Measurement of Poverty: a Case Study of Pakistan Ambar Narayan (World Bank) Regional Poverty Analysis and Monitoring Workshop Islamabad, Pakistan March 2002

Role of Poverty Lines Poverty lines have an element of subjectivity –E.g. the World Bank’s $1/day (PPP) poverty line; useful for comparing across countries –National poverty lines: better suited to individual countries Consistency in defining poverty lines needed for exploring poverty trends Poverty lines only useful to measure consumption/ income poverty –Non-income dimensions equally important to measure “capability”

Outline of Presentation Choice of poverty lines –Important issues; different approaches Poverty lines used for Bank poverty studies for Pakistan –Why the choice of this line –Need for consistent poverty lines to examine trends Important issues in poverty measurement –E.g. consumption aggregates, price adjustments Some results from poverty measurement –Poverty trends; issues of comparability between surveys Analysis using poverty estimates; a few examples

Choice of Poverty Lines Setting poverty line involves –Defining a minimum bundle of goods/services –identifying the cost of a minimum bundle Standard approach: define household as poor if their expenditure is insufficient to consume the minimum bundle How to define the minimum bundle –Calorie-based approach: minimum calorific requirements are converted into minimum expenditure requirements –Basic-needs approach: cost of achieving a minimum bundle of basic needs -- calorific needs and other purchasable needs such as fuel, housing and clothing

Expenditure-Based Poverty Lines for Pakistan Calorie-based approach looking at food expenditures only –Havinga et al (1989), Mahmood et al (1991) Cost of basic needs approach incorporating food and non-food expenditures –Ercelawn (1991), Jafri (1999), FBS (2001) Fundamental similarity between these approaches –The poverty line expenditure level corresponds to the average or estimated expenditure of households which consumes the minimum calorie intake

Expenditure-Based Poverty Lines (Contd.) Why should the cost of minimum bundle depend only on calorie intakes ? –Food is the most important need ? –Calorie intakes (actual/expected) is a good proxy for all basic needs ? –Non-calorific needs hard to specify ? Alternative: poverty line is the money value of a bundle of commodities that represents a minimally acceptable level of living selected a priori –Gazdar et al (1994), World Bank (1995); modified from Ahmad (1993)

Poverty Line Used by Bank Studies Defining a basic needs bundle (like Ahmad, 93) requires intimate knowledge of the country Pakistan one of the few developing countries where this exercise has been undertaken Comprehensive, but somewhat subjective process : –“The proposed basic needs package consists of food, clothing, housing, health, education, transport, social interaction and recreational facilities…...Discussions were held with professional economists in Federal Government, Provincial Governments, Research Institutes and Universities. A check list thus prepared was rechecked with heads of different families. A team of economists was constituted to arrive at the quantum and value of each componential item of various basic needs separately in the rural and urban areas. These were rechecked with the consumers in different areas” (Ahmad, 93; p28)

Poverty Line Used by Bank Studies Ahmad’s poverty line for a family of 2 adults & 4 children (91-92 prices) –Rural: Rs. 300 per capita out of which Rs. 150 allocated to food needs –Urban: Rs. 419 per capita out of which Rs. 212 allocated to food needs Adjustments made by Gazdar et al (1994) using HIES (90-91) –Reducing the urban-rural food price differential, using cost-of-living price deflator –Adjusting housing expenditures by estimating expected rural and urban housing expenditure, given non-housing expenditure equal to that in the minimum required bundle –With adjustments, rural poverty line falls to Rs 296 per capita; the urban line falls to Rs 334

Further Adjustments to Poverty Line Poverty lines have to be adjusted for inter-temporal price changes, and inter-province price differences Inter-temporal price changes: we have used inflation rates from CPIs –CPIs are only available sources for non-food prices –Food inflation rates using household data over the years do not yield substantive changes to poverty lines Poverty lines not adjusted for inter-province price differences –Household expenditures adjusted for price differences instead Poverty lines adjusted by equivalence scale –Into “per equivalent adult” terms, using Ahmad’s equivalence scale (1 child = 0.8 adult)

Poverty Lines (Per Equivalent Adult) in Current Rupees Urban Rural

More on the Basic Needs Poverty Line Comparison with calorie measures –Regression analysis (for 90-91) reveals that the rural and urban poverty lines correspond to per capita calorie intake of 2250 (for a family of 2 adults and 4 children) and 1950 respectively Comparison with consumption patterns –Expenditure shares for food, housing and other (90-91 HIES) for households 10% on either side of the poverty line, compare well with the shares implied by the construction of the poverty line Comparison with other poverty lines –Compares well with Naseem (77), Lanjouw (94); 10-20% higher than lines by Malik (94), Ercelwan (91)

Constructing Expenditure Aggregates Include those expenditures that correspond to “basic needs” Include expenditures on flow of utilities only Decisions on what to include and what not may involve subjective judgments Critical to maintain consistency in methodology over time (across different household surveys)

Consumption Aggregates in our Study Following items are included in household consumption aggregates to determine poverty status –Food: Expenditure on consumed food items, irrespective of whether they were paid for in cash or not –Non-durable goods: E.g. Fuel and lighting, personal care articles and services, education, health, recreation and reading, personal transport and traveling, household laundry, cleaning, apparel, footwear, housing, maintenance and repair charges of household effects Important items excluded –Expenses on house, property, or any other tax, fines –Purchase of durable goods –Transfers paid out by household members

Adjusting Consumption Aggregates for Price Differences Methodology adopted: –Use food prices to construct household specific price indices, separately for rural/urban –Deflate household expenditures by corresponding price indices –Implicit assumption that differences in food prices captures cost of living differences to a high degree

Comparing Poverty Across HIES (1990s) and PIHS (98-99) Factors in favor of comparability of data across years –Consistency in poverty lines and methodology for measuring household expenditures –Consumption module almost unchanged across surveys –Sample sizes and sampling methodology: mostly similar since Factors that may compromise comparability across years –Change in recall period for some food items in PIHS –Change in sampling framework for rural areas in PIHS –Average household sizes higher in PIHS Differences large for lower expenditure deciles in rural areas Especially large differences for rural Sindh and Balochistan

Average Rural Household Sizes Across Surveys Per Capita Exp Deciles HIES HIES HIES PIHS/HIES Total

Our Poverty Estimates (FBS Estimates in Parentheses)

Poverty Trends in Pakistan

Analysis with Poverty Estimates: Examples Sensitivity analysis: how poverty estimates respond to shifts in poverty line –Additional insights from looking at distribution of population around the poverty line Relating poverty to growth and redistribution –Growth-inequality decomposition of changes in poverty rates –Measuring “pro-poor” growth Non-income/consumption dimensions of poverty –Find associations between consumption poverty and indicators of “capability” Analysis of vulnerability (the prob. of falling into poverty) –Measuring vulnerability; finding factors that determine vulnerability –Needs panel data ideally; “cohort” level analysis also possible using repeated cross-sections, like HIES & PIHS

Sensitivity of Head Count to Poverty Line - I

Sensitivity of Head Count to Poverty Line - II

A Snapshot of Vulnerability? Distribution of Population Around the Poverty Line

Growth-Inequality Decomposition of Changes in Poverty Estimates Measures the impact of changes in mean consumption and distribution on poverty –Growth component: how much of the change in poverty measures is due to variation in mean expenditure (per equiv adult) over time, holding the distribution constant. –Redistribution component: how much of the change in poverty measures is due to a change in the distribution of expenditure, holding the mean expenditure constant

Growth-Inequality Decomposition of Changes in Poverty Measures between and 98-99

Final Messages Choice of poverty line remains a largely subjective judgment –That said, any approach incorporating basic needs (beyond calories) seems preferable in our opinion More than the exact line that is chosen, it is important to decide on a national poverty line –Choose a benchmark poverty line and update it only for inflation Comparability of surveys across years critical for examining poverty trends –Dependent on a number of factors, e.g. consistency in sampling framework, questionnaires, methodology of field survey Poverty estimates useful for a broad range of analysis –Important to relate consumption poverty measures to non- income/expenditure dimensions human deprivation