the proportion of poor people in a country, we use various measurements.
Measuring Income Poverty Four major methods: Cost of Basic Needs (CBN) approach Food Energy Intake (FEI) approach One-dollar-a-day approach Social subjective poverty line In this lecture, I only explain CBN, which provide a basic justification of using One-dollar-a-day approach.
Costs of Basic Needs Approach The CBN approach is also based on nutritional requirements. 1) Define a basic food basket of poor 2) Calculate costs of obtaining the basket that provides requirements: >> Food Poverty Line. 3) A non-food poverty line is calculated at the mean nonfood expenditure of households who are on or around the food poverty line.
Costs of Basic Needs Approach Thus, the poverty line is the sum of food and nonfood poverty lines. Poverty Line = Z Food + Z Non-Food Different prices should be applied to different regions, such as urban vs. rural.
Indicators of Poverty The Headcount ratio: Poverty Gap: Squared Poverty Gap: See Deaton (1997): Chapter 3
xixi Individual income or expenditure 0 z P0: Headcount P1: Poverty Gap P2: Squared Poverty Gap
xixi Individual income or expenditure Weight 0 z P0: Headcount The headcount ratio does not give any information about the distribution of poor below the poverty line: an uniform weight to every poor household. 1
xixi Individual income or expenditure 1 0 z P1: Poverty Gap Poverty Gap indicates the degree of poverty. It assigns a weight which is (Z – X i )/ Z. Weight
xixi Individual income or expenditure 1 0 z P2: Squared Poverty Gap Squared Poverty Gap indicates the degree of poverty also but assigns a weight which is ((Z – Xi)/ Z) 2. Poorer households receive larger weights. Weight
Comparisons of poverty measures The Headcount Ratio is an easy to use measure, but it does not capture the depth of poverty. For instance, P0=.20 could be 20 % of people are just below the poverty line or quite below the poverty line. The Poverty Gap captures the depth of poverty. By multiplying this on the total income (GNI), we can get the total value to bring every poor person at the poverty line divided by the number of people. The Squared Poverty Gap gives more weights to poorer population.
Poverty Dynamics Chronic Poverty: the average welfare indicator (e.g., income or expenditure) over time is below the poverty line. –How to escape poverty: Need to improve physical and human capital to improve income generating ability in general. Temporary assistances may not help them to escape poverty in the long run. Transitory poverty: when the income or expenditure goes below the poverty line at times, although the average income or expenditure is above the poverty line. –How to escape poverty: Temporary helps, such as safety net programs or credit programs, may help them when they fell below the poverty line.
Chronic Poverty Time Poverty Line Always Poor (Chronic poverty) Transitory Poverty
Concept of Poverty: Measuring poverty in its multiple dimensions Income Poverty –Pros: (Mostly) Comparable across regions and countries –Cons: Measured at the household level, ignore inequality within the household Health and Education –Pros: Measured at the Individual level, Comparable measures are available –Cons: Limited data Vulnerability; Voicelessness and Powerlessness –Pros: These are important components of poverty –Cons: Difficult to define and measure it Source: World Development Report 2000/2001, World Bank, Chapter 1
Measuring Vulnerability Because of poor infrastructure and public service deliveries, without functioning insurance markets, people in poverty are vulnerable against shocks (natural disasters, diseases, violence, crime, etc.). Thus, vulnerability is an important component in poverty. But it is difficult to measure it. An example: Standard Deviation of Income over time –This measure reflects fluctuations in income. –Problem 1: Equal weights to upward and downward fluctuations –Problem 2: No time dimension: consecutive downward fluctuations are more damaging than separate ones. –Problem 3: Many small downward fluctuations and a large one may have same impacts. Source: World Development Report 2000/2001, World Bank, Chapter 1
Measuring Ability to cope with shocks Resourceful people are able to cope with shocks and recover from them over time, while resource poor people may suffer from long-term consequences by falling in to poverty. Measuring households’ ability to cope Physical assets Human capital Income diversification Links to networks (social capital) Participation in informal (or formal) safety nets Access to credit markets Source: World Development Report 2000/2001, World Bank, Chapter 1