Measurement of Poverty: Concepts & Measurements

Measurement of Poverty:Concepts & Measurements Measurement of Poverty

Measurement of Poverty “The governments are very keen on amassing statistics. They collect them, add them, raise them to the nth power and take the cubed root and prepare wonderful diagrams.But you must never forget that every one of these figures comes in the first instance from the village watchman who just puts down whatever he damn well pleases.” - Sir Josiah Stamp Measurement of Poverty

Measurement of Poverty Practical Concerns • Identification of Poverty Line • Defining the Unit of Measurement • Selecting the Indicator of Well-being Measurement of Poverty

Identification of Poverty Lines • The point at which the poor are separated from the non-poor • Relative Poverty Lines • Absolute Poverty Lines Measurement of Poverty

Absolute Poverty Lines Measurement of Poverty

Food Energy Intake Method • Sets PL at the level of expenditure at which FEI is just sufficient to meet basic nutrition requirements • STEP ONE: Establish the minimum nutrition requirements. • STEP TWO: Examine the observed spending pattern to see at what average expenditure household just achieve minimum nutrition requirement. Measurement of Poverty

Food Energy Intake Method Food Energy Intake Min Nutrition Standard (eg 2100 cals.) PL Expenditure (or Income) Measurement of Poverty

Food Energy Intake Method • The PL determined by the FEI method may vary across regions due to differences in: • Preferences: if more expensive animal protein and less food grain is eaten. • Relative Prices: in urban areas it may cost more to obtain basic nutrition because food prices are higher. • Publicly Provided Goods: in capital city transport to/from work may be cheaper than in provincial cities, allowing for lower expenditure level to meet minimum FEI. Measurement of Poverty

Food Energy Intake Method • This method does take account of non-food purchases. Measurement of Poverty

Cost of Basic Needs • PL is equal to the value of a bundle of consumption goods necessary to meet basic needs • May include just food (extreme poverty) • But more commonly includes non-food items Measurement of Poverty

Cost of Basic Needs • STEP ONE: Establish the minimum consumption bundle necessary to meet basic needs Measurement of Poverty

Cost of Basic Needs • STEP TWO: Establish the cost for the items in the basic consumption bundle Measurement of Poverty

Additional Considerations in Setting Poverty Lines • Regional Poverty Lines • Significant regional price differences may exist • Urban / Rural poverty lines common • Sensitivity Analysis • Typically near mode of distribution • Multiple poverty lines often tried Measurement of Poverty

Distribution of ExpenditureMexico, 1992 Measurement of Poverty

Cumulative Distribution of ExpenditureMexico, 1992 Measurement of Poverty

Defining the Unit of Measurement • Household vs. Individual • Adjusting for differences among HH • Adjusting for the age / gender of HH members • Adjusting for HH size Measurement of Poverty

Defining the Unit of Measurement • Example: • 2 HH with monthly Y of $150 • HH1 has 2 members…per capita Y = $75 • HH2 has 3 members …per capita Y = $50 • BUT: • HH1 has 2 adult men • HH2 has woman and 2 small children Measurement of Poverty

Equivalence Scales and Economies of Scale • HH size is often measured in “adult equivalent” units • each member of the HH counts as some fraction of an adult male • Economies of scales can then be accounted for by scaling the adult equivalent units Measurement of Poverty

Equivalence Scales and Economies of Scale • Many different methodologies are followed within two basic approaches • Fixed Scales • Estimated Scales Measurement of Poverty

Fixed Scales • Ex 1: Adult Equivalent Scale: • Adult Male = 1 • Adult Female = 0.74 • Child < 5 years = 0.6 • Ex 2: OECD Scale: AE=1+0.7*(A-1)+0.5*C • First adult = 1 • Additional adults = 0.7 • Children < 14 = 0.5 Measurement of Poverty

Estimating AE Scales • Based on examining HH data to see how consumption varies with gender/age and size • Food share of expenditure is regressed on HH size, HH composition Measurement of Poverty

Examples of AE Estimated Scales • Ex 1: Deaton and Meullbauer, Sri Lanka, Indonesia • Adults = 1 • Child 13-17 = 0.5 • Child 7-12 = 0.3 • Child < 7 = 0.2 Measurement of Poverty

Examples of AE Estimated Scales • Ex 2: Deaton, India and Pakistan • The AE value of adding another person to a HH with 2 adults: • Age 0-4 = 0.48 • Age 5-9 = 0.56 • Age 10-14 = 0.60 • Age 15-54 = 0.68 Measurement of Poverty

What is a HH? • UN definition: • “Group of people who eat together” • But: how long must one be a resident to be counted as part of a HH • Students, migrant workers, etc. Measurement of Poverty

Selecting the Indicator of Well-being • Monetary Measure of Welfare • Income • Expenditure • Non-Monetary Measures of Welfare • Direct Measures • Subjective Measures Measurement of Poverty

Income • Definition: Y = C +  in net worth • Example • Assets start of year: $10K • Spending on consumption: $3K • Assets end of year: $11K • Annual Y: $4K Measurement of Poverty

Problems with Income as Welfare Measure • Conceptual Problems • Goal is to measure HH ability to meet basic needs, but Y is just one factor • access to credit, public services, access, etc. are other factors that determine ability to meet basic needs Measurement of Poverty

Problems with Income as Welfare Measure • Measurement Problems • Understating of Y • Difficult to recall all of Y, especially when Y flow is erratic as in the informal sector • Fear of tax collector • Illegally earned Y • Separating inputs from revenue in agriculture • Accounting for own consumption of output Measurement of Poverty

Expenditure • Generally preferred to Income • Is more direct measure of what is consumed • Less volatile than Y • Consumption smoothing... Measurement of Poverty

Consumption Smoothing Income Consumption Y C Time Measurement of Poverty

Calculating Y or Expenditure for HH • How do we measure Y / Expenditure? • What is included? • NB: HH may be both producers and consumers Measurement of Poverty

Measuring Y and ExpenditureHH as Consumer Measurement of Poverty

Measuring Y and ExpenditureHousehold as Producer Measurement of Poverty

Calculating Y and Expenditure • Must not include: • Inputs into HH production, like money spent on seeds, fertilizer • Expenditure on investment, like purchase of tools Measurement of Poverty

Calculating Y and Expenditure • Should include: • Housing for owner-occupied dwellings • Expenditure on durable goods Measurement of Poverty

Non-Monetary Measure of Welfare • Direct Welfare Measures • Nutrition Poverty • Health Poverty • Education Poverty Measurement of Poverty

Nutrition Poverty • Input • Example: Calories per day • Outcomes • Example: Malnutrition Measurement of Poverty

Health Poverty • Outcomes • Ex: life expectancy, infection rates • Inputs • Ex: vaccination rates Measurement of Poverty

Education Poverty • Outcomes • Ex: Literacy rates • Inputs: • Ex: Enrolment numbers Measurement of Poverty

Subjective Measures • HH may be asked directly about their welfare • HH may be asked to establish minimum standards • Community indicators may be established Measurement of Poverty

Poverty Measures • We may want to measure poverty directly instead of looking at Y and inequality together • The most commonly used poverty measures are: • Head Count Index • Poverty Gap • Proportional Poverty Gap • Squared Poverty Gap Measurement of Poverty

Head Count Index • HCI = (# poor) / (population) • Measures the “incidence” of poverty • i.e. it tells us “How many poor” Measurement of Poverty

Head Count Index • Simplest and most commonly used measure • Limitations: • Does not account for depth of poverty; i.e. it does not tell us how far below the poverty line the poor are. • Advantages: • Simple to understand, straightforward interpretation. • Additive across populations. Measurement of Poverty

Regional Head Count Estimates Extreme Poverty <$275/year Measurement of Poverty

Regional Head Count Estimates Moderate Poverty < $370/year Measurement of Poverty

Absolute Poverty Gap • PG = (# Poor) * (Y shortfall) • PG = (Z-Yi) ; • where Z is PL, Yi is income of person i • It tells us the total Y shortfall of the poor; i.e. the absolute amount that would be needed to raise all the poor up to the poverty line. Measurement of Poverty

Absolute Poverty Gap Poverty Gap Y PL Population (poorest to richest) Measurement of Poverty

Absolute Poverty Gap Y Y Poverty Gap PL PL Population Population Relatively large poverty gap Relatively small poverty gap Measurement of Poverty

Measurement of Poverty: Concepts & Measurements