Poverty

1. Poverty Measurement and Functional Impact of poverty

2. characteristics World economy has grown in past century, leading to an increase in consumption of 32%, 26% between 1965-75 and 1975-85 However 1/5th of population continue under poverty. Obviously poverty and inequality are related concepts. The poorest 10% accounted for just 0.5% and the wealthiest 10% accounted for 59% of all the consumption: http://www.globalissues.org/article/26/poverty-facts-and-stats Affects current existence.. Lack of adequate food, shelter & clothing Illiteracy, undernutrition, bad health Affects future too… Destroys hope and aspiration of future

3. Poverty: Measurement issues Conceptual issues Overall expenditure or item by item consumption Absolute or relative Temporary or chronic Households or individuals Issue of a poverty line Quantification issues

4. Poverty line Following common practice, the poor are defined as those who lack command over basic consumption needs, including food and non-food components. Thus, the poverty line, is obtained by specifying a consumption bundle considered adequate for basic consumption needs and then by estimating the cost of these basic needs. In other words, the poverty line may be thought of as the minimum expenditure required by an individual to fulfill his or her basic food and non-food needs. Given arbitrariness of the poverty line, it makes sense to define more than one poverty line. For example, one common approach is to define one poverty line that marks households that are "poor," and another lower level that indicates those that are "extremely poor." Another approach is to construct a “food poverty line,” which is based on some notion of minimum amount of money a household needs to purchase some basic-needs food bundle and nothing more. If the cost of basic non-food needs is estimated, then the food poverty line added to the non-food needs will equal the overall poverty line.

5. Relative & Absolute poverty To the extent that one’s goal is to identify and target today’s poor, then a relative poverty line is appropriate, and needs to be tailored to the overall level of development of the country. For instance, a $1 per day poverty line might be useful in Vietnam, where 27% of the population would be considered poor by this standard in 1998 (Haughton 2000), but would be of little relevance in the United States where almost nobody would be poor by this standard. As countries become better off, they have a tendency to revise the poverty line upwards – For instance, the European Union typically defines the poor as those whose per capita incomes fall below 50% of the median. As the median income rises, so does the poverty line.

6. Absolute poverty line is set so that it represents the same purchasing power year after year. For example, the United States poverty line does not change over time (except to adjust for inflation), so that the poverty rate today may be compared with the poverty rate of a decade ago, knowing that the definition of what constitutes poverty has not changed. Legitimate comparisons of poverty rates between one country and another can only be made if the same absolute poverty line is used in both countries.

7. objective” poverty line The key idea here is that the poverty line should be set at a level that enables individuals to achieve certain capabilities, including a healthy and active life and full participation in society. In practice this almost certainly would imply that the commodity-based poverty line would rise as a country becomes more affluent, because the minimum resources needed to participate fully in society probably rise over time. The commonest way of making this operational is the Cost-Of-Basic Needs (CBN) approach, while the Food Energy Intake (FEI) method has been suggested as an alternative when the data available are more limited.

8. The Cost-of-Basic-Needs method: The most satisfactory approach to building up a poverty line, while remaining in the spirit of trying to ensure that the line covers basic needs, proceeds as follows: Stipulate a consumption bundle that is deemed to be adequate, with both food (2100calories) and non-food components; and Estimate the cost of the bundle for each subgroup (urban/rural, each region, etc.).

9. Food Energy Intake measure Under the food energy intake method [Greer and Thorbecke,1986; Paul, 1989], poverty lines are set by computing the level of consumption or income at which households are expected to satisfy the normative nutritional requirement.

10. Measures of Poverty HCR PGR Squared PGR FGT index Sen index SST index Watt index Time taken to exit

11. Headcount index By far the most widely-used measure is the headcount index, which simply measures the proportion of the population that is counted as poor, often denoted by P0. P0=Np/N where Np is the number of poor and N is the total population (or sample). If 60 people are poor in a survey that samples 300 people, then P0 = 60/300 = 0.2 = 20%. More formally it can be written as: Simple to construct and to understand

12. However it doesn’t consider INTENSITY of poverty:how poor are the poor? Violates transfer principle: A measure of poverty should capture transfers from a richer to a poorer person Usually HCR are related to households whereas an accurate measure should be to individuals

13. Poverty gap index PGI adds up the extent to which individuals on average fall below the poverty line, and expresses it as a percentage of the poverty line Sum of Poverty gap gives cost of eliminating poverty figure (only if perfect targeting)

14. Although better than HCI, PGR still does not capture severity of poverty

15. Squared Poverty gap Weighted sum of poverty gap(as a proportion of the poverty line) where the weigts are the proportionate gaps themselves A poverty gap of (say) 10% of the poverty line is given a weight of 10% while one of 50% is given a weight of 50%; this is in contrast with the poverty gap index, where they are weighted equally. Hence, by squaring the poverty gap index, the measure implicitly puts more weight on observations that fall well below the poverty line. Captures inequality among the poor better

16. Although the FGT measure provides an elegant unifying framework for measures of poverty, it leaves unanswered the question of what is the best value of a. Also lack emotional appeal. The weights can be changed to tune the sensitivity of the measure (Foster, Greer and Thorbecke (1984),

17. FGT measure convenient feature of the FGT class of poverty measures is that they can be disaggregated for population sub-groups and the contribution of each sub-group to national poverty can be calculated. The measures of poverty depth and poverty severity provide complementary information on the incidence of poverty. It might be the case that some groups have a high poverty incidence but low poverty gap (when numerous members are just below the poverty line), while other groups have a low poverty incidence but a high poverty gap for those who are poor . The type of intervention from government for the two are different.

19. Sen Index Sen (1976) has proposed an index that sought to combine the effects of the number of poor, the depth of their poverty, and the distribution of poverty within the group. The index is given by: where P0 is the headcount index, µP is the mean income (or expenditure) of the poor, and GP is the Gini coefficient of inequality among the poor. The Gini coefficient ranges from 0 (perfect equality) to 1(perfect inequality). The Sen Index can also be written as the average of the headcount and poverty gap measures, weighted by the Gini coefficient of the poor, giving

20. (Osberg and Xu 2002) Sen Index may also be written as where GPP is the Gini coefficient of the poverty gap ratios of only the poor and PP 1 is the poverty gap index calculated over poor individuals only. The Sen index has been widely discussed, and has the virtue of taking the income distribution among the poor into account. However the index is almost never used outside of the academic literature, perhaps because it is lacks the intuitive appeal of some of the simpler measures of poverty, but also because it “cannot be used to decompose poverty into contributions from different subgroups” (Deaton, 1997)

21. Sen-Shorrocks-Thon index SST is the product of the headcount index, the poverty gap index (applied to the poor only), and a term with the Gini coefficient of the poverty gap ratios (i.e. of the Gn’s) for the whole population. This Gini coefficient typically is close to 1, indicating great inequality in the incidence of poverty gaps. In 1996, 12.4% of the population of Quebec province (Canada) was in poverty. The poverty gap index, applied to the poor only, stood at 0.272. And the Gini coefficient of the poverty gap ratios was 0.924. Thus the Sen-Shorrocks-Thon index was 0.065 (=0.124 × 0.272 × (1+0.924)).

22. strength of the SST index is that it can help give a good sense of the sources of change in poverty over time. This is because the index may be decomposed into which may be interpreted as, % change in SST index = % change in headcount index + % change in poverty gap index ( among poor) + % change in (1+Gini coefficient of poverty gaps). This allows us to decompose poverty into three aspects: are there more poor? Are the poor poorer? and is there higher inequality among the poor?

23. Change in poverty rate overtime in Newfoundland was due to variation in the number of people in poverty(P1) rather than size of poverty gap per poor person or the distribution of poverty among the poor.

24. Watts Index The first distribution-sensitive poverty measure was proposed in 1968 by Watts (see Zheng 1993). Watts index is computed, by dividing the poverty line by income, taking logs,and finding the average over the poor. In its discrete version, it takes the form: where the N individuals in the population are indexed in ascending order of income (or expenditure), and the sum is taken over the q individuals whose income (or expenditure) yi falls below the poverty line z. The Watts index is attractive in that it satisfies all the theoretical properties that one would want in a poverty index, and is increasingly used by researchers in generating such measures as the poverty incidence curve

26. Time take to exit when thinking about poverty reduction strategies, it may be useful to show how long it would take, at different potential economic growth rates, for the average poor person to exit poverty. A poverty statistic with this property is derived by Morduch (1998); the statistic is decomposable by population sub-groups and is also sensitive to how expenditure (or income) is distributed among the poor. For the jth person below the poverty line, the expected time to exit poverty (i.e., to reach the poverty line), if consumption per capita grows at positive rate g per year is:

27. Empirical observations on Poverty Country specific and cross-poverty comparisons of poverty Demographic characteristics Larger family size of poor High ratio of dependents, children Above is both Cause and effect of poverty However, per capita expenditure measures overstate poverty in the context Relevance of weighing & scaling in poverty measure Role of gender Rural and urban poverty

28. Empirical observations on Poverty Lack of Assets Physical assets: land, tools human assets: no skill sets and lack of ability to acquire skills Casual wage employed Informal sector, self-employed UnderNutrition Affects ability for productive work: muscular wastage, lacks immunity, affects cognitive skills Perpetuates poverty Increase in income and better nutrition:elasticities

29. Functional Impact of Poverty Wider impact of poverty on economic systems. Relevant to understand what causes poverty and formulation of appropriate policies to eradicate it Fundamental feature of poverty is that it denies access to markets Obtain Credit, sell labor, rent land or tools Repercussions for entire economy

30. Poverty, credit and insurance Poor are not able to access creit from formal credit markets Lack of collateral Limited perceived incentives of poor to repay Forces poor to informal credit markets Insurance Insured incidence must be verifiable-information Moral hazard Developing countries, insurance is limited to cover poor Informal village level schemes answer to above Self-insurance as agroup

31. Poverty, nutrition and labor markets Around 27-28 percent of all children in developing countries are estimated to be underweight or stunted. The two regions that account for the bulk of the deficit are South Asia and sub-Saharan Africa. Functional role of undernutrition: relationship between nutritional status andcapacity for sustained work Energy balance Energy input, resting metabolism, energy for work, deficit and surplus Initial increases in income goes to satisfying resting metabolism,further increases enhances work capacity, still further reduces it due to surplus