poverty lines michael lokshin decrg-po the world bank

Poverty Lines Michael Lokshin DECRG-PO The World Bank

Poverty Lines 1.The welfare ratio 2.The theoretical ideal 3.Practice: Objective poverty lines 4.Practice: Subjective poverty lines 5.Recommendations for practice 2 Poverty lines

1. The welfare ratio 3 Poverty lines Add up expenditure on all commodities consumed (with imputed values at local market prices) and Deflate by a poverty line that might depend on household size, composition, and location/date) The real expenditure or welfare ratio is: where P ij is a price paid for good j by household i Q ij is a quantity of good j consumed by household i

2. The theoretical ideal 4 Poverty lines Poverty line should be absolute in the space of welfare: Two individuals with the same level of welfare are treated similarly Poverty line should satisfy the weak Pareto principle that states that a welfare gain cannot increase poverty The ideal poverty line is the minimum cost of achieving a reference level of welfare by a given household: P i are the prices paid by a household i for goods X i are household characteristics that could affect households welfare Z w is is the reference level of utility

The theoretical ideal 5 Poverty lines Linear approximation of the expenditure function: where Q ij is the consumption of good j that brings household i to the reference welfare level Z w

Common issues in Practice Identification of consumers cost function from demand behavior Are there goods that should be included in the consumption aggregate but not the poverty line (qat in Yemen?) Identification of external effects (interdependence). Utility depends on own consumption and relative position. Absolute versus relative poverty? Is there really a difference? Absolute in the space of welfare can mean relative in the commodity space (Ravallion and Chen, 2009) 6 Poverty lines

Calibration of poverty lines to supplementary welfare data 7 Poverty lines Imperfect welfare indicator W i for household I Examples: Food share Nutritional/Health status Self-rated welfare (Cantrils scale) Perceived consumption adequacy Income Y i and other welfare-relevant characteristics Poverty line could be derived from estimating:

Absolute vs. relative poverty? 8 Poverty lines Welfare depends on relative income: M is mean income in a country. The reference level of utility: Thus, the poverty line is absolute in welfare space, but is relative in the consumption space the poverty line is a function of mean income: For a poverty line to be absolute in the space of welfare (that is yield Z w ) the commodity-based poverty line Z have to rise as M is rising.

Poverty lines for different countries 9 Poverty lines

10 Poverty rates for different countries

3. Practice: Objective Poverty Lines 11 Poverty lines Cost of Basic Needs (CBN) method: Poverty line is a cost of a bundle of goods deemed sufficient for basic needs. Food-share version of CBN : Poverty line is a cost of the food- energy requirement Food-Energy Intake (FEI) method: Find expenditure or income at which food-energy requirements are met on average for each region/socio-economic group

Problems to be aware of 12 Poverty lines Defining basic consumption needs Setting food energy requirements: problems with variability of activity levels; multiple equilibrium. Setting basic non-food consumption needs Consistency in terms of welfare: Is the same standards of living being treated the same way in different subgroups of the poverty profile? Is the definition of welfare consistent with the definition of poverty? Should some goods purchased by the poor be included into the poverty bundle? How sensitive are the rankings in a poverty profile to these choices?

Consistency of Poverty Lines Poverty lines 13 Two bundles yield same food-energy intake, but the urban bundle is almost certainly preferable to the rural bundle The standard of living at the urban poverty line is higher than at the rural line These two poverty lines are inconsistent providing different welfare levels % of calories from food UrbanRural Rice5040 Corn1040 Vegetables2010 Meat2010

Difference in the cost per capita Poverty lines 14 Food Consumption and Cost of a calorie by quintile Expenditure Quintile Percentage of expenditure on food Calories per capita, per day Cost per calorie Lowest 701,5910.68 2 651,8550.79 3 602,0200.87 4 542,1601.00 Highest 472,7511.38

Example 2: Food-energy intake Method 15 Poverty lines Different sub-groups attain food energy requirements at different standards of living, in terms of real consumption expenditures.

16 Income Food intake, kcal/day ZuZr 2100 Urban Rural Z

Allowing for differences in relative prices 17 Poverty lines Ideally we only want to adjust the poverty bundle for differences in relative prices The problem is how to implement this ideal in practice The identification problem remains Key thing: To control for welfare differences

Allowing for differences in relative prices 18 Poverty lines 1. Parametric demand models: If we know the parametric utility function then or we can figure it out from demand behavior then use this to determine the cost of the reference welfare level in each region 2. Numerical methods: Look at consumption behavior of poorest x% nationally in each region of the country Cost the consumption bundle of that group in each region Calculate the poverty rate nationally and iterate if the answer differs too far from x

Methods of Setting Poverty Lines Do Matter! 19 Poverty lines Poverty Headcount % UrbanRural Indonesia FEI method16.814.3 CBN method10.723.6 Tunisia FEI method7.35.7 CBN method3.513.1

World Bank Method: Cost per calorie 20 HHIDFood items Caloric content per 1 kg Quantity purchased (kg) Price paid ($) 1001Milk1000.51.4 1001Bread2001.03.0 1001Meat6000.35.0 1002Bread2001.01.5 1002Butter12000.24.0 1002Milk1000.51.5 1002Sugar7001.04.2 1002Potatoes3005.07.3 1003Meat6000.77.0 1003Beans5000.52.2 1003Veg. Oil4500.33.4 Caloric value 50 200 180 200 240 50 700 1500 420 250 135 40.53925$0.010 Total Cost per calorie

World Bank Method: Cost per calorie 21 HHIDFood items Caloric content per 1 kg Quantity purchased (kg) Price paid ($) 1001Milk1000.51.4 1001Bread2001.03.0 1001Meat6000.35.0 1002Bread2001.01.5 1002Butter12000.24.0 1002Milk1000.51.5 1002Sugar7001.04.2 1002Potatoes3005.07.3 1003Meat6000.77.0 1003Beans5000.52.2 1003Veg. Oil4500.33.4 Caloric value 50 200 180 200 240 50 700 1500 420 250 135 $0.015 Mean cost per calorie 0.022 Cost per calorie 0.007 0.016

World Bank Method: Cost of a calorie Poverty lines 22 Pick a nutrition requirement: 2100 Kcal per day ( NR ) Select a group of households around the poverty line Usually take 2 nd to 5 th deciles of expenditure distribution Calculate the total spending of these households on food ( FS ). Calculate the total caloric content of these purchases ( TC ) Calculate the cost of a calorie for this group: CC=FS/TC Calculate the cost of food poverty line as: FPL = NRCC=NRFS/TC

Estimating Cost per Calorie Poverty lines 23 Expected location of povery line Fourth decile Second decile

24 Income Z1Z1 2 5 Price(mean) 2.45 3.25 2.05 2.01 Market Supermarket Price of a calorie/ goods Is the width of the band important? Case of dual prices

25 Income Z1Z1 2 5 Price(mean) 3.50 3.45 3.65 3.75 Market Supermarket Price of a calorie/ goods Street vendor Local store Is the width of the band important? Case of multiple prices

Poverty lines 26 Adjust Food Poverty Line for non-food expenditures LPL: Select a group of households whose total expenditure is equal (close) to Food Poverty Line Estimate average share of non-food consumption S L in their total consumption expenditure Calculate: LPL = FPL/(1- S L ) Example: FPL = $50, S L =0.2 LPL = $50/(1-0.2)=62.5 World Bank Method: Lower poverty line

World Bank Method: Upper poverty line Poverty lines 27 UPL: Select a group of households whose food expenditure is equal to Food Poverty Line Estimate average share of non-food consumption in their total consumption expenditure S U Calculate: UPL = FPL/(1- S U ) Example: FPL = $50, S u =0.35 UPL = $50/(1-0.35)=76.9

Non-food adjustment diagram 28 Poverty lines

Updating poverty lines over time Poverty lines 29 Once poverty line is established, it is important to update it correctly for the new time period It is incorrect to recalculate poverty lines every year: by doing that we would use relative poverty lines (similar to urban/rural example) Two ways to go: update old poverty line using new prices. That would answer the question: How many people can afford the old basket now? update new poverty line using old prices. That would answer the question: How many people could afford the new basket in the past?

4. Practice: Social Subjective Poverty Line 30 Poverty lines Minimum Income Question (MIQ): What income do you consider to be absolutely minimal, in that you could make ends meet with less?

Practice: Social Subjective Poverty Line Poverty lines 31 Latent individual welfare W i : Derive the Social Subjective poverty line as: In practice W i can be approximated as: MIQ (OLS) Consumption adequacy questions (Ordered Probit) Economic ladder questions (Ordered Probit)

Examples of subjective welfare questions for Jamaica and Nepal 32 Poverty lines Respondents asked whether their food, housing and clothing expenditures were adequate for their family needs. The implied subjective poverty lines are robust to alternative methods of dealing with other components of expenditure The aggregate poverty rates accord closely with the poverty rates based on poverty lines derived with CBN method. However, the geographic and demographic poverty profiles differ substantially from those based on objective poverty lines

Poverty rates based on subjective and objective poverty lines: Poverty lines 33 self rated poverty lines are higher than official poverty lines subjective poverty rates are also higher than the official (income) poverty rates

5. Recommendations Poverty lines 34 The WB recommends using objective, absolute poverty lines in developing countries Usually, several poverty lines are calculated. For example, Lower and Upper poverty lines in the WB method Always conduct sensitivity analysis. Test the degree to which the results are sensitive to the choice of poverty lines. This can be done by repeating the calculations for different lines and comparing results

poverty lines michael lokshin decrg-po the world bank

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