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Slide 1
Poverty Lines Michael Lokshin DECRG-PO The World Bank
Slide 2
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
Slide 3
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
Slide 4
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
Slide 5
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
Slide 6
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
Slide 7
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:
Slide 8
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.
Slide 9
Poverty lines for different countries 9 Poverty lines
Slide 10
10 Poverty rates for different countries
Slide 11
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
Slide 12
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?
Slide 13
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
Slide 14
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
Slide 15
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.
Slide 16
16 Income Food intake, kcal/day ZuZr 2100 Urban Rural Z
Slide 17
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
Slide 18
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
Slide 19
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
Slide 20
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$0.010 Total Cost per
calorie
Slide 21
World Bank Method: Cost per calorie 21 HHIDFood items Caloric
content per 1 kg Quantity purchased (kg) Price paid ($)
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
Slide 22
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
Slide 23
Estimating Cost per Calorie Poverty lines 23 Expected location
of povery line Fourth decile Second decile
Slide 24
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
Slide 25
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
Slide 26
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
Slide 27
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
Slide 28
Non-food adjustment diagram 28 Poverty lines
Slide 29
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?
Slide 30
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?
Slide 31
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)
Slide 32
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
Slide 33
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
Slide 34
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