International congres Social Justice and fight against exclusion in the context of democratic transition Poverty measurement: the World Bank approach Daniela Marotta Antonio Nucifora Tunis September 21, 2011
Outline What is poverty? Why measure it? What is the World Bank approach? How to measure poverty? Define an indicator of welfare Establish a poverty line Measures of poverty
Poverty o World Development Report (2000): defines poverty as "unacceptable deprivation in well-being o This means there are absolute necessities without which the member of a society cannot function: well-being is defined as command over commodities (poverty in monetary terms) The poverty line as a money-metric welfare Ravallion (1998):. a poverty line *is+ the monetary cost to a given person, at a given place and time, of a reference level of welfare. People who do not attain the level of welfare are deemed poor, and those who do are not. o But Sen (1987): well being comes from a capability to function in society
The World Bank and poverty measurements There is not a World Bank approach Any methodology of poverty measurement is not perfect in theory. Still, it is very important to build a firm consensus over several aspects of a methodology. Some criteria have to be met Poverty lines have to be: Intuitive Transparent Contextual Objective
Measuring Poverty and why Why measure poverty? Poverty data can inform anti-poverty policy. 1. The growth strategy 2. Social Spending 3. Targeted Interventions
Measure of household welfare Expenditures or Income? Expenditures is typically a more reliable measure, although it is more expensive to measure Income can fluctuate a lot; expenditures smoothens out irregularities and is better reflective of long-term average well-being (or permanent income) Regardless of choice, a prerequisite to measuring poverty is that expenditure or income must be properly measured Lifecycle hypothesis
Poverty lines: Objective / subjective Objective poverty is based on some socially accepted criterion of meeting a minimum standard of living Subjective poverty is based on individuals self-assessment of whether or not they meet a minimum standard of living
Poverty lines: absolute / relative Absolute poverty line is fixed in terms of living standards / welfare Example: cost of a bundle of basic commodities Poverty comparisons are consistent in that two individuals with the same level of welfare are treated the same way Can differ from region to region within a country Relative poverty line varies with the average standard of living Example: half the mean or median of per capita income
Setting objective poverty lines Cost of Basic Needs (CBN) approach Establish a minimum threshold of consumption necessary for achieving minimum standards of living (food, clothing, shelter ) How to establish that threshold of basic needs? The choice of basic needs bundle should reflect local perceptions of what constitutes poverty Start by estimating cost of a basic food bundle; this gives the food poverty line (e.g., often food needs are set at 2100 kilocalories per person) Estimate the allowance for basic non-food goods and services Add food and non-food allowances to get poverty line
Setting objective poverty lines Food Energy Intake (FEI) approach Find level of expenditures or income at which food-energy requirements (e.g., 2100 calories) are met on average Food-energy intake rural 2100 urban z z Income
a. Both approaches estimate total household expenditure which can sustain the minimum calorie requirement (in per capita/per adult equivalent terms) b. Compared with CBN, FEI involves fewer steps in estimation, but unreliable if regional (e.g., urban and rural) consumption patterns are very different c. (CBN) Egypt, Jordan, Iraq, Indonesia, Bangladesh; (FEI) India, Pakistan CBN vs FEI
Updating poverty lines Updating poverty line with inflation rates Poverty line is explicitly fixed to a specific welfare level so that poverty indices can be easily comparable over time Due to changes in life style and taste, poverty lines updated with inflation rates might not be able to achieve calorie requirement Estimating poverty line for every survey Poverty line in real terms might change makes a comparison over time difficult The new poverty line is supposed to achieve the calorie requirement Recommendation At intervals of 10 or more years, re-estimate the poverty line to adjust to changes in lifestyle and taste In the meantime, update the poverty line with inflation rates to make poverty indices comparable over time
Poverty Measures Number of poor Poverty Rate or Headcount Poverty Rate how many people are below the poverty line (z) α = 0 Depth of poverty or Poverty Gap How much money is needed to bring all the poor up to the poverty line (increase incomes y i* to z) α = 1 Severity of poverty (square poverty gap) How far are people from poverty line α = 2 PG q 1 1 n i1 yi z q 1 n i1 z y z i 13
International Poverty Comparisons When analyzing poverty in a given country the World Bank advocates using a definition of poverty that is generally accepted in that country $1.25-a-day poverty estimates are useful for global monitoring of progress No single bundle of goods (basic needs) is internationally acceptable so this line is used To include those who would be considered poor in many middleincome countries, the World Bank also publishes international poverty estimates based on a $2-a-day line But these lines are not a useful basis for domestic policy-making to reduce poverty The WB recommends using objective, absolute poverty lines
Where $1.25 a day is coming from: National poverty lines plotted against mean consumption using consumption PPPs for 2005 OLS elasticity=0.66 Source: ChThese estimates are derived based on poverty standards in the World s poorest countries en and Ravallion (2009) 15
Using international poverty lines: global poverty monitoring 16
International Poverty Lines
Consensus building in poverty measurement at the national level Experience in Latin America: Poverty Committees Include individuals with relevant expertise and reputation on poverty methodologies (Stakeholders include experts from academia, public sector and international organizations The WB role: Help ensure that poverty figures are backed by the best international practices Help build inter-agency consensus and foster transparency Lend credibility as an active member of Expert Committees (part of Poverty Committees) Provide financial and technical assistance throughout process
Recommendations The WB recommends using objective, absolute poverty lines in developing countries Always conduct sensitivity analysis. Build consensus
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