1. Module 7 Vulnerability to Poverty
Measuring poverty
Multidimensional poverty
Poverty Dynamics
Panel Data
Inference with Panel Data
International Poverty Comparisons
Vulnerability to Poverty
Tackling Poverty
Module 7 Vulnerability to Poverty
Jonathan Haughton
June 2017

2. JH: Poverty Measurement Course
Objectives
Explain why measures of current poverty are inadequate
Define vulnerability to poverty.
Explain how to measure vulnerability to poverty (vht), given measures of expected consumption (E(ct+1)), its variance (σ2), the poverty line (z), and a normality assumption.
Outline the steps required to measure vulnerability to poverty, given data from a cross-sectional household survey.
Critically analyze the methodological issues related to the practical measurement of vulnerability to poverty
Itemize the main sources of risk faced by households.
Describe the nature, purpose, and principal contents of Risk and Vulnerability Assessments.
June 2017
JH: Poverty Measurement Course

3. Why measure vulnerability?
Poverty measures the poor ex post
Policy needs to target the future poor; being poor now may be a poor guide to the future
A household is vulnerable to poverty if it is likely to be poor in the future (ex ante poverty)
June 2017
JH: Poverty Measurement Course

4. Vulnerability to Poverty Defined
“The propensity to suffer a significant welfare shock, bringing the household below a socially-defined minimum level”
What shock?
To consumption/capita? Or (unsmoothed) income/capita?
What minimum?
Poverty line?
How measure propensity?
In next year?
Within next few years?
June 2017
JH: Poverty Measurement Course

5. Levels of vulnerability
If probability of being poor in future is:
50%+: highly vulnerable
Greater than average poverty rate: vulnerable
Less than average poverty rate: not vulnerable
But you still might be unlucky
June 2017
JH: Poverty Measurement Course

6. JH: Poverty Measurement Course
The challenge
Vulnerability is a probability, potentially based on huge amounts of information, such as
Household assets, education, skills
Risks faced – drought, food prices, illness, etc.
Ability to handle risk – e.g. by dissaving, borrowing, working harder
Simplify:
Expected consumption/capita next period:
Variance of expect consumption/capita:
Poverty line: z
Assume is normally distributed.
June 2017
JH: Poverty Measurement Course

7. JH: Poverty Measurement Course
Basic calculation
Example 1: Expect consumption/capita of 55, standard deviation of 13, poverty line of 40.
Probability of poverty is 12.4%, = vulnerability
norm.dist(40,50,12,1)
Example 2: As 1, but = 47.5, sd = 6.5.
Probability of poverty is 12.4% = vulnerability!
June 2017
JH: Poverty Measurement Course

8. JH: Poverty Measurement Course
Measuring E(C) and σ
Chaudhuri et al. (2002)
Estimate econometrically:
X variables include household characteristics
Use this to predict c, assuming X doesn’t change
Note assumption:
Regress squared residuals from 1 on same X variables to estimate and hence the estimated variance of E(c) for each household.
Use to measure vulnerability for each household:
June 2017
JH: Poverty Measurement Course

9. JH: Poverty Measurement Course
Results: Indonesia
Poverty rate was 22%; 45% vulnerable
Consistent with reported fears of poverty
Makes targeting harder
More than half the vulnerable population not poor now
And some poor are not vulnerable!
June 2017
JH: Poverty Measurement Course

10. JH: Poverty Measurement Course
Issues
Measurement error
Noise likely inflates σ; Pritchett et al. (2000) reduce it by 30%.
Babies
Kamanou & Morduch (2002) claim a quarter of σ is due to demographic changes; how interpret?
Measurement of σ
Cross-section is not ideal; but longitudinal data are very rare
Normal distribution
We assume ln(C) ~ N(E(C),σ²); use empirical distribution?
June 2017
JH: Poverty Measurement Course

11. Sources of Vulnerability
Difficult to model in practice
June 2017
JH: Poverty Measurement Course

12. Risk and Vulnerability Assessments
“Diagnostic tools” favored by World Bank
Understand sources of vulnerability to poverty:
What are the main and most severe shocks?
Which groups are most at risk from these?
Catalog public interventions related to social risks
Identify the “policy gap”
Ask how vulnerable households can
Reduce risk (e.g. migrate; build dikes)
Mitigate risk (e.g. build up savings; diversify income)
Cope with shocks (e.g. sell assets, borrowing)
June 2017
JH: Poverty Measurement Course

13. JH: Poverty Measurement Course
Some lessons
Vulnerability to poverty:
Is measurable, albeit not easily
No consensus yet on how best to do this
Is more widespread than poverty
Shifts the focus to social protection
… which also includes protecting children, etc.
June 2017
JH: Poverty Measurement Course

14. JH: Poverty Measurement Course
Notes on the Reading
Haughton & Khandker, chapter 12
Dercon has a good overview
Dercon, Stefan Assessing Vulnerability to Poverty. Paper prepared for the U.K. Department for International Development. Department of Economics, Oxford University.
For a recent summary of the state of the art:
Naudé, W., Santos-Paulino, A., and McGillivray, M. (2009). Measuring Vulnerability : An Overview and Introduction. Oxford Development Studies, 37(3):
Chaudhuri et al. set out a practical methodology
Chaudhuri, Shubham, Jyotsna Jalan, and Asep Suryahadi Assessing Household Vulnerability to Poverty from Cross- sectional Data: a Methodology and Estimates for Indonesia. Discussion Paper Series No , Department of Economics, Columbia University, New York.
June 2017
JH: Poverty Measurement Course