# Module 3: Measuring (step 2) Poverty Lines

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1 Module 3: Measuring (step 2) Poverty Lines

2 Topics 1. Alternative poverty lines 2. Setting an absolute poverty line 2.1. Cost of basic needs method 2.2. Food energy method 2.3. Subjective method 3. Issues in setting poverty line. Module 3: Measuring (step 2) 2

3 1. Alternative poverty lines. (1) Once we have an aggregate consumption indicator for each household, we need to judge whether the amount defines the members of the household as poor. We calculate a poverty line, the threshold below which individuals and households are considered poor and above which they are considered non-poor. Module 3: Measuring (step 2) 3

4 1. Alternative poverty lines. (2) There are many different types of poverty lines. One of the main distinction is between: Relative poverty line: when the line is defined relative to some measure of welfare for the entire population (distribution). Absolute poverty line: when the line is defined in absolute terms, as the minimum cost of a reference living standard. Module 3: Measuring (step 2) 4

5 1. Alternative poverty lines. (3) A. Relative poverty line Definition: A relative line is set in relation to the overall distribution of income or consumption in a country/region of reference. Example: set the poverty line at 50 percent of the mean consumption in the country, or at 50 percent of the median consumption. Relative lines are typically used in high income countries. Module 3: Measuring (step 2) 5

6 1. Alternative poverty lines. (4) Advantages and disadvantages: (+) In high income countries, absolute poverty (where defined by a minimum cal intake) or destitution is very small, so the poverty rates will be small (lack of variation). (-) Relative poverty lines do not allow for comparisons across countries or over time since they don t represent the same welfare level. Module 3: Measuring (step 2) 6

7 1. Alternative poverty lines. (5) (-) Relative poverty lines depend only on the distribution of consumption. They lead to poverty measures which are insensitive to overall well-being. In a country, if the consumption of all individuals doubled, poverty would remain unchanged. Module 3: Measuring (step 2) 7

8 1. Alternative poverty lines. (6) (-) Dependence on distribution also means that: if the poor are getting poorer (all things equal for the others), the mean or median consumption decreases, the poverty line decreases, and poverty measures decrease. If the rich are getting richer (all things equal for the others), the mean or median consumption increases, the poverty line increases, and poverty measures increase. Module 3: Measuring (step 2) 8

9 1. Alternative poverty lines. (7) B. Absolute poverty line Definition: An absolute poverty line is set as an absolute level below which consumption is considered to be too low to meet the minimum welfare level acceptable. Absolute poverty lines are typically used in low or middle income countries. Module 3: Measuring (step 2) 9

10 1. Alternative poverty lines. (8) Advantages and disadvantages: (+) An absolute poverty line is essential for comparisons of poverty rates between two countries or over time, since it ensure that similar standards are used. (+) In low or middle income countries, where some groups may be unable to reach minimum standards, an absolute poverty line is usually preferred to identify those in absolute need of interventions. Module 3: Measuring (step 2) 10

11 1. Alternative poverty lines. (9) (-) In rich countries, the absolute poverty line would probably not provide relevant information: The \$1 per day poverty line might be useful in Vietnam (where 27% of the population is poor by this standard in 1998), but would be of little relevance in the UK. (-) It is difficult to define what constitutes basic needs, which vary across individuals according to their metabolism and their activity level. Module 3: Measuring (step 2) 11

12 1. Alternative poverty lines. (10) The World Bank uses national absolute poverty lines for within country analysis. For across country, the \$/day poverty lines are used: US \$1 per person per day (adjusted for PPP) The current estimate is that 1,200 million people worldwide are poor by this standard. US \$2 per person per day (adjusted for PPP) The current estimate is that over 2 billion people worldwide are poor by this standard. (Both are in purchasing power parity terms). Module 3: Measuring (step 2) 12

13 1. Alternative poverty lines. (11) Comparison of absolute and relative poverty worldwide: Source: World Bank Share of population living on less than \$1 per day (in 1998) Share of the population living on less than one-third of average nat. consump. for 1993 (in 1998) East Asia and Pacific East Asia and Pacific excluding China Europe and Central Asia Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Total Total excluding China Module 3: Measuring (step 2) 13

14 1. Alternative poverty lines. (12) Recommendation: Absolute poverty lines are still relevant since absolute poverty is prevalent. We focus on the absolute poverty lines in this course. Ultimately, the choice can greatly affect poverty measures and who is considered poor in a country. It is therefore absolutely essential to test the sensitivity of results to the choice of poverty line (see Module 6). Module 3: Measuring (step 2) 14

15 1. Alternative poverty lines. (13) As countries become better off, they have a tendency to revise the poverty line upwards with the notably exception of the United States, where the line has (in principle) remained unchanged for almost four decades. Module 3: Measuring (step 2) 15

16 1. Alternative poverty lines. (14) Module 3: Measuring (step 2) 16

17 2. Setting an absolute poverty line. (1) Poverty line defined as the minimum amount necessary to achieve the minimum level of wellbeing. There are two major issues: A. Referencing problem what is the minimum level of well-being? B. Identification problem how to estimate the minimum amount of money necessary to achieve it? Module 3: Measuring (step 2) 17

18 2. Setting an absolute poverty line. (2) Alternative methods for setting an absolute poverty line: 1. Cost of basic needs method (Food-share version) 2. Food-energy method 3. Subjective method Module 3: Measuring (step 2) 18

19 2.1. Cost of basic needs method. (1) The method is based on the estimated cost of the bundle of goods adequate to ensure that basic needs are met. In practice, the cost of the food basket necessary to attain the minimum energy intake is calculated. A small allowance for non-food expenditure is then added. Module 3: Measuring (step 2) 19

20 2.1. Cost of basic needs method. (2) Step 1. Pick a nutritional requirement. Step 2. Choose the basket of food items that will allow to attain this requirement. Step 3. Estimate the cost of meeting this food basket, that is the food component. Step 4. Add a non-food component. Module 3: Measuring (step 2) 20

21 2.1. Cost of basic needs method. (3) Example: 1 - Construction of food component Calories in a portion Expenditure for a portion 2,100 calories Expenditure, for 2,100 calories Rice Corn Eggs Total Assumption: non-food = 20% (food) = Total poverty line = food + non-food = = 126. Module 3: Measuring (step 2) 21

22 2.1. Cost of basic needs method. (4) Issues in the calculation: 1. What is the minimum energy intake? 2. What basket of goods do we choose to attain that minimum? 3. What prices do we use? 4. How do we estimate the non-food component? Module 3: Measuring (step 2) 22

23 2.1. Cost of basic needs method. (5) ISSUE 1: What is the minimum energy intake? Problem: Needs vary across individuals (age, gender, activity) and over time for a given individual (activity levels). Solution: International estimates give recommended energy requirements for alternative activity levels and body weight. One usually uses the requirement of 2,100 calories per day per person. [remember the discussions of household size and composition in Module 2]. Module 3: Measuring (step 2) 23

24 2.1. Cost of basic needs method. (6) ISSUE 2: What basket of goods to attain the minimum? Problem: Many different baskets of goods can be used to reach the same minimum. Which one do we choose? Module 3: Measuring (step 2) 24

25 2.1. Cost of basic needs method. (7) For example, food consumption by expenditure quintile (Vietnam, ) shows that calories are more expensive for the rich diet. Quintile Expenditure per capita ( 000 dong/year) % food in total expend. Calories per capita per day Cost per Calorie (dong) Poorest Richest Module 3: Measuring (step 2) 25

26 2.1. Cost of basic needs method. (8) Same calories from different food baskets Kazakhstan 2001: distribution of calories across food groups Govt Subsist. Min. WB Bread, Rice, Pasta Beef Fish Milk and Dairy Eggs Fats Fruits Vegetables Sugars Spices, Sauces Module 3: Measuring (step 2) 26

27 2.1. Cost of basic needs method. (9) The question is particularly relevant if we choose to use different poverty lines in different regions, or for different groups. Which basket to choose? The criteria for selection of bundles (and poverty lines in general) is to have the same standard of living treated the same way in different groups consistency in terms of welfare Module 3: Measuring (step 2) 27

28 2.1. Cost of basic needs method. (10) Another example: imagine two poverty lines built on the following two baskets designed to yield the same energy intake: % calories from each source Rice Cassava Vegetables Meat Urban Rural Module 3: Measuring (step 2) 28

29 2.1. Cost of basic needs method. (11) With these baskets: the urban basket is almost certainly preferable to the rural one. Therefore, the standard of living at the urban poverty line is higher than at the rural line. This makes the poverty comparison inconsistent, which can distort policy making based on the poverty profile. not a good choice! Module 3: Measuring (step 2) 29

30 2.1. Cost of basic needs method. (12) Solution: choose one single basket for all the population groups, to ensure consistency in terms of welfare. Typically, the average food composition of a certain group is taken (for example, the average for the poor themselves, or the average for the second quintile, or the average for those around the poverty line, etc. ). Module 3: Measuring (step 2) 30

31 2.1. Cost of basic needs method. (13) 3. Which prices do we use to cost the basket? Problem: Prices differ across the population groups (see Module 2 earlier). Solution: Use local prices for the groups, but keep using a single basket of goods to have regional poverty lines. Or, use national average prices. Module 3: Measuring (step 2) 31

32 2.1. Cost of basic needs method. (14) 4. How do we estimate the non-food component? Problem: We add a non-food component to the food component to calculate the line. How do we estimate that component? Solution: There are two main techniques: Method 1: Bundle of goods Method 2: Food-share method Module 3: Measuring (step 2) 32

33 2.1. Cost of basic needs method. (15) Method 1: Bundle of goods: This technique consists in picking a bundle of goods and services and pricing them. This is similar to the technique used to estimate the food component, and it shares the same issues. Module 3: Measuring (step 2) 33

34 2.1. Cost of basic needs method. (16) Method 2: Food share or Orshansky method: The method consists using the share of food in total expenditure of some group of households (typically the poor) to calculate the non-food component as follows: Cost of food-energy requirement Food-share of "poor" Module 3: Measuring (step 2) 34

35 2.1. Cost of basic needs method. (17) The food-share method has limitations. In particular, differences in average consumption between groups or dates create difficulties: Those with a higher mean will tend to have a lower food share, which will thus lead one to use a higher poverty line. The difference can even be large enough to cause a rank reversal in measured poverty levels across sectors or regions of an economy. Module 3: Measuring (step 2) 35

36 2.1. Cost of basic needs method. (18) Among households that can afford to reach Z f, the lowest level of non-food expenditure which displaces basic food expenditure is given by the distance NF. This distance NF is the minimum level of basic non-food expenditure. Food expenditures Z f 45 0 F N Z f Z Total poverty line Food exp curve Total exp Module 3: Measuring (step 2) 36

37 2.1. Cost of basic needs method. (19) Estimate food share eqtn: Food share = f(y)/y = α + β ln (Y / Z f ) + Lower poverty line, Z L : Add the nonfood of those with Y = Z f Nonfood exp = Z f- food exp = Z f- αz f Z L = Z f + (Z f - αz f )=(2 -α) Z f Module 3: Measuring (step 2) 37

38 2.1. Cost of basic needs method. (20) Upper poverty line, Z u : Identify from est. curve, the nonfood for those whose food exp. = Z f Module 3: Measuring (step 2) 38

39 2.2. The food energy method. (1) The method is based on the observation of the typical level of expenditure or income for which households obtain the food needed to meet basic energy requirements. This level of expenditure will include non-food as well as food items, since even poor households consume other goods (such as clothing and shelter), which are included in the level identified. Module 3: Measuring (step 2) 39

40 2.2. The food energy method. (2) Graphically, if we plot the number of calories obtained by households at different expenditure levels (or income levels), we obtain the Calorie- Expenditure (or income) function. The line is found by identifying the expenditure level for which 2,100 calories are consumed. (see next page). Module 3: Measuring (step 2) 40

41 2.2. The food energy method. (3) Food energy intake (calories/day) 2,100 Calorie-expenditure (or income) function Poverty line Expenditure (or income) Module 3: Measuring (step 2) 41

42 2.2. The food energy method. (4) This method presents many limitations: The relationship between food energy intake and total consumption varies. Therefore, using this method is equivalent to bringing some relative component in the absolute line, with all the associated issues. The dimension in which the relationship varies are: according to wealth and tastes: as a result, lines will be higher in richer regions (where households on average buy more expensive calories). Module 3: Measuring (step 2) 42

43 2.2. The food energy method. (5) Food energy intake (calories/day) 2,100 Calorie-expenditure (or income) function Rural Urban Rural Urban Expenditure (or income) Module 3: Measuring (step 2) 43

44 Food energy intake (calories/day) 2.2. The food energy method. (6) Over time: Here, the function shifts from 1993 to In practice, food prices rose by 70% and non-food prices by 25% and consumers shifted from food to non-food items, since food had become relatively more expensive. The Calorie-expenditure function shift was thought to be implausibly large. 2, Expenditure (or income) Module 3: Measuring (step 2) 44

45 2.3. Subjective methods. (1) 3. Subjective methods. The methods are based on the subjective judgment of people on what constitutes a socially acceptable minimum standard of living. Module 3: Measuring (step 2) 45

46 2.3. Subjective methods. (2) The typical question used is the following: "What income/expenditure do you consider to be absolutely minimal, in that you could not make ends meet with any less?" The answers will vary from person to person (in part as a result of household size and composition). The answers are usually found to be correlated with actual income. Module 3: Measuring (step 2) 46

47 2.3. Subjective methods. (3) If we plot the responses on a graph, we typically obtain the following. The point Z could be used as the poverty line: Subjective minimum income * * * * * * * z * Subjective poverty line * 45o * * * * * * * * * * * actual income or expenditure Module 3: Measuring (step 2) 47

48 3. Conclusions and recommendations. (1) 1. The key issue is not the actual precise location of the poverty line, but rather, the key issue is being sure that the line is fixed in terms of the indicator of well-being (so that, irrespective of where household live, the same level of consumption is always treated the same way). Module 3: Measuring (step 2) 48

49 3. Conclusions and recommendations. (2) 2. Whatever the poverty line selected, it is important to carry out sensitivity analysis. This consists in testing the degree to which the results are sensitive to the choice of poverty line. This can be done by repeating the calculations for different liens and comparing. (see Module 6 for more details). One can also consider a second poverty line, such as the ultra-poor line. Module 3: Measuring (step 2) 49

50 3. Conclusions and recommendations. (3) The recommended method: cost-of-basic-needs approach 1. Select nutritional requirement 2. Select a single food bundle for the entire population, using prevailing tastes (take the average consumption of some reference group). 3. Price this bundle at prevailing prices for each of the groups analysized (e.g. rural / urban). 4. Set the non-food allowance in line with the consumption behavior of those around the food poverty line (calculate the food-share of those around the food line). Module 3: Measuring (step 2) 50

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