Measurement of Poverty: Concepts & Measurements

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 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

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

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

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 Expenditure Mexico, 1992 Measurement of Poverty

Cumulative Distribution of Expenditure Mexico, 1992 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

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

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

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

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

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

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

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 Expenditure HH as Consumer Measurement of Poverty

Measuring Y and Expenditure Household 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

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

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

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

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

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

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

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 1985 figures Measurement of Poverty

Regional Head Count Estimates Moderate Poverty < $370/year 1985 figures Measurement of Poverty

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

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

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

Proportional Poverty Gap PPG = (1/N){(Z-Yi)/Z} Measures the “depth” of poverty It gives some weight to how far below the poverty line a poor individual is If a poor person’s income fall, the HC won’t change, but the PPG will increase to reflect the increase in the depth of poverty Measurement of Poverty

Squared Poverty Gap(Foster-Greere Thorbecke) PPG = (1/N){(Z-Yi)/Z}2 Measures the “severity” of poverty Squares the difference between the poverty line and each household’s income provides much greater weight to the poorest of the poor because the farther the HH from the poverty line, the greater the weight it is given Measurement of Poverty

Measurement of Poverty Poverty Measures Head Count Proportional Poverty Gap Squared Poverty Gap Absolute Poverty Gap Income Distribution Y PL Pop (poorest to richest) Measurement of Poverty

Measurement of Poverty Poverty Measures These first 3 poverty measures are often referred to as the Foster-Greere-Thorbecke family of indices They can all be written as: Pα= (1/N){(Z-Yi)/Z} =0 is HC =1 is PPG =2 is SPG Measurement of Poverty

Poverty Measures from Mexico Measurement of Poverty

Human Development Index An attempt to account for some of the limitations of using just income or expenditure as a measure of welfare Tries to take seriously some of Sen’s arguments about capabilities Sen argues that the goal is to increase capabilities …to be well fed, educated, healthy These capabilities won’t always be perfectly correlated with income Measurement of Poverty

Income and Capabilities Measurement of Poverty

Measurement of Poverty HDI Consists of 3 elements Life Expectancy Educational Attainment 2/3 Adult Literacy 1/3 School Enrolment Per Capita Income Adjusted down for Y > $5K Each component scored on 0 - 1 scale Index is simple average of 3 components Measurement of Poverty

Gender Development Index Motivated by inequality in the distribution of resources across gender. Is there evidence that resources are distributed unequally? The same 3 components as HDI, but gives weight to relative equality in Y and achievement of capabilities by gender. Measurement of Poverty

Measurement of Poverty Human Poverty Index Attempt by UNDP to take Sen’s capability approach even more seriously Index combines 3 parts: Vulnerability to early death Access to education Overall standard of living Health, water, nutrition Measurement of Poverty

Measurement of Poverty The secret of truth is that there are no facts, only stories. - Joao Ubaldo Ribeira Brazilian novelist Measurement of Poverty