Lecture 2-1 Defining and Measuring Poverty

Instructor: Dr. Jin Wang Feb 11th, 2011

An overview of the poverty definition, official poverty measure and critiques

Definitions: Absolute Poverty vs. Relative Poverty Poverty Measure: Headcount Index vs. Poverty Gap Index Case study: How does the World Bank measure global poverty? How does UK measure its poverty? How does mainland China measure its poverty? How does Hong Kong measure its poverty?

What is poverty?

Can we say a person in Hong Kong is poor if they have a living standard that is obviously higher than the average person, for example, in Africa?
Is it an absolute concept that is the same across the world or Is it a relative concept that depends on the incomes of others in the area?

To Define and Measure Poverty

Key Steps to define Poverty Defining an indicator of living standard

Establishing a minimum acceptable living standard to separate the poor from the non-poor (the poverty line) Generating summary measures of the extent of poverty.

Step 1: The Indicator of Living Standard and its Distribution

The most frequently used indicator is:

Candidate 1: Income Candidate 2: Consumption Expenditure

The practical choice depends on data availability.

Step 2: Poverty line

The poverty line as a benchmark: the poor are those whose expenditure (or income) falls below a poverty line.

How to choose a poverty line?

The choice of the poverty line (and measure) depends crucially on being absolute or relative poverty.

Absolute Poverty

Absolute Poverty: having less than an objectively defined threshold.

Many countries calculate absolute poverty lines by calculating how much it costs to obtain enough food,

usually in terms of meeting a calorie norm of around 2000 cal per person per day (as suggested by nutritional experts at the Food and Agricultural Organization of the United Nations)

Calorie Engel Curve: a method to determine absolute poverty line

The

Calorie Engel Curve plots the logarithm of calorie

Log (Per capita Calorie Consumption)

consumption against the logarithm of total household expenses per capita.

Calorie Engel Curve

Log (per capita expenditure)

Calorie Engel Curve: to determine absolute poverty line

By looking at what people actually spend, we can find the income (or total expenditure) level at which, on average, people get 2,000 calories.
The critical level will be the poverty line. Those people whose expenditure falls below that is classified as poor.

Poverty line based on the Engel Curve

Log (Per capita Calorie Consumption) Calorie Engel Curve

Log (2,000 Calories)

Poverty Line

Log (per capita income)

Calorie-based Poverty Lines

Calorie-based poverty lines are widely used around the world. The association with food appears to be attractive, because

poor people do indeed spend much of their budget on food there is more political support for anti-poverty programs that involve food than for measures based on goods that are seen as less meritorious.

The nutritional basis, and the involvement of nutritional scientists in setting the norms, also appears to add legitimacy to the lines and the counts that are based on them.

An Example: Calorie Engel Curves of India

An Example: Using Calorie Engel Curve to measure poverty in India

Relative Poverty

Relative Poverty: having less than the general standard of living in the country or region in which they live.

For instance, the OECD and European Union typically define the poor as those whose per capita income falls below 50 percent of the median. As the median income rises, what happens to the poverty line?

Poverty Line: The Micawber Problem

In Dickens David Copperfield, the character of Mr Micawber has an eloquent understanding of a poverty line.

Income twenty shillings, expenses nineteen shillings and sixpenceresult happiness.

Income twenty shillings, expenses twenty shillings and sixpenceresult, misery.

Poverty Line: The Micawber Problem Contd

Why should everything depend on such a tiny difference? Why do we say that someone who is just below the poverty line is poor, and thus a candidate for transfers and the special attention of the World Bank, while someone who is just above it, whether by sixpence or six HKD, needs no help and can be safely left to their own devices?

Poverty Line: Can we find a cutoff with a jump in behavior?

Is there some income level, or perhaps some combination of income and other thingsan index of wellbeingwhere there is a real observable jump in behavior? Yet decades of research into peoples spending patterns and income levels has always failed to find a point at which behavior suddenly changes, and which we might use as the cutoff for a poverty line.

Step 3: Construct Summary Measures of the Extent of Poverty

The headcount index (Poverty Rate) measures the proportion of the population that is poor.

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Formal Definition:

Advantages (+) and disadvantages (-) of Headcount Index

(+) simple to construct easy to understand. (-) The headcount index does not take the intensity of

poverty into account - insensitive to differences in the depth of poverty of the Poor. It assumes all poor are in
the same situation. Over time, the index does not change if individuals below the poverty line become poorer or richer, as long as they remain below the line

Headcount Index
Question: Country A and B, based on the headcount index, which is poorer?

B A Nq

A Numerical Example

In the table below, what is the headcount index for country A and B?
Expenditure for each individual in country Headcount poverty rate

Headcount Poverty Rates in A and B, Assuming Poverty Line of 125

Expenditure in A Expenditure in B

100 124

100 124

150 150

150 150

=2/4=50%
=?

Policy Implication based on Headcount Index

A transfer to a very poor household would probably leave the headcount index unchanged (if poor remains below the line) even though poverty has overall lessened. The easiest way to reduce the headcount index is to target benefits to people just below the poverty line, because they are the ones who are cheapest to move across the line. Policies based on the headcount index might be sub-optimal.

Headcount Index

Overall, the headcount index remains the most popular poverty measure. In order to ensure rigorous analysis, however, it is important to carry out sensitivity analysis (for instance, by calculating the measure for different poverty lines).

Measures of poverty - Poverty Gap Index

Poverty Gap Index: the average gap between poor peoples living standards and the poverty line in the population, as a proportion of the poverty line (with nonpoors gap being zero). This indicates the average extent to which households fall below the poverty line. It accounts for the intensity/depth of poverty: how poor the poor are.

Poverty Gap Index

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Formal Definition of Poverty Gap Index

Poverty Gap Index

Question: Country A and B, based on the poverty gap index, which is poorer?

A
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A Numerical Example
In the table below, what are the Poverty Gap Indices for country A and B?
Poverty Gap Index in A and B, Assuming Poverty Line of 125

Expenditure for each individual in country

Expenditure in A Expenditure in B 100 100 150 150

Poverty Gap Index

(125 100) (125 100) } 125 125 4 0.10 {

124

124

150

150

=?

Poverty Gap Index (+) advantages

The Poverty Gap Index can be interpreted as the average shortfall of poor people.

It shows how much would have to be transferred to the poor to bring their expenditure up to the poverty line, and present it as an average in terms of poverty line (PGI).

PGI takes the intensity of poverty into

account.
Therefore, PGI complements the headcount index.

Policy Implications of Poverty Gap Index

In the construction of Poverty Gap Index, Someone just below the line now counts for less than someone a long way below it. The malevolent government can no longer cook its books by taking money from the poorest and giving it to those just below the line.

Practical Issues of Headcount Index vs. Poverty Gap Index

In practice, only academics and a few statistical agencies calculate such PGI measures with any regularity.

PGIs superiority seems to be outweighed by the difficulty of explaining them to the press or to the public. it seems to be rare that poverty comparisons, between two places, two countries, or between two dates, are different if we use the better measures.

Summary: 3 steps of poverty measurement

1) A distribution of Living Standard 2) A critical level (Poverty line) below which individuals are classified as Poor 3) A poverty measure

Poverty and Growth

Some believe that Economic growth is the best way to reduce poverty, so by focusing on economic growth, we can eradicate poverty. Other argue the opposite, economic growth does not benefit the poor Who is right?

Is Growth Good for the Poor?

We need to start with some definitions... What is Growth? Growth of what?

What is Good?

What is GDP and What is Growth?

GDP is the market value of all final goods and services produced within a country in a given period of time. The GDP is measured in the National Account Statistics of all the countries. Economic growth is measured by the growth of the Gross Domestic Product (GDP), divided by the number of people, i.e. the growth of per capita GDP (inflation adjusted).

An Example on GDP and Growth

The expenditure method: where did those goods go? GDP=Consumption + Investment + Government Spending + (Exports - Imports) Next, we will use HK as an Example to calculate GDP and growth

Example: What is the GDP for HK?

Source: http://www.censtatd.gov.hk/

What is the Growth Rate from 2008-2009?

Source: http://www.censtatd.gov.hk/

What is good?

Dollar and Kray (2002) find that Growth increase the income of the poor on average equiproportionally to that of every one: when GDP per capita increase by 10%, the income of the poor increase by 10%. e.g. if GDP was 1000 dollar per capita, and the poor were getting on average 200 dollars per capita, if GDP increases to 1100 dollars, the income of the poor will increase to 220 dollars.

What is good?

When GDP increases by 100 dollars, the Poors quality of life, access to services, does not necessarily increase. for example the rate of child mortality reduction was much lower in the 1990s than in the 1980s, despite the fact that (income) poverty reduction was more rapid in the 1990s than in the 1980s. China, Kerala, Sri Lanka, Cuba, have made great progress against child mortality and lack of education before any economic reform.

Do the poor benefit from rises in income proportionally? Source: Dollar and Kray (2002)

Do the poor benefit from growth proportionally?

Source: Dollar and Kray (2002)

Interpretation and Caution

The fact that this is true on average does not mean that this is always the case: there are large variation from countries to countries, and period to period:

To take India for example, growth did not lead to a significant reduction of poverty in the 1990s. The rapid expansions in high-tech industries is likely to disproportionately benefit the well-educated. Growth in agriculture on which most poor people depend has been less rapid.

Poverty and Capabilities: Multi-dimensions

Poverty is not simply a matter of low income. Poverty is a multi-dimensional phenomenon.

Poverty as capability deprivation is developed by Amartya Sen (1999)

Poverty is the absence of one or more of the basic capabilities that are needed to achieve minimal functioning in the society in which one lives including education, health, etc.

Multi-dimensional Poverty Index

The Multidimensional Poverty Index complements income-based measures by considering multiple deprivations.

MPI combines three dimensions 1. Living standard 2. Education 3. Health

Components of MPI

The MPI requires a household to be deprived in multiple indicators at the same time. A person is multi-dimensionally poor if the weighted indicators in which he or she is deprived add up to at least 30 percent. But lack of reliable data has been a major constraint!