Poverty alleviation and targeting

Transcription

1 Poverty alleviation and targeting Abdelkrim Araar, Sami Bibi and Jean-Yves Duclos Workshop on poverty and social impact analysis Dakar, Senegal, 8-12 June 2010 Poverty alleviation and targeting Kampala 1 / 26

2 Outline Outline Objectives Targeting and poverty Group targeting Targeting by indirect taxation Conclusion Targeting and poverty Group targeting Targeting by indirect taxation Conclusion Poverty alleviation and targeting Kampala 2 / 26

3 Objectives Discuss the broad principles of government intervention; Examine some of the properties of transfer schemes; Compare the poverty impact of different targeting interventions; Consider the impact of price and indirect tax changes on poverty. Poverty alleviation and targeting Kampala 3 / 26

4 Outline Objectives Targeting and poverty Setting Targeting imperfections Targeting schemes Group targeting Targeting by indirect taxation Targeting and poverty Conclusion Poverty alleviation and targeting Kampala 4 / 26

5 Setting Policymakers do not have perfect information on living standards and the characteristics of each individual to enable perfect targeting. Policies are sought such that: Operationally feasible: The program must be based on available information and be implementable. Socially efficient: The proposed program must be efficient in reducing poverty given its cost. Poverty alleviation and targeting Kampala 5 / 26

6 Targeting imperfections Targeting generates two types of errors (Weisbrod (1970)): 1. Targeting wrongly a non-poor individual; 2. Failure to target a poor individual. For instance, transferring an amount to all households with four or more children involves: 1. assisting non-poor households with four and more children, 2. and not assisting poor households with fewer than four children. Poverty alleviation and targeting Kampala 6 / 26

7 Targeting schemes Two targeting schemes are often considered (for instance, Duclos and Araar (2006), Chapter 12): 1. Lump-sum transfer: a constant amount to each targeted individual. An individualiwith incomey i ends us with an incomey i +a. 2. Proportional transfer: an amount that is proportional to some characteristics of an individual, for instance, an income source or a consumption good. For example, if an individualihas incomey i, his income would be changed to y i (1+λ). Poverty alleviation and targeting Kampala 7 / 26

8 Outline Objectives Targeting and poverty Group targeting Targeting by population subgroup Targeting by population subgroup Targeting by population subgroup Targeting by population subgroup Reducing the headcount index Reducing the average poverty gap Reducing the severity of poverty Group targeting Targeting by indirect taxation Conclusion Poverty alleviation and targeting Kampala 8 / 26

9 Targeting by population subgroup Targeting may be made on the basis of belonging to some socioeconomic group (Bourguignon and Fields (1997)). Assume that grouplreceives a lump-sum transfer a > 0. Initially non-poor individuals will remain non-poor. Initially poor individuals with incomes y i z a will become non-poor. Remains poor Escapes from poverty z y 1 y 2 Income (y) Poverty alleviation and targeting Kampala 9 / 26

10 Targeting by population subgroup To know the proportion of individuals that escape poverty, we need the density function, f(z) of individuals around z. The impact of a transfer of $1on the headcount of groupl is f l (z). The impact of that transfer on the entire population s headcount is φ l f l (z), where φ l is the population share of groupl. Poverty alleviation and targeting Kampala 10 / 26

11 Targeting by population subgroup a f l (y = z) Escaping poverty z Income (y) Poverty alleviation and targeting Kampala 11 / 26

12 Targeting by population subgroup If the policy is to reduce population poverty the most per dollar spent, then we have to target the group with the greatest density level atz. f m (z) f l (z) z Income (y) Poverty alleviation and targeting Kampala 12 / 26

13 Reducing the headcount index Incomes of Incomes of i groupl groupm Headcount 4/6 4/6 Poverty gap 12/60 20/60 Average income 12 8 Poverty line = 10 Targeting grouplreduces the headcount most, although the poverty gap is higher and average income is lower for groupm. Poverty alleviation and targeting Kampala 13 / 26

14 Reducing the headcount index Incomes of Incomes of i groupl groupm Headcount 4/6 4/6 Poverty line = 10 Targeting groupsl ormreduces the headcount by the same level (2/12), but with a cost of 6 for l and only4form. Poverty alleviation and targeting Kampala 13 / 26

15 Reducing the average poverty gap A transfer ofa = 1 to all members of grouplreduces the average poverty gap in that group by n l i=1 (z (y i +1)) + /z n l n l i=1 (z y i) + /z n l = Pl (α = 0;z) z where n l is the population size of grouplandp l (α = 0;z) is its poverty rate. The population impact is φl P l (α=0;z). z If the policy is to reduce the population average poverty gap the most per dollar spent, then the group to target is the one with the greatest group headcount. Poverty alleviation and targeting Kampala 14 / 26

16 Reducing the severity of poverty Income of Incomes of i groupl groupm Headcount 4/6 4/6 Poverty gap 36/60 24/60 Poverty line = 10 Targeting grouplormreduces the population average poverty gap by the same amount per dollar spent. However, the most severe poverty is in groupl. We can change this by focussing on the squared poverty gap. Poverty alleviation and targeting Kampala 15 / 26

17 Reducing the severity of poverty Incomes of Incomes of i groupl groupm Headcount 4/6 4/6 Poverty gap 36/60 24/60 Poverty line = 10 Targeting grouplreduces the population squared poverty gap (per dollar spent) proportionally to the average poverty gap of groupl, namely, by -2/z times the average poverty gap of grouplfor each per capital dollar spent. Poverty alleviation and targeting Kampala 15 / 26

18 Outline Objectives Targeting and poverty Group targeting Targeting by indirect taxation The impact of price changes The headcount impact of price changes The poverty gap impact of price changes Price changes and poverty Poverty impact of tax reforms Targeting by indirect taxation Conclusion Poverty alleviation and targeting Kampala 16 / 26

19 The impact of price changes Indirect taxation is often the principal source of public revenues in developing countries, and consumption subsidies often account for a large share of public expenditures (e.g., Bibi and Duclos (2007)). To see the poverty impact of a change in the price of commodities, implied by a change in indirect taxation or by an economic shock, we first normalize commodity prices to 1: ρ k = 1 k. We have therefore y i,k = ρ k q i,k = q i,k, where y i,k and q i,k are, respectively, the expenditure and the quantity of goodk related to the individuali. Assume that a tax τ on a goodk increases its consumption price bydτ k ; the post-reform price is then ρ k = 1+dτ k. Poverty alleviation and targeting Kampala 17 / 26

20 The impact of price changes We can approximate the monetary-equivalent change in well-being that follows. For instance, assume that $ 100 is initially spent on goodk to buy 100 units. Also assume that the new tax on this good raises its price by 1%. We can now buy only 99 units of goodk with the same $ 100. The value of 1 unit is lost, at a welfare value of $1. The change in well-being (or real income) is therefore approximately: 100*(-$0.01)=-$1. Poverty alleviation and targeting Kampala 17 / 26

21 The impact of price changes In general, the change in well-being for individualiis approximately q i,k dτ k where theq i,k is the quantity of goodk purchased by the individuali. The approximation is fine when price changes are relatively small (i.e., they are considered marginal). Poverty alleviation and targeting Kampala 17 / 26

22 The headcount impact of price changes Assume that the price of goodk has increased (dτ k > 0). Initially poor individuals will remain poor. Non-poor individuals with total expenditurez < y i < z +q i,k dτ k will become poor. The proportion of such individuals can be estimated by the density function f(z) and the average expenditures on goodk of those aroundz. Poverty alleviation and targeting Kampala 18 / 26

23 The headcount impact of price changes Denote bye[q k y = z] the average expenditure on goodk of those with income y = z. The expected change in well-being for those with incomes close to the poverty line is then E[q k y = z]dτ k. An increase ofdτ k in the price of goodk will then increase the headcount byf(z)e[q k y = z]dτ k. Poverty alleviation and targeting Kampala 18 / 26

24 The headcount impact of price changes E[q k y = z]dτ k Entering to poverty f(y = z) z Income (y) Poverty alleviation and targeting Kampala 18 / 26

25 The poverty gap impact of price changes The poverty gap of a poor individualiincreases by z (y i q i,k dτ k ) z y i = q i,kdτ k. z z z The population average poverty gap thus increases by 1 z n i=1 q i,kdτ k Υ(y i <z) n. If theq i,k for the poor are large, then the change in the average poverty gap will also be large. Poverty alleviation and targeting Kampala 19 / 26

26 Price changes and poverty From Duclos, Makdissi, and Wodon (2008), we know that the impact of a change in the price of goodk on the FGT poverty indices is given by: where P(α; z) dτ k = CD k (α; z)dτ k τ k CD k (α; z) = { E[qk y = z]f(z), when α = 0, α z n i=1 g(y i; z) α 1 q i,k n dτ k, when α 1. CD k (α; z) is referred to as the consumption dominance curve of goodk. Poverty alleviation and targeting Kampala 20 / 26

27 Poverty impact of tax reforms Suppose that a tax reform changes the tax rates of two goods (j and k) and that it is revenue neutral. This implies that µ q j dτ j = µ q k dτ k ordτ j = µq k µ jdτ q k, where µ q k is the mean consumption of goodk. It follows that a reform with dτ k > 0 will reduce FGT povertyp(α; z) if and only if CD j (α; z) µ q j < CD k(α; z) µ q. (1) k Poverty alleviation and targeting Kampala 21 / 26

28 Outline Objectives Targeting and poverty Group targeting Targeting by indirect taxation Conclusion Summary Relevant DASP commands Exercises with Stata and DASP References Conclusion Poverty alleviation and targeting Kampala 22 / 26

29 Summary Policymaking involves a trade-off between the welfare benefits and the budgetary costs of different types of targeting options. Targeting schemes can often be modeled either as involving lump-sum transfers or a proportional transfer, or mix of the two. Targeting by population subgroup is a common for of targeting that can help reduce total poverty the most per dollar spent. Poverty-efficient targeting may sometimes involve targeting those groups with lower poverty indices and higher average income. Poverty alleviation and targeting Kampala 23 / 26

30 Summary If the objective is to reduce the population average poverty gap the most per dollar spent, then the group to target is the one with the greatest group headcount. The poverty impact of an increase in some commodity price depends on the share of the poor in that commodity, the overall importance of the commodity, and the size of the price change. Poverty alleviation and targeting Kampala 23 / 26

31 Relevant DASP commands Poverty and targeting by population groups (itargetg) Poverty and targeting by income components (itargetc) Poverty alleviation and targeting Kampala 24 / 26

32 Exercises with Stata and DASP Part I: Exercises 8.1, 8.2, 8.3, 8.4, 8.5, 8.6 Part II: Exercises 2.7, 2.8 Part III: Exercises 1.1, 1.2, 1.3 Part III: Exercises 2.1, 2.2 Part III: Exercises 3.1, 3.2 Part III: Exercises 4.1, 4.2 Part III: Exercises 5.1, 5.2 Part III: Exercises 6.1, 6.2, 6.3 Poverty alleviation and targeting Kampala 25 / 26

33 References BIBI, S. AND J.-Y. DUCLOS (2007): Poverty Decreasing Indirect Tax Reforms: Evidence from Tunisia, International Tax and Public Finance, 14, BOURGUIGNON, F. AND G. FIELDS (1997): Discontinuous Losses from Poverty, GeneralizedP α Measures, and Optimal Transfers to the Poor, Journal of Public Economics, 63, DUCLOS, J.-Y. AND A. ARAAR (2006): Poverty and Equity Measurement, Policy, and Estimation with DAD, Berlin and Ottawa: Springer and IDRC. DUCLOS, J.-Y., P. MAKDISSI, AND Q. WODON (2008): Socially-Improving Tax Reforms, International Economic Review, 49, WEISBROD, B. (1970): Collective action and the distribution of income - A conceptual approach, in Public expenditure and policy analysis, ed. by R. Haverman and J. Margolis, Chicago: Markham. Poverty alleviation and targeting Kampala 26 / 26