Module 1 Measuring Poverty Multidimensional poverty Poverty Dynamics Panel Data Inference with Panel Data International Poverty Comparisons Vulnerability Tackling Poverty Module 1 Measuring Poverty Jonathan Haughton jhaughton@Suffolk.edu June 2017

JH: Course on Poverty Analysis Objectives Define poverty Explain why poverty needs to be measured Identify the three steps required to measure poverty, namely Choosing a measure of welfare Establishing a poverty line Presenting and summarizing the results Evaluate consumption and income as measures of welfare Identify the methods used to construct a poverty line Describe and explain the headcount index of poverty, and compare it with the other FGT (Foster- Greer-Thorbecke) poverty measures Argue that there is no single best measure of poverty June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis What is poverty? “a pronounced deprivation in well-being” Conventional view: not enough money Sen: Lack of capabilities to function in society. Treated in Module 2 Distinct from, but related to Vulnerability (“ex ante poverty”) Inequality June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis Why measure poverty? … given that it is expensive to measure Keep the poor on the agenda Target interventions (domestic, international) Monitor and Evaluate projects, policies Evaluate institutions World Bank: “Our dream is a world free of poverty” N.B. Role of Poverty Reduction Strategy Papers June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis The Three Steps Define an indicator of welfare e.g. income per capita, expenditure per capita Establish a poverty line Generate summary measures of poverty June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis Aside: Surveys Poverty measures are based on survey data Ask: Is sample frame representative? Sample size? Stratified? If yes, use weights for summary statistics Clustering? If yes, adjust when measuring standard errors Cross-section, or also panel? What indicator(s) collected? How? (e.g. diary?) Good data cleaning? Quality control? LSMS have set a high standard June 2017 JH: Course on Poverty Analysis

What welfare indicator? “Utility”, as proxied by (typically) Income per capita, or Consumption per capita Candidate 1: Income Income ≡ Consumption + Δ net worth Net worth is hard to measure (e.g. livestock) What time period? Year? Lifetime? Income often seriously understated June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis Expenditure? Candidate 2: Expenditure Include own-production and purchases More stable than income; better tracks “lifetime income” Problems Many items Under-reporting, especially luxuries Sensitive to questions e.g Vietnam tobacco June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis June 2017 JH: Course on Poverty Analysis

Technical considerations Durables Housing Weddings and funerals June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis Adult equivalents Commonly: expenditure per capita But: individual needs differ; economies of scale in consumption OECD scale: AE = 1 + 0.7 (Nad – 1) + 0.5 Nch Elegant: AE = (Nad + α Nch)^θ E.g. α = 0.7; θ = 0.8. Deaton and Zaidi (1998) “There are so far no satisfactory methods for estimating economics of scale” [in consumption] June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis Other measures Calories per day Food share of consumption Nutritional outcomes Peer or observer assessments June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis Poverty Lines Relative: “the poor are always with us” e.g. Line giving poorest 20% (quintile) e.g. Half (or 60%) of the mean wage rate (EU) Absolute: for comparisons over time, states e.g. World Bank “dollar a day” e.g. Cost-of-basic-needs poverty lines e.g. Food poverty line (i.e. cost of enough food, only) e.g. US. Mollie Orshansky. 3 times cost of adequate food. Updated over time to reflect price changes June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis June 2017 JH: Course on Poverty Analysis

Cost of Basic Needs Method Widely used, but with variations Pick a nutritional requirement for good health e.g. 2,100 kcals per person per day Estimate the cost of buying enough food for this e.g. Cost of diet of someone consuming 2,100±100 kcals/cap/day Add a non-food component e.g. Non-food spending of someone consuming 2,100±100 kcals/cap/day Update over time by revising prices June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis June 2017 JH: Course on Poverty Analysis

Measures of Poverty: Headcount Index Headcount Index: P0 = Np/N Popular, easy to understand Does not pick up depth of poverty Assumes equal sharing within household June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis Poverty Gap Index Poverty Gap Index Does not reflect inequality among the poor June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis FGT Foster-Greer-Thorbecke Poverty gap squared: α=2 Choice makes a modest difference June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis Other measures Sen-Shorrocks-Thon Watts Time Taken to Exit June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis June 2017 JH: Course on Poverty Analysis

JH: Course on Poverty Analysis Reading Haughton & Khandker, chapters 1-4 Jonathan Haughton & Shahidur Khandker, 2009, Handbook on Poverty and Inequality, World Bank, Washington DC. Can be downloaded from http://web.cas.suffolk.edu/faculty/jhaughton/povertymanual.html June 2017 JH: Course on Poverty Analysis