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Measurement and Functional
    Impact of poverty
• World economy has grown in past century, leading to
  an increase in consumption of 32%, 26% between
  1965-75 and 1975-85
• However 1/5th of population continue under poverty.
  Obviously poverty and inequality are related
• The poorest 10% accounted for just 0.5% and the
  wealthiest 10% accounted for 59% of all the
• Affects current existence..
  –   Lack of adequate food, shelter & clothing
  –   Illiteracy, undernutrition, bad health
  –   Affects future too…
  –   Destroys hope and aspiration of future
 Poverty: Measurement issues
• Conceptual issues
  – Overall expenditure or item by item
  – Absolute or relative
  – Temporary or chronic
  – Households or individuals
  – Issue of a poverty line
• Quantification issues
                        Poverty line
• Following common practice, the poor are defined as those who lack
  command over basic consumption needs, including food and non-
  food components.
• Thus, the poverty line, is obtained by specifying a consumption
  bundle considered adequate for basic consumption needs and then
  by estimating the cost of these basic needs.
• In other words, the poverty line may be thought of as the minimum
  expenditure required by an individual to fulfill his or her basic food
  and non-food needs.
• Given arbitrariness of the poverty line, it makes sense to define
  more than one poverty line. For example, one common approach is
  to define one poverty line that marks households that are "poor,"
  and another lower level that indicates those that are "extremely
• Another approach is to construct a “food poverty line,” which is
  based on some notion of minimum amount of money a household
  needs to purchase some basic-needs food bundle and nothing
  more. If the cost of basic non-food needs is estimated, then the food
  poverty line added to the non-food needs will equal the overall
  poverty line.
   Relative & Absolute poverty
• To the extent that one’s goal is to identify and
  target today’s poor, then a relative poverty line is
  appropriate, and needs to be tailored to the
  overall level of development of the country. For
  instance, a $1 per day poverty line might be
  useful in Vietnam, where 27% of the population
  would be considered poor by this standard in
  1998 (Haughton 2000), but would be of little
  relevance in the United States where almost
  nobody would be poor by this standard.
• As countries become better off, they have a
  tendency to revise the poverty line upwards –
  For instance, the European Union typically
  defines the poor as those whose per capita
  incomes fall below 50% of the median. As the
  median income rises, so does the poverty line.
• Absolute poverty line is set so that it represents
  the same purchasing power year after year. For
  example, the United States poverty line does
  not change over time (except to adjust for
  inflation), so that the poverty rate today may be
  compared with the poverty rate of a decade
  ago, knowing that the definition of what
  constitutes poverty has not changed.
• Legitimate comparisons of poverty rates
  between one country and another can only be
  made if the same absolute poverty line is used
  in both countries.
         objective” poverty line
• The key idea here is that the poverty line should
  be set at a level that enables individuals to
  achieve certain capabilities, including a healthy
  and active life and full participation in society. In
  practice this almost certainly would imply that
  the commodity-based poverty line would rise as
  a country becomes more affluent, because the
  minimum resources needed to participate fully in
  society probably rise over time.
• The commonest way of making this operational
  is the Cost-Of-Basic Needs (CBN) approach,
  while the Food Energy Intake (FEI) method has
  been suggested as an alternative when the data
  available are more limited.
The Cost-of-Basic-Needs method:
• The most satisfactory approach to building
  up a poverty line, while remaining in the
  spirit of trying to ensure that the line
  covers basic needs, proceeds as follows:
  – Stipulate a consumption bundle that is
    deemed to be adequate, with both food
    (2100calories) and non-food components; and
  – Estimate the cost of the bundle for each
    subgroup (urban/rural, each region, etc.).
  Food Energy Intake measure
• Under the food energy intake method
  [Greer and Thorbecke,1986; Paul, 1989],
  poverty lines are set by computing the
  level of consumption or income at which
  households are expected to satisfy the
  normative nutritional requirement.
          Measures of Poverty
•   HCR
•   PGR
•   Squared PGR
•   FGT index
•   Sen index
•   SST index
•   Watt index
•   Time taken to exit
             Headcount index
• By far the most widely-used measure is the
  headcount index, which simply measures the
  proportion of the population that is counted as poor,
  often denoted by P0. P0=Np/N
• where Np is the number of poor and N is the total
  population (or sample). If 60 people are poor in a
  survey that samples 300 people, then P0 = 60/300
  = 0.2 = 20%.
                                           1 N
                                      P0   I ( yi  z )
• More formally it can be written as:     N i 1
• Simple to construct and to understand
• However it doesn’t consider INTENSITY of
  poverty:how poor are the poor?
• Violates transfer principle: A measure of poverty
  should capture transfers from a richer to a
  poorer person
• Usually HCR are related to households whereas
  an accurate measure should be to individuals

Head count rates in A and B, assuming poverty line of 125
                   Expenditure for each individual in country     HCR
Expenditure in A                      100           100 150 150    50%
Expenditure in B                      114           124 150 150    50%
                    Poverty gap index
  • PGI adds up the extent to which individuals on
    average fall below the poverty line, and expresses it
    as a percentage of the poverty line
              1 N Gi
         Pi     z
              N i 1
                                G  ( z  yi ).I ( yi  z )
  • Sum of Poverty gap gives cost of eliminating poverty
    figure (only if perfect targeting)

Poverty Gap Index, poverty line=125
                   Expenditure for each individual in country         PGI
Expenditure in C        100        110      150                 160         50%
Poverty gap              25         15         0                 0
G/z                      0.2      0.12         0                 0 (0.32/4)
 • Although better than HCI, PGR still does
   not capture severity of poverty

HCI & PGR , assuming poverty line of 125
              Expenditure for each individual in country    HCR    PGI
   in A        99    101     150                      150    50%     0.1
   in B       100    110     150                      160    50%    0.08
   in C        79    121     150                      150    50%     0.1
          Squared Poverty gap
• Weighted sum of poverty gap(as a proportion
  of the poverty line) where the weigts are the
  proportionate gaps themselves
• A poverty gap of (say) 10% of the poverty line
  is given a weight of 10% while one of 50% is
  given a weight of 50%; this is in contrast with
  the poverty gap index, where they are
  weighted equally. Hence, by squaring the
  poverty gap index, the measure implicitly puts
  more weight on observations that fall well
  below the poverty line.
           1         Gi 2
      Pi 
                ( z )
                i 1
                                   G  ( z  yi ).I ( yi  z )

• Captures inequality among the poor better
• Although the FGT measure provides an elegant
  unifying framework for measures of poverty, it
  leaves unanswered the question of what is the best
  value of α. Also lack emotional appeal.
• The weights can be changed to tune the sensitivity
  of the measure (Foster, Greer and Thorbecke
                              1      Gi 
                                               ( z )
                                   Pi                               ,  0
                                             N    i 1
Squared Poverty Gap Index, poverty line=125
              Expenditure for each individual in country       Squared PGI
   in C         100       110     150                 160

Poverty gap       25       15        0                     0

G/z              0.2     0.12        0                     0 0.08(0.32/4)

(G/z)^2         0.04 0.0144          0                     0 0.0136 (=0.0544/4)
                  FGT measure
• convenient feature of the FGT class of poverty
  measures is that they can be disaggregated for
  population sub-groups and the contribution of each
  sub-group to national poverty can be calculated.
• The measures of poverty depth and poverty severity
  provide complementary information on the incidence
  of poverty. It might be the case that some groups have
  a high poverty incidence but low poverty gap (when
  numerous members are just below the poverty line),
  while other groups have a low poverty incidence but a
  high poverty gap for those who are poor .
• The type of intervention from government for the two
  are different.
Poverty indices by sub-groups, Madagascar
                      HCI%    Rank   PGI%    Rank      severity%    Rank

Small farmers          81.6      1     41       1            24.6          1

Large famers            77       2    34.6      2              19          2

Unskilled workers      62.7      3    25.5      3              14          5

Herdsman/fishermen     51.4      4    27.9      4            16.1          3

Rtirees/handicapped    50.6      5    23.6      5            14.1          4
                    Sen Index
• Sen (1976) has proposed an index that sought to combine
  the effects of the number of poor, the depth of their
  poverty, and the distribution of poverty within the group.
  The index is given by:
                          Ps  Po (1  (1  G )

• where P0 is the headcount index, μP is the mean income
  (or expenditure) of the poor, and GP is the Gini coefficient
  of inequality among the poor. The Gini coefficient ranges
  from 0 (perfect equality) to 1(perfect inequality). The Sen
  Index can also be written as the average of the headcount
  and poverty gap measures, weighted by the Gini
  coefficient of the poor, giving
                                  Ps  PoG  P1 (1  G )
                                             P            P
• (Osberg and Xu 2002) Sen Index may also be written
                               Ps  P0 P1 (1  G )
                               P    PP

• where GPP is the Gini coefficient of the poverty gap
  ratios of only the poor and PP 1 is the poverty gap
  index calculated over poor individuals only.
• The Sen index has been widely discussed, and has the virtue
  of taking the income distribution among the poor into account.
  However the index is almost never used outside of the
  academic literature, perhaps because it is lacks the intuitive
  appeal of some of the simpler measures of poverty, but also
  because it “cannot be used to decompose poverty into
  contributions from different subgroups” (Deaton, 1997)
           Sen-Shorrocks-Thon index
• SST is the product of the headcount index, the poverty gap
  index (applied to the poor only), and a term with the Gini
  coefficient of the poverty gap ratios (i.e. of the Gn’s) for the
  whole population. This Gini coefficient typically is close to 1,
  indicating great inequality in the incidence of poverty gaps.
                                     ^ P
                 PSST  P0 P P (1  G )

• In 1996, 12.4% of the population of Quebec province (Canada)
  was in poverty. The poverty gap index, applied to the poor only,
  stood at 0.272. And the Gini coefficient of the poverty gap ratios
  was 0.924. Thus the Sen-Shorrocks-Thon index was 0.065
  (=0.124 × 0.272 × (1+0.924)).
• strength of the SST index is that it can help give
  a good sense of the sources of change in
  poverty over time. This is because the index
  may be decomposed into
                                               ^ P
        ln PSST   ln P0   ln P1   ln(1  G )

• which may be interpreted as, % change in SST
  index = % change in headcount index + %
  change in poverty gap index ( among poor) + %
  change in (1+Gini coefficient of poverty gaps).
• This allows us to decompose poverty into three aspects:
   – are there more poor?
   – Are the poor poorer? and
   – is there higher inequality among the poor?
• Change in poverty rate overtime in
  Newfoundland was due to variation in the
  number of people in poverty(P1) rather than size
  of poverty gap per poor person or the
  distribution of poverty among the poor.

Changes and Decomposition of Poverty, in Newfoundland 1984-1996
               ind                           Change                          Change    Change
               ex    P0      P1 p    1+Gp    lnSST index      change lnPo    lnP1 p    ln(1+Gp)
     1984    0.137   0.245   0.304   1.844
     1989    0.095   0.169   0.296   1.897          -0.37 *       -0.372 *    -0.027       0.028
     1994    0.105   0.184   0.304   1.884           0.104          0.086     0.026        -0.007
     1995    0.125   0.212   0.316   1.864           0.168          0.141     0.038         -0.01
     1996    0.092   0.164   0.294   1.897          -0.307          -0.254    -0.071       0.018

source:Osberg and Xu 1999
                      Watts Indexmeasure was
    The first distribution-sensitive poverty
    proposed in 1968 by Watts (see Zheng 1993). Watts
    index is computed, by dividing the poverty line by
    income, taking logs,and finding the average over the
    poor. In its discrete version, it takes the form:

                          ln( z )  ln( y )
                 W                        i
                    N     i 1
• where the N individuals in the population are indexed in
  ascending order of income (or expenditure), and the
  sum is taken over the q individuals whose income (or
  expenditure) yi falls below the poverty line z.
• The Watts index is attractive in that it satisfies all the
  theoretical properties that one would want in a poverty
  index, and is increasingly used by researchers in
  generating such measures as the poverty incidence
Calculating the Watts index, poverty line 125
              Expenditure foe each individual in country                              Wats index
Case 1(poor)
Expenditure                                          100    110      150       160
z/yi                                                1.25    1.14    0.83      0.78
log(z/yi)                                          0.223   0.128   -0.182    -0.247        0.088
Case 2(less poor)
Expenditure                                          110    120      150       160
z/yi                                                1.14    1.04    0.83      0.78
log(z/yi)                                          0.128   0.041   -0.182    -0.247        0.042
Case 2(deeper poverty)
Expenditure                                           90    120      150       160
z/yi                                                1.25     1.1    0.83      0.78
log(z/yi)                                          0.329   0.041   -0.182   -0.0247        0.093
             Time take to exit
• when thinking about poverty reduction strategies,
  it may be useful to show how long it would take,
  at different potential economic growth rates, for
  the average poor person to exit poverty. A
  poverty statistic with this property is derived by
  Morduch (1998);
• the statistic is decomposable by population sub-
  groups and is also sensitive to how expenditure
• (or income) is distributed among the poor. For the
  jth person below the poverty line, the expected
  time to exit poverty (i.e., to reach the poverty
  line), if consumption per capita grows at positive
  rate g per year is:         ln( z )  ln( x )
                      t                   
                        j              j
                                 g           g
 Empirical observations on Poverty
• Country specific and cross-poverty
  comparisons of poverty
• Demographic characteristics
  – Larger family size of poor
  – High ratio of dependents, children
  – Above is both Cause and effect of poverty
  – However, per capita expenditure measures
    overstate poverty in the context
  – Relevance of weighing & scaling in poverty
  – Role of gender
• Rural and urban poverty
   Empirical observations on Poverty
• Lack of Assets
  – Physical assets: land, tools
  – human assets: no skill sets and lack of ability to
    acquire skills
  – Casual wage employed
  – Informal sector, self-employed
• UnderNutrition
  – Affects ability for productive work: muscular
    wastage, lacks immunity, affects cognitive skills
  – Perpetuates poverty
  – Increase in income and better nutrition:elasticities
  Functional Impact of Poverty
• Wider impact of poverty on economic
• Relevant to understand what causes
  poverty and formulation of appropriate
  policies to eradicate it
• Fundamental feature of poverty is that it
  denies access to markets
  – Obtain Credit, sell labor, rent land or tools
• Repercussions for entire economy
      Poverty, credit and insurance
• Poor are not able to access creit from formal
  credit markets
  – Lack of collateral
  – Limited perceived incentives of poor to repay
  – Forces poor to informal credit markets
• Insurance
  – Insured incidence must be verifiable-information
  – Moral hazard
  – Developing countries, insurance is limited to cover
  – Informal village level schemes answer to above
  – Self-insurance as agroup
   Poverty, nutrition and labor markets
• Around 27-28 percent of all children in developing
  countries are estimated to be underweight or
  stunted. The two regions that account for the bulk of
  the deficit are South Asia and sub-Saharan Africa.
• Functional role of undernutrition: relationship
  between nutritional status andcapacity for sustained
• Energy balance
  – Energy input, resting metabolism, energy for work, deficit
    and surplus
  – Initial increases in income goes to satisfying resting
    metabolism,further increases enhances work capacity, still
    further reduces it due to surplus