Poverty lines

1. Poverty lines Michael Lokshin, DECRG-PO The World Bank

2. Problem: • Poverty rate in urban areas declined by 25% Poverty rate in rural areas declined by 25%. • Overall poverty rate in the country declined by more than 50%.

3. Solution:

4. Poverty lines Michael Lokshin, DECRG-PO The World Bank

5. Objective poverty line Methods found in practice Cost-of-basic-needs method • Poverty line = cost of a bundle of goods deemed sufficient for “basic needs”. • Food-share version: Cost of food-energy requirement Food-share of “poor” Food-energy intake method: Expenditure or income at which food-energy requirements are met on average for each region/socio-economic group

6. Objective poverty lines: WB approach • Food Poverty Line • Determine food requirements CR • Determine the cost of one calorie C • Calculate the cost of food poverty line as a product of food energy requirements and the cost of one calorie FPL = CR*C • Total Poverty Line • Determine the share of non-food consumption in two groups of households (SNF) TPL=FPL/(1-SNF)

7. Food Poverty Line • Determine food caloric requirements CR • WHO calorie requirements for different age-gender group • Other criterions could also be used: protein, fat, carbohydrates, and micronutrients requirements. • If only one poverty line: calculate average caloric requirements for the whole country: • Caloric requirements could be similarly calculated for the different regions in the country

8. Food Poverty Line: Example Table: Estimated caloric requirements for Georgia, 2003

9. Food Poverty Line: Cost of calorie • Determine cost of one calorie • Richer households consume more expensive calories. • Estimate cost of a calorie for households around the poverty line • But we do not know yet what is the poverty line • Use approximate region based on prior estimates

10. Food Poverty Line: Cost of calorie • Calculate caloric content of all food consumed by a household (CC) • Calculate total household food expenditure (FE) • Democratic and plutocratic approach • Plutocratic: • Democratic: • The results will be different. We use democratic approach

11. Food Poverty Line • Note that we do not explicitly define any food basket • Calculate Food Poverty Line: FPL=CD*CR • Food poverty line could be calculated for the country as a whole or you can derive FPL for different regions

12. Total Poverty Line: Lower PL • We have no criteria/norm on non-food portion of the poverty line. • “Lower” poverty line: • Estimate share of non-food expenditure in the total consumption of households whose total expenditure equals to FPL TE=FPL • Data might contain no or very few households like that. • Use a band around FPL to calculate this share. For example use band +/- 10% of FPL. Compare with a smaller band +/-5%.

13. Total Poverty Line: Upper PL • “Upper” poverty line: • Estimate share of non-food expenditure (SNF) in the total consumption of households whose food expenditure equals to FPL FE=FPL • Data might contain no or very few households like that. • Use a band around FPL to calculate this share. For example use band +/- 10% of FPL. Compare with a smaller band +/-5%. • Total Poverty line: TPL=FPL/(1-SNF)

14. Subjective poverty lines: MIQ • The Minimum Income Question (MIQ) "What income do you consider to be absolutely minimal, in that you could not make ends meet with any less?“ • Is this method suitable for developing countries? Not always • Can one estimate z* without the MIQ?

15. Subjective poverty lines: CAQ • Consumption adequacy question: “Concerning your family’s food consumption over the past one month, which of the following is true?” Less than adequate ...1 Just adequate .......…. 2 More than adequate.. .3 "Adequate" means no more nor less than what the respondent considers to be the minimum consumption needs of the family. Subjective poverty lines could be derived from CAQ

16. Subjective poverty lines: CAQ Objective and CAQ subjective poverty rates by household size. Madagascar 2003 .

17. Subjective poverty lines: ELQ • Economic Welfare Question (Cantril ladder) • Please imagine a 9-step ladder where on the bottom, the first step, stand the poorest people, and on the highest step, the ninth, stand the rich. On which step are you today? Comparison of actual and predicted subjective welfare

18. Recommendations for practice • Key issue is often not the precise location of the poverty line but being sure that it is fixed in terms of the living standards indicator. • When that indicator is "command over basic consumption needs", there are two steps to forming sensible poverty lines: • decide what constitutes "basic consumption needs" in the specific society; this is fundamentally a normative value judgment; and • for different groups in the poverty profile of that society, set nominal poverty lines which are just enough to assure that those needs can at least be afforded.

19. Objective poverty lines: Problems Defining "basic consumption needs" • Setting food energy requirements (Variability; multiple equilibria; activity level). • Setting "basic non-food consumption needs" (behavioral approaches). Consistency in terms of welfare • Is the same standard of living being treated the same way in different sub-groups of the poverty profile? If not, then the profile may be quite deceptive. • Is the definition of welfare consistent with the definition of poverty? If some good is purchased by poor people why should it not be included in the poverty bundle? Key question: how sensitive are the rankings in a poverty profile to these choices?