Poverty measurement in Sri Lanka: towards a solution?

1. Poverty measurement in Sri Lanka: towards a solution? Ambar Narayan (World Bank) Nobuo Yoshida (World Bank) Workshop on Methodology of Poverty Analysis In Sri Lanka March 1st, 2004

2. Criteria for poverty line • Intuitive • Transparent • Contextual • Objective

3. Issues • Calorie requirement for poverty line • CBN vs. FEI • Equivalent Adult Scale vs. Per Capita • Household Survey Based Price Index vs. Price Survey Based Price Index • Updating Poverty Lines • Base Year

4. Calorie Requirement for Poverty Line • Existing work in Sri Lanka • Nanayakkara (1994) • 2500 – 2520 kcal per equivalent adult per day • 2000 – 2050 kcal per capita per day (Nanyakkara, 1994) • DCS, Gunewardena (2000) and Vidyaratne and Tilakaratne (2003) adapt very similar figures to the above • International experience: 1978 kcal – 2300 kcal per capita per day • Consistent with recommended nutrient allowances given by Medical Research Institute of Sri Lanka

5. CBN vs. FEI • Both approaches estimate total household expenditure which can sustain the minimum calorie requirement (in per capita/per adult equivalent terms) • Compared with CBN, FEI involves fewer steps in estimation, but unreliable if urban and rural consumption patterns are very different • (FEI) India, Pakistan; (CBN) Nepal, Indonesia, Bangladesh • For Sri Lanka, both VT (2003) and Gunewardena (2000) use CBN • Given the advantage of CBN and its acceptance in SL, CBN is a reasonable choice - with careful treatments on choice of food basket, prices, and estimation on non-food exp

6. Equivalent Adult Scale vs. Per Capita • Adjustment for equivalence scale can be done in • Poverty line estimation (actual calorie intake) • Consumption aggregate

7. Equivalent Adult Scale vs. Per Capita, cont. Two options: 1. Use per capita for both poverty line estimation and consumption aggregates 2. Use equivalent adult scale for poverty line estimation but use per capita for consumption aggregate • No matter which option is chosen, check sensitivity of poverty profiles and trends to • Equivalent adult scale vs. per capita • Economies of scale in consumption

8. Updating poverty lines • Updating poverty line with inflation rates • Poverty line is explicitly fixed to a specific welfare level so that poverty indices can be easily comparable over time • Due to changes in life style and taste, poverty lines updated with inflation rates might not be able to achieve calorie requirement • Estimating poverty line for every survey • Poverty line in real terms might change – makes a comparison over time difficult • The new poverty line is supposed to achieve the calorie requirement • Recommendation • At intervals of 10 or more years, re-estimate the poverty line to adjust to changes in lifestyle and taste • In the meantime, update the poverty line with inflation rates to make poverty indices comparable over time

9. Spatial and Over time Price Adjustments

10. Recommended options • Use SLCPI or unit values from HIES for both spatial and over time price adjustments • Use SLCPI or unit values for spatial price adjustment, and CCPI for inflation • If price indices from SLCPI are used, these should be validated using unit values from HIES • Using CCPI for inflation adjustment is likely to be more acceptable; it is still important to crosscheck using HIES unit values

11. Choice of base year for poverty line estimation • Pragmatic option for Sri Lanka appears to be 1995-96 • Adjust that poverty line for 1990-91 and 2001-02 (and 2005?) using inflation rate (CCPI?) • Note: all comparisons over time hinge critically on the comparability of consumption aggregate

12. Comparison among the existing methodologies in Sri Lanka

13. Summary of poverty estimates G nos. are based on CBN lower bound + 20% as poverty line (Rs. 968) DCS trend is based on % of households who are poor

14. Puzzle……!! • Discrepancy in poverty rates for 1995-96 • DCS is at odds with G/VT • Conjecture: DCS doesn’t adjust for spatial price differences – likely to understate poverty in expensive areas (urban?) • Opposing trends: • DCS and G differ • Conjecture: DCS re-estimates poverty line every year – thus real value of poverty line not held constant