Measurement of Living Standards in Latin America : Challenges and Research Agenda Jaime Saavedra The World Bank

WB: Current research program derived from the WDR 2006 Explore newer approaches in measurement, which aim at capturing the concepts of  Well being indicators  inequality of opportunity,  Empowerment and agency (the capacity to advance owns agenda) Enhance the quality and quantity of existing data on poverty and inequality as conventionally measured in terms of current incomes.

Complementary research agenda on improving survey data Methodological and technological experiments aimed at  improve the measurement of core indicators;  expand the areas of policy covered by surveys (larger and more detailed coverage of social programs, access to quality public services, to financial services, better capture of specific groups, migration ) ;  improve the quality accuracy, relevance, and timeliness of data; Need to solve problems of:  Attrition and non response by the rich  Better location specific price-indexes  Recall periods

Three challenges in measuring living standards in the region 1. Well-being indicators 2. Measuring equality of opportunities 3. Multidimensionality of poverty

Well-being indicators and measurement challenges  Income Improve understanding of components of income that are harder to measure Informal and self-employed sector income  Subjective Welfare (self-rated poverty, etc.) Propose methods to validate and understand differences. Bolivian Quechuas tend to self-rate poorer than suggested by income poverty profiles while the converse is true for Aymaras Understanding patterns of self rated poverty may facilitate understanding political economy consideration in the implementation of policies.  Relative wealth position

Measuring equality of opportunities (EOO) Need to go beyond the Income poverty paradigm. Let: Individual welfare = g (Y) = f (A; Z; P ) A = assets/endowments Z = environment (prices, institutions, access to public goods) P = preferences If individual preferences are assumed to be a responsibility of the individual, then interpersonal comparisons should be based on the set of endowments and environment (the opportunities set ) rather than on individual welfare. EOO framework proposes that outcome determinants that are beyond an individual’s control or responsibility and not the outcome itself are the basis for defining poverty and for measuring inequality

Why measurement of opportunities matter? Opportunities maybe affected by policy: we want to reduce the importance of gender, ethnicity and parental education (the circumstances) in explaining income or educational attainment. Equalizing income is not a long run stable sociopolitical equilibrium  If transfer to the poor are increased up to the level of reducing extreme poverty, feeling of social exclusion will persist. Need to influence distribution of endowments and environment (the opportunities set defined by A and Z

Already a small empirical literature on approximating the importance of unequal opportunities (i.e. inequality attributable to circumstances, i.e dimension that are beyond the control of individuals) in explaining outcomes like consumption/incomes and educational attainment Ecuador 1999 Share of percapita consumption explained by parental education, occupation and place of birth Population38% Children % (Bourguignon, Ferreira, Menendez methodology)

Multidimensionality of poverty Life duration, income, wealth, education, agency (Rao and Walton, 2004), access to social networks (Jha 2005), capacity to aspire, (Appaduria, 2004) Difficult that a multidimensional vector of outcomes (or of opportunities) can be aggregated into a summary measure: Alternative  Consider a set of functions, one for each dimension, and dominance is established if a distribution A reduces poverty in each of the dimensions when compared to a distribution B. This definition does not require to assume some complementarity or substitutability across dimensions

Multidimensionality of poverty Another alternative  Specify a “poverty” line along each dimension. Define minimum set of opportunities or capabilities and define multidimensional poverty dominance (Bourguignon and Chakravarty, 2004) his dominance definition requires assuming some complementarity and substitutability across dimensions.