Exploring Poverty Indicators

1. Exploring Poverty Indicators 5th - 9th December 2011, Rome

2. Outline • What is poverty? • Dimensions of poverty • Overview of the Cost of Basic Needs (CBN) poverty line approach • Construction of the poverty line • Determining the cost of the food basket • Aggregate poverty indicators

3. What is poverty?

4. What is poverty? • Poverty is therefore an abstract concept with multiple dimensions • There is no consensus on how to measure poverty, even when examining only one dimension

5. Dimensions of poverty • Single or multiple dimensional measures • Example: Human Development Index (life expectancy, education, living standards) • Material or non material • Example: Income, assets, education, freedom • Objective or subjective • Participatory Poverty Assessment • Uganda; both objective and own assessment of poverty • Means to meet basic needs • 2200 kcal per day or means to achieve 2200 kcal per day

6. Dimensions of poverty • All of these dimensions are important for comprehensive poverty analysis and for creating poverty profiles • In this training we will focus on monetary poverty – whether an individual has enough resources to cover his/her basic needs. • This is the approach that gets the most attention and also the most demanding to calculate

7. Cost of Basic Needs (CBN) approach • The CBN approach attempts to establish the cost of a bundle of goods that ensures that a household’s basic needs are met • The cost of those goods is used to establish a poverty line

8. CBN poverty line • The poverty line reflects the monetary cost of what is considered to be the minimum required in order to remain out of poverty • It is defined in relation to the living standards of a particular society at a single point-in-time • The poverty line must adapt to changes in the standard of living of the society • The poverty line has two components: • Food • What is the minimum caloric requirement for a household? • Non-food • What are the essential non-food purchases and what is their total cost?

9. Steps in calculating the CBN poverty line • Determine the minimum calorie requirement • Define the basket of goods to attain that requirement • Estimate the cost of obtaining the food basket (food poverty line) • Estimate the non-food component

10. Data required for creating the food poverty line • Quantity consumed • Converted into a common unit such as kilograms, liters, etc. • Price for each item • Calorie content of each food item • Usually kilocalories / 100 grams This should all look familiar!!!

11. Using consumption data instead of income data • Fluctuations in income data are typically smoothed, hiding the current status • Consumption is more representative, particularly in agricultural economies • Income data is not easily gathered for many income activities, such as self-employment • Households are more likely to truthfully report their consumption than their income • Consumption data is more expensive to collect but is conceptually clearer

12. Consumption aggregate • The consumption aggregate is the value of all goods and services used by the household (food and non-food items) • The value of food consumption includes: • Expenditure on purchases • Consumption of own production • Gifts and in-kind food • The consumption is then converted into a monetary value • The aggregate aims to give an estimate on the welfare level in the household using the value of their consumption; therefore savings do not contribute to this defnition of wealth

13. Non-food component • The non-food component includes items such as: • Non-food consumable goods • Durable goods • Housing and shelter • Other housing expenses • Transportation • Education • Health • Large purchases are not included (for example a car); Instead ‘user values’ are utilized which require information on the lifespan of assets, their age, and their value at the time of purchase and now

14. Food basket • The basket should reflect the basic food needs as commonly eaten by the poor • First define “the poor” reference population; for example: • The poorest 50% • The 5th and 6th decile of the consumption aggregate • Chose deciles to avoid the poorest part of the population that will have a non-representative consumption pattern • Rank all individuals by household consumption per capita and choose the reference population

15. Establish the food basket for the reference population • To determine the value of the food basket, select households in the reference population • Calculate the average consumption of each food item consumed (xi) • Calculate median “unit values” (pi) • Unit value is the price paid by each household • Calculate the median price paid in the population • This yields the cost of the basket: • + + …

16. Calculating the food poverty line • Calculate the average calorie intake for the referencepopulation • Scale the cost of the basket to achieve the average kilocalorie per capita consumption of the entire population • If the average calorie intake in the reference population is 2,000 and the average consumption of the entire population is 2,400 the cost of the food basket will be: • This is the food poverty line

17. Poverty indicators • Use household consumption per capita and compare to the poverty line for each household to classify a household as poor Poverty headcount: share of population below poverty line Poverty gap: how far are the poor from the poverty line

18. Poverty indicators • We can use the food poverty line to analyse the percent of the population with food consumption below the food poverty line • To create this indicator, compare the household food consumption aggregate against the food poverty line and create a bivariate variable: FoodPoor = 1 Else FoodPoor= 0

19. Example output

20. Example output