Introducing new Cost-of-Basic-Needs poverty lines for South Africa Josh Budlender (From a forthcoming paper with Murray Leibbrandt and Ingrid woolard) Presentation for the national minimum wage research initiative at wits

Context of this presentation South Africa doesn’t have a legislated poverty line, and no consensus view amongst policymakers or academics Stats SA recently released a line but potentially some methodological concerns While at SALDRU we undertook a review, which led to development of new lines Have been helped immensely by StatsSA and others Focus of this presentation: explaining what our new poverty lines mean, and a few methodological decisions which distinguish our lines Unless otherwise stated, values are monthly per capita 2011 Rands (primary dataset is 2010/2011 IES).

Introducing poverty lines What we’ll be discussing are what are called “Absolute money-metric” lines. This means: we calculate an amount of money which is the minimum a person needs per month to be “non-poor” This monthly amount of money is linked to “basket” of goods and services, which remain fixed While monetary value of basket may change across time and space (prices), the “real value” – what you can buy with the money – stays constant Absolute money-metric lines are not only (or necessarily best) way to measure poverty. But are important.

Methods of setting absolute poverty lines Setting a poverty line is always somewhat arbitrary – how do you even define poverty? But can attempt to make the process as scientific as possible Before mid-2000s, SA methods resulted in very arbitrary lines Researchers decided what goods and services they thought were needed to be non-poor, and costed these goods. Very prescriptive, unscientific, often based on racial prejudices Now: try to have a method which uses as little subjective prescription by researchers as possible: Ravallion’s “Cost of Basic Needs” method

Cost of Basic Needs methodology The Cost of Basic Needs method developed in 1994, and is a predominant method for setting absolute poverty lines. Basis of the line is the minimum cost of sufficient caloric intake. Gives us 3 lines, which include non-food needs to varying extents Food poverty line Minimum cost of sufficient calories, based on existing consumption habits Lower-bound poverty line Food line + non-food expenditure of households with total expenditure at the food line Upper-bound poverty line Food line + non-food expenditure of households with food expenditure at the food line Easier to understand with an example (next slide)

CoBN lines example (2011 Rands) Caloric requirement: 2100 kcal per person per day Reference group: households in deciles 3,4,5 Food poverty line: R337 per person per month Households whose total expenditure is similar to R337 per person per month, have (on average) non-food expenditure of R197 Lower bound = R337 + R197 =R534 per person per month Households whose food expenditure is similar to R337 per person per month, have (on average), non-food expenditure of R705 Upper bound = R337 + R705 = R1042 per person per month

Clearer interpretation of CoBN lines? Food line: minimum cost of “sufficient food”, if all money is spent on the purchase of food Upper bound either: Minimum cost of “sufficient” food and non-food (assumes those with sufficient food expenditure have sufficient non-food expenditure) The level of expenditure at which people tend to purchase sufficient food Lower bound: conceptually unclear. We argue that it is not a defensible poverty line. Following Stats SA, we suggest that upper bound be seen as standard poverty line, while food line be seen as “extreme poverty” line.

Existing CoBN lines in South Africa Essentially 2 existing iterations of the CoBN method in SA before our research: Hoogeveen and Ozler (2006), the first CoBN line Stats SA 2015, which updated Stats SA 2008 lines As we go through some of the methodological decisions made in the construction of the SALDRU line, I will highlight differences between our and the existing methodology While I will discuss the Stats SA methodology quite a lot, the primary advancement our paper has over the Hoogeveen and Ozler method is that we use new data (though there are some methodological differences)

Potentially contentious methodological decisions Cannot look at all the discussable decisions in one presentation, so I focus on: The minimum sufficient caloric requirement Discussion of the StatsSA food basket methodology Truncating the upper-bound line Other significant issues from the paper not discussed here: choice of dataset, construction of the consumption aggregate, the (very messy) process of converting food expenditures into calories, using expenditure patterns of households or individuals, defining a reference group of the poor, identifying the correct non-food expenditures

Food line Q1: How many calories? 2015 StatsSA report used a required caloric intake of 2100 kilocalories per person per day This was different to the 2261 kcal used in the earlier 2008 report, and attracted some criticism Both measures come from tables of recommended caloric intakes, differentiated by age and sex Tables used to create average requirement per person in the population, depending on demographic characteristics

2261 kcal: Recommended Dietary Allowances (US Food and Nutrition Board, NRC: 1989) “Light to moderate physical activity” Assumes median heights and weights as of US population prior to 1989 Leads to 2261 per capita per day requirement with 2000 IES  We calculate 2257 with 2011 IES

2100 kcal: Management of Nutrition in Major Emergencies (WHO: 2000) “Light physical activity” Anthropometric profile of the “typical developing country” For demographic profile of “typical developing country”, WHO calculates average requirement of 2080 kcal per capita per day  We calculate 2078 kcal per person per day for SA with 2011 IES

2261 or 2100 kilocalories? Not at all clear to us which is preferable, but until more work is done it seems best to use 2100 kcal measure 2100 kcal is as defensible as any other measure, and has the advantage of being common practice in the international poverty line literature Is also based on more recent calculations The choice does effect poverty line estimates though – not insubstantial

Food line Q2: Costing 2100 kilocalories Want “cost-per-cal” of the reference group Hoogeveen and Ozler approach: calculate caloric intake from all foods, calculate the cost of this intake, scale up cost to derive the cost of 2100 kcal StatsSA approach: derive a “representative basket” of food items which are somewhat representative of national and poor people’s consumption patterns Calculate caloric intake from basket items, calculate cost of this intake, scale up to derive cost of a basket which will give 2100 kcal. This is the food line.

StatsSA representative basket Decision to use food basket rather than all food items is justified by StatSA on grounds of representativity But raises some potential problems: National criteria disqualify some foods which poor people consume significantly, thus distorting the poor cost-per-calorie (e.g. samp) Makes poverty line vulnerable to changes in food classification (e.g. eggs, tea) We therefore prefer to use expenditure on all food items which we have data for On StatsSA justifications for the representative basket method: 1) Not clear why variance in basket structure is a significant issue, especially when alternative is omitting items from the basket 2) Even the “representative basket” is not common to all households – requirement was that at least 10% of households nationally buy each item

All-food vs basket-food expenditure

Ultimately, basket vs “all food” makes little difference: Using reference deciles 2-4: StatsSA: food line = R335 cost-per-cal = 0.5313 cents SALDRU: food line = R309 cost-per-cal = 0.4845 cents Despite some methodological differences, our food line in practical terms ends up being quite similar to the Stats SA measure. Not the case for upper-bound. not clear how much of even this small divergence is due to basket method. A large part is likely due to differences in methodology when it comes to converting expenditures into calories Via our alternative expenditure to calorie conversion: food line = R325; cost-per-cal = 0.5082 cents

Issues with the Stats SA upper bound Upper-bound created by calculating non-food expenditure of households which have food expenditure similar to FPL StatsSA calculated a food line of R335 p/m By the above method, they calculate an upper-bound of R959 p/m However this upper-bound was judged to be implausibly high, and steps were taken to adjust it StatsSA reduces upper-bound by only looking at non-food consumption of houses in deciles 2-7 → New upper-bound = R779

Is the concern justified? Useful to look at implied Engel coefficients Engel coefficients? – percentage of total expenditure which is spent on food Unadjusted upper bound: R959 upper, R335 food Suggests poor people spend 35% of their income on food Adjusted: R779 upper, R335 food Suggests poor people spend 43% of their income on food

Implied vs actual Engel coefficients Seems like original upper-bound is not implausibly high, given level of food line and the prevailing food/non-food expenditure share, and is better than the adjusted line. There is a data issue, eg household reporting R300 food and R20000 non-food per capita expenditure But seems like a data issue, and so rather create exclusion criteria which directly deal with this. We use a rule which requires very high non-food expenditure AND significant discrepancies between reported income and reported expenditure . Is not ideal, but fortunately method is quite robust to outliers as upper-bound is calculated with medians, and doesn’t seem to be something to worry about actually

The Stats SA truncation has a material effect We ultimately calculate an upper bound of R1042 After our efforts to directly move outliers, and some other methodological changes This is actually quite similar to the untruncated Stats SA figure of R959 The truncation, which reduces the upper bound, serves to artificially lower the upper bound to R779 While there is a real data quality issue, which Stats SA identify, we argue that truncation as above is not a good way to correct for that.

SALDRU lines in comparison with existing lines

Some last thoughts The SALDRU paper discussed here is an to “get under the hood” of the CoBN measure and review the different methodological decisions which must be made. We propose our new measure based on discussion of these issues – will hopefully be convincing! The big difference between our and the Stats SA lines is in the upper bound. Otherwise similar, but this is a substantial difference. For poverty measurement: absolute money-metric lines measure just one dimension of poverty. Must be combined with others for comprehensive understanding of poverty. Poverty lines are a subsistence measure. Not the same as “decent living level”. Being on the cusp of poverty should surely not be seen as desirable. In March 2015: Upper = R1307 per person per month  R43 per day Food = R444 per person per day  R15 per day