lecture+2 1+defining+and+measuring+poverty

8/4/2019 Lecture+2 1+Defining+and+Measuring+Poverty

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Lecture 2-1

Defining and Measuring PovertyInstructor: Dr. Jin Wang

Feb 11th

, 2011


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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?


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What is poverty?

Can we say a person in Hong Kong ispoor if theyhave a living standard that is obviouslyhigher thanthe average person, for example, in Africa?

Is it an absolute concept that is the same across theworld or

Is it a relative concept that depends on the incomesof others in the area?


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To Define and Measure Poverty

Key Steps to define Poverty Defining an indicator of living standard

Establishing a minimum acceptable livingstandard to separate the poor from the non-poor(the poverty line)

Generating summary measures of the extent ofpoverty.


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Step 1: The Indicator of Living Standard and itsDistribution

The most frequently used indicator is:

Candidate 1: Income

Candidate 2: Consumption Expenditure

The practical choice depends on data availability.


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Step 2: Poverty line

The poverty line as a benchmark: the poorare those whose expenditure (or income) fallsbelow a poverty line.

How to choose a poverty line?

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


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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 enoughfood,

usually in terms of meeting a calorie norm of around

2000 cal per person per day (as suggested by nutritionalexperts at the Food and Agricultural Organization of theUnited Nations)


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Calorie Engel Curve:

a method to determine absolute poverty line

Log(PercapitaCalorieConsu

mption)

Log (per capita expenditure)

Calorie Engel Curve

The Calorie Engel Curve plots the logarithm of calorie

consumption against the logarithm of total household expenses per

capita.


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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 isclassified as poor.


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Poverty line based on the Engel Curve

Log(PercapitaCalorieConsumption)

Log (per capita income)

Calorie Engel Curve

Log (2,000 Calories)

Poverty Line


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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 asless meritorious.

The nutritional basis, and the involvement of nutritionalscientists in setting the norms, also appears to addlegitimacy to the lines and the counts that are based onthem.


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An Example: Calorie Engel Curves of India


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An Example: Using Calorie Engel Curve to

measure poverty in India


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Relative Poverty

Relative Poverty: having less than thegeneral standard of living in the country or

region in which they live.

For instance, the OECD and European Uniontypically 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?


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Poverty Line: The Micawber Problem

In Dickens David Copperfield, the character of MrMicawber has an eloquent understanding of apoverty line.

Income twenty shillings, expenses nineteen shillings

and sixpenceresult happiness.

Income twenty shillings, expenses twenty shillings andsixpenceresult, misery.


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Poverty Line:

The Micawber Problem Contd

Why should everything depend on such a tinydifference?

Why do we say that someone who is just below the

poverty line is poor, and thus a candidate fortransfers and the special attention of the WorldBank,

while someone who is just above it, whether bysixpence or six HKD, needs no help and can besafely left to their own devices?


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

Is there some income level, or perhaps somecombination of income and other thingsan indexof wellbeingwhere there is a real observable jump

in behavior?

Yet decades of research into peoples spendingpatterns 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 povertyline.


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Step 3: Construct Summary Measures of

the Extent of Poverty

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

Nq


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Formal Definition:


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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 thedepth 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 theyremain below the line


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Headcount IndexQuestion: Country A and B, based on the headcount

index, which is poorer?

A

B

Nq


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A Numerical Example

In the table below, what is the headcount index forcountry A and B?

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

Expenditure for eachindividual

in country

Headcount

poverty rate

Expenditure

in A100 100 150 150

Expenditure

in B124 124 150 150

=2/4=50%

=?


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Policy Implication based on Headcount Index

A transfer to a very poor household would probably

leave the headcount index unchanged (if poorremains below the line) even though poverty hasoverall lessened.

The easiest way to reduce the headcount index is totarget benefits to people just below the poverty line,because they are the ones who are cheapest tomove across the line.

Policies based on the headcount index might besub-optimal.


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Headcount Index

Overall, the headcount index remains the mostpopular poverty measure.

In order to ensure rigorous analysis, however, it isimportant to carry out sensitivity analysis (forinstance, by calculating the measure for different

poverty lines).


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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 non-poors gap being zero).

This indicates the average extent to whichhouseholds fall below the poverty line.

It accounts for the intensity/depth of poverty:how poor the poor are.


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Poverty Gap Index

Nq


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Formal Definition of Poverty Gap Index


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Poverty Gap Index

A

B

Nq

Question: Country A and B, based on the poverty gap

index, which is poorer?


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A Numerical Example

Poverty Gap Index in A and B, Assuming Poverty Line of 125

Expenditure for each

individualin country

Poverty Gap Index

Expenditure

in A 100 100 150 150

Expenditure

in B 124 124 150 150

In the table below, what are the Poverty Gap

Indices for country A and B?

= ?

10.0

4

}125

)100125(

125

)100125({


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Poverty Gap Index (+) advantages

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

It shows how much would have to be transferred tothe poor to bring their expenditure up to the poverty

line, and present it as an average in terms of povertyline (PGI).

PGI takes the intensity of poverty into

account. Therefore, PGI complements the headcount index.


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Policy Implications of Poverty Gap Index

In the construction of Poverty Gap Index,Someone just below the line now counts for lessthan someone a long way below it.

The malevolent government can no longer cookits books by taking money from the poorest and

giving it to those just below the line.


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Practical Issues of Headcount Index vs.Poverty Gap Index

In practice, only academics and a few statisticalagencies calculate such PGI measures with anyregularity.

PGIs superiority seems to be outweighed by thedifficulty of explaining them to the press or to thepublic.

it seems to be rare that poverty comparisons,between two places, two countries, or between twodates, are different if we use the better measures.


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Summary: 3 steps of poverty measurement

1) A distributionofLiving Standard

2) A critical level(Poverty line) below

which individuals

are classified as Poor

3) Apoverty measure


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Poverty and Growth

Some believe that Economic growth is the best wayto reduce poverty, so by focusing on economicgrowth, we can eradicate poverty.

Other argue the opposite, economic growth doesnot benefit the poor

Who is right?


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Is Growth Good for the Poor?

We need to start with some definitions...

What is Growth? Growth of what?

What is Good?


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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 Statisticsof all the countries.

Economic growth is measured by the growth of theGross Domestic Product (GDP), divided by the

number of people, i.e. the growth of per capita GDP(inflation adjusted).


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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 calculateGDP and growth


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Example: What is the GDP for HK?

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


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What is the Growth Rate from 2008-2009?

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


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What is good?

Dollar and Kray (2002) find that Growth

increase the incomeof the poor on average equi-proportionally 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 thepoor were getting on average 200 dollars per

capita, if GDP increases to 1100 dollars, theincome of the poor will increase to 220dollars.


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What is good? When GDP increases by 100 dollars, the Poors

quality of life, access to services, does notnecessarily 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 wasmore rapid in the 1990s than in the 1980s.

China, Kerala, Sri Lanka, Cuba, have made greatprogress against child mortality and lack of

education before any economic reform.


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


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Do the poor benefit from growth proportionally?

Source: Dollar and Kray (2002)


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Interpretation and Caution

The fact that this is true on average does not

mean that this is always the case: there are largevariation from countries to countries, and period toperiod:

To take India for example, growth did not lead to asignificant reduction of poverty in the 1990s.

The rapid expansions in high-tech industries is likely todisproportionately benefit the well-educated.

Growth in agriculture on which most poor peopledepend has been less rapid.


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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 byAmartya Sen (1999)

Poverty is the absence of one or more of the basiccapabilities that are needed to achieve minimalfunctioning in the society in which one lives includingeducation, health, etc.


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Multi-dimensional Poverty Index

The Multidimensional Poverty Indexcomplements income-based measures byconsidering multiple deprivations.

MPI combines three dimensions

1. Living standard

2. Education3. Health

C f MPI


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Components of MPI

The MPI requires a household to be deprived in multiple indicators at thesame time.

A person is multi-dimensionally poor if the weighted indicators in which heor she is deprived add up to at least 30 percent.

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