Measuring consumption, income and poverty lines Workshop Measuring Poverty – Concepts, Challenges and Recommendations Friday, April 17th, 2015 Palace of Serbia, Bulevar Mihajla Pupina 2, Room 129, Belgrade Javier HERRERA DIAL IRD-Université Paris Dauphine

Issues in measuring income and consumption in developing countries Income or consumption as welfare indicator? Measuring income – Measuring mixed income from the informal sector – Direct vs. Indirect data collection – Imputed rent – Should we take into account divergences between household survey and national accounts? Measuring consumption – Valuing self-consumption – Considering all modes of acquisition (buy, self-consumption, in- kind payment, public & private transfers). – Accounting for durable goods – Fuzzy frontiers between household final private consumption, intermediate consumption and investment

Poverty lines in practice On the importance of defining the reference population – A unique reference population or different (regional) reference populations? – Cost of basic needs or Food Energy intake approach? Steps in defining consistent poverty lines empirically Updating poverty lines

Basic property of poverty lines The poverty line must be absolute in the utility space and relative in the price and goods  This will ensure that poverty comparisons are consistent (two persons with the same utility level are treated in the same way; the same yardstick measures their welfare).  The total poverty line is the minimum cost for an individual of a fixed/unique (reference) utility level for all individuals (Ravallion).

On the importance of the reference population We need to define a reference population in order to determine the composition and cost of the basic consumption basket and to estimate the Engel’s coefficient that will allow us to estimate the non- food necessary consumption. Selecting implicitly separate reference populations (one for each region, expenditure quintiles, etc.) will have as as necessary consequence inconsistent poverty lines: lower for poorer households, higher for richer households.

A priori selecting an initial reference population Caloric norms Total household expenditures Multilateral spatial price deflator Deflated expenditures percentiles (all households) Food basket quantities Unit values of food basket items Food consumption basket value (EPL) Engel’s Coefficient Cost of basic needs consumption basket (Total poverty line) Food basket items values Total poverty incidence Nutrition conversion table Adjusted food basket quantities Total acquired calories Steps in defining empirically consistent poverty lines

A case study of inconsistent poverty lines

Poverty evolution in Paraguay by urban & rural area Source: DGEEC. Household surveys

Source: own estimates based on EIH 1997/98 Household expenditures cumulative density functions (cdf) by regions

Old vs revised poverty lines Source: own estimates based on EIH 1997/

Old vs revised poverty lines Source: own estimates based on EIH 1997/

Defining reference populations according to their calorie intake: Paraguay poverty baseline 1997/98 Source: DGEEC

Cost per calories varies by expenditure level: poor households buys cheap calories, richer households buys expensive calories (Paraguay 1997) Source: own estimates based on EIH 1997/98 Decile expenditures AsunciónCentral urbanOther urbanRural 140,637,728,524,2 240,439,132,529,9 342,343,535,031,9 444,649,638,634,1 552,250,341,135,8 651,850,544,438,4 761,456,646,840,6 858,657,449,944,5 949,358,754,746,9 1084,378,766,955,3 Total57,457,048,843,7

Item Grams per capita /day Metrop. areaOther urbanRural area Papa, mandioca, batata172,2303,5506,5 Harina (trigo o maíz)20,44147,6 Fideos33,238,631,3 Maíz2,519,845 Aceite, grasa, manteca25,932,235,8 Carne vacuna118,297,167,3 Leches (fresca, pasteurizada)209,8153,8152,1 Banana58,536,525,6 Naranja, pomelo, mandar., limón5321,320 Manzana, pera, mango9,52,91,3 Sandia, melón, mamón, pina12,64,85 Tomate44,434,618,8 Cebolla34,227,317,3 Food basket composition differs for (richer) metropolitan area households and (poorer) rural households (Paraguay 1997)

Monthly per capita expenditures % respect Metrop. area Engel’s coefficient Asunción Metrop. area , ,8% Other urban ,3 76,5 56,5% Rural ,9 64,4 64,4% Wide differences in expenditure levels and Engel’s coefficients of wrongly selected reference population Source: own estimates based on EIH 1997/98

Regions Price disparities Total poverty lines Asunción Metrop area 100 Central -urban 90,499,0 Other urban 77,662,2 Rural 64,237,6 Unjustified differences in poverty lines Source: own estimates based on EIH 1997/98