Measuring and Modeling Poverty: An Update Martin Ravallion Development Research Group, DEC World...
-
Upload
emory-todd -
Category
Documents
-
view
218 -
download
0
Transcript of Measuring and Modeling Poverty: An Update Martin Ravallion Development Research Group, DEC World...
Measuring and Modeling Poverty: An Update
Martin RavallionDevelopment Research Group, DEC
World Bank
Frontiers in Practice: Reducing Poverty Through Better Diagnostics
PREM Workshop, World Bank, March 2006
Part 1: Measuring poverty
1.1 What is a “poverty line”?1.2 Objective poverty lines1.3 Subjective poverty lines1.4 Poverty measures revisited1.5 Robustness tests1.6 Growth incidence curves1.7 Measuring the impacts of policies
Part 2: Modeling poverty
2.1 Static models
2.2 Poverty mapping
2.3 Dynamics: Repeated cross-sections
2.4 Dynamics: Panel data
2.5 Micro growth models
Part 1: Measuring poverty
• The welfare ratio: Add up expenditures on all commodities consumed (with imputed values at local market prices) and
• Deflate by a poverty line (depending on household size and composition and location/date)
• => “real expenditure” or “welfare ratio:”
i
iii z
qpy
iq = quantities consumed by i
But what is z?
1.1: What is a “poverty line”?
= price vector facing person iip
The poverty line as money-metric welfare
For informing anti-poverty policies, a poverty line should be absolute in the space of welfare
• This assures that the poverty comparisons are consistent in that two individuals with the same level of welfare are treated the same way.
• Welfare consistency in poverty comparisons will be called for as long as:– the objectives of policy are defined in terms of welfare, and– policy choices respect the weak Pareto principle that a welfare
gain cannot increase poverty,
The poverty line as money-metric welfare
The ideal poverty line should then be the minimum cost to a given individual of a reference level of welfare fixed across all individuals:
),,( ziii wxpez
e=expenditure function, giving minimum cost of achieving welfare level wz when facing prices p and with characteristics x
Welfare function:
),( iii xqww
Poverty line as the “cost of basic needs”
m
jijij
m
j ij
ziiiji qp
p
wxpepz
1
*
1
),,(
= quantity consumed of good j by i*ijq
Poverty line is the cost of a bundle of goods needed to assure a minimum level of welfare
How then do we measure “welfare”?
Traditional approach in economics: an interpersonally comparable utility function defined on consumptions, with differences in tastes represented by a vector of household characteristics:
• Consistent with choices over private goods, i.e., q maximizes w(q, x) at given x.
• But interpersonal comparisons of utility are essential, and x also serves this role.
),( iii xqww
Sen’s capability-based approach: an interpretation
Welfare depends on the functionings (‘beings and doings’) that a person is able to achieve.
• “Poverty” means not having an income sufficient to support specific normative functionings.
• Functionings depend on goods consumed and characteristics. Utility depends on functionings.
• Thus we can still derive as the reduced form.
• Functioning-consistency requires that fixed normative funtionings are reached at the poverty line.
• Multiple solutions for the poverty bundle:– Minimum income s.t. all normative functionings are met– Income level at which functionings are met in expectation.
),( iii xqww
Two generic problems
Identification problem: how to weight aspects of welfare not revealed by market behavior.
• How do family characteristics (such as size and composition) affect individual welfare at given total household consumption?
• How to value command over non-market goods (including some publicly supplied goods)?
• How to measure the individual welfare effect of relative deprivation, insecurity, social exclusion?
Referencing problem: what is reference level of welfare above which one is not poor, i.e., the poverty line in welfare space, which must anchor the money-metric poverty line.
Poverty measurement in practice attempts to expand the information base for addressing the identification and referencing problems
Absolute vs. relative poverty • Poverty should be absolute in the space of “welfare” but
relative in the space of commodities
• Welfare depends on relative income:
(where m = mean income)
• Welfare poverty line:
• which gives poverty line as a function of the mean:
)/,( myyww
)(mzz Poverty lines across countries
Log poverty line
Mean consumption
)/,( mzzwwz
$1/day
Evidence for Malawi
Relative deprivation amongst the poor? • Test for perceived welfare effects of relative deprivation using
self-assessed welfare and perceived welfare of friends and neighbors (Lokshin and Ravallion)
• Subjective welfare addresses the identification problem.
• Findings: Relative deprivation is not a concern for most of the sample, although it is for the comparatively well off (upper fifth, esp., in urban areas).
=> welfarist explanation for the high priority given to absolute poverty in poor countries.
1.2: Objective poverty lines
1. Cost-of-basic-needs methodPoverty line = cost of a bundle of goods deemed sufficient for “basic needs”.
Food-share version: poverty line = Cost of food-energy requirement Food-share of “poor”
2. Food-energy intake method Find expenditure or income at which food-energy requirements are met on average.– i.e., functioning consistency in expectation, but only one
functioning
Methods of setting poverty lines matter!
Head-count index (% poor) Urban Rural Indonesia Food energy method 16.8 14.3 Cost-of-basic needs method
10.7 23.6
Tunisia Food share method 7.3 5.7 Cost-of-basic needs method
3.5 13.1
Problems to be aware of
1. Defining "basic consumption needs"• Setting food energy requirements (variability; multiple equilibria;
activity level).• Setting "basic non-food consumption needs" (behavioral
approaches).
2. 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?
Inconsistent poverty lines?
Example 1: “Cost-of-basic-needs method”
% of calories from each source
"urban" rural"
rice 50 40
cassava 10 40
vegetables 20 10
meat 20 10
• The two bundles yield same food-energy intake.• But the "urban" bundle is almost certainly preferable• 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.
Example 2: "Food-energy intake method"
Different sub-groups attain food energy requirements at different standards of living, in terms of real consumption expenditures. e.g., "rich" urban areas buy more expensive calories than "poor" rural areas.
zuIncome
Food-energy intake
2100
zr
rural
urban
Do your poverty lines have the same real value to the poor across the poverty profile? Much evidence that they do not!
Allowing for differences in relative prices
• Ideally we only want to adjust the poverty bundle for differences in relative prices
• The problem is how to implement this ideal in practice• The identification problem remains
Parametric demand models: If we know the parametric utility function then or we can figure it out from demand behavior then use this to determine the cost of the reference welfare level in each region
Numerical methods: • Look at consumption behavior of poorest x% nationally in
each region of the country• Cost the consumption bundle of that group in each region• Calculate the poverty rate nationally• Iterate if the answer differs too far from x
When non-food prices are missing
Step 1: Find the cost at prevailing prices of a single national food consumption bundle that assures that recommended caloric requirements are met at prevailing tastes nationally. This gives the food poverty line.
Step 2: Set the non-food allowance, consistent with consumption behavior of those who can either just attain or just afford the food poverty line.
bf
f(y)
yf-1(bf)2bf – f(bf)
45°
Utility-consistency can still be a problem!
Testing poverty lines
• Well-defined “poverty bundles” by area
+
• Complete price matrix (commodity x area)
Revealed preference test for utility-consistency (Lokshin and Ravallion)
• This assumes homogeneous preferences (given x).
• The problem of welfare comparisons across different tastes remains.
• A promising clue: subjective welfare data
1.3: The social subjective poverty line
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?“
z* Actualincome
Subjective minimumincome
45°
Is this method suitable for developing countries?
Can one estimate z* without the MIQ?
Subjective poverty lines for developing countries
• Minimum income question is of doubtful relevance to most countries
• Subjective poverty lines can be derived using simple qualitative assessments of consumption adequacy.
• 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.
Modeling consumption adequacy
Individual needs are a latent variable:
Z =βY + πX + ε
Subjective poverty line identified from qualitative data using the model:
Prob(Y > Z) = F[(1-β)Y-α- πX)/σ]
(Pradhan and Ravallion)
Examples for Jamaica and Nepal
• Respondents asked whether their food, housing and clothing were adequate for their family’s needs. • The implied poverty lines are robust to alternative methods of dealing with other components of expenditure. • The aggregate poverty rates turn out to accord quite closely with those based on independent “objective” poverty lines. • However, there are notable differences in the geographic and demographic poverty profiles.
1.4: Poverty measures revisited
n
iiii zyp
nP
1
),(1
General class of additive (“subgroup consistent”/ ”subgroup decomposable”) measures:
Aggregate poverty index Individual poverty index• non-increasing in y• non-decreasing in z
Unidimensional approach: y and z are scalarsMultidimensional approach: y and z are vectors
“Money-metric welfare” vs. “multidimensional poverty measures”
1. Multidimensional poverty measurement: {Person i is poor iff }2. Welfare function approach to poverty measurement:
{Person i is poor iff } or equivalently:{Person i is poor iff where }
• Surely these must be consistent, so why do we need both approaches?
• The real issue is how to implement multi-dimensional welfare metrics, whether or not one uses a “multidimensional” poverty measure.
0),;,( 2211 iiii zyzyp
wii zyyw ),( 21
ii zy 11 wii zyzw ),( 21
FGT measures
Headcount index (H): % living in households with income per person below the poverty line.
Poverty gap index (PG): mean distance below the poverty line as a proportion of the poverty line
Squared poverty gap index (SPG): poverty gaps are weighted by the gaps themselves, so as to
reflect inequality amongst the poor (Foster et al., 1984).
)0()]0,/1[max(),( iiii zyzyp
0
1
2
FGT: multidimensional version
(Bourguignon and Chakravarty, 2003)
/222111 )]0,/1[max()]0,/1[max( zyvzyvp iii
Four groups of parameters:v weights attached to each dimension elasticity of substitution (shape of contours) poverty aversion parameter (concavity) z poverty lines (how can they be constant?
Watts measure
• Watts index based on the aggregate proportionate poverty gaps of the poor:
• This is the only index that satisfies all accepted axioms for poverty measurement including: focus axiom, monotonicity axiom; transfer axiom, transfer-sensitivity and subgroup consistency (Zheng)
• Multidimensional Watts index:
]0),/max[log(),( iiii yzzyp
/222111 )]0),/[max(log()]0),/[max(log( iii yzvyzvp
1.5: Testing robustness
The three poverty curves:1. The poverty incidence curve
= H for each possible poverty lineEach point gives the % of the population deemed poor if the point on the horizontal axis is the poverty line.
2. The poverty depth curve = area under poverty incidence curve
Each point on this curve gives aggregate poverty gap per capita.
3. The poverty severity curve = area under poverty depth curve
Each point gives the squared poverty gap per capita.
First-order dominance test
If the poverty incidence curve for A is above that for B for all poverty lines up to zmax then there is more poverty in A than B for all poverty measures and all poverty lines up to zmax
Income per capita 0 100 200 300 400 500 600 700
0
.2
.4
.6
.8
1 A
B
What if the PICs intersect at some point < zmax?e.g., higher rice prices in Indonesia: very poor lose, those near the poverty line gain.
Second-order dominance test
If the poverty deficit curve for A is above that for B up to zmax then there is more poverty in A for all poverty measures which are strictly decreasing and weakly convex in consumptions of the poor (e.g. PG and SPG; not H).
Third-order dominance testIf the poverty severity curve for A is above that for distribution B then there is more poverty in A, if one restricts attention to distribution sensitive (strictly convex) measures such as SPG and the Watts index.
1.6: Growth incidence curves
• Invert the CDF to obtain the quantile function:
• Then calculate growth rates at each percentile to give the growth incidence curve:
• Note that if the Lorenz curve does not change then
1( ) ( ) ( )t t t ty p F p L p
1
( )( ) 1 ( 1)
( )t
t tt
L pg p g
L p
tt gpg )(
Example 1: China and India in 1990s
Figure 1: Growth incidence curves for China and India in the 1990s
0
1
2
3
4
5
6
7
8
9
10
0 10 20 30 40 50 60 70 80 90
The poorest p% of population ranked by per capita income/expenditure
An
nu
al g
row
th in
in
co
me/e
xp
en
dit
ure
per
pers
on
(%
)
China 1990-1999
India 1993/94-1999/00
But looked what happened in China around mid 1990s
Figure 2: Growth incidence curve for China, 1993-1996
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
0 10 20 30 40 50 60 70 80 90
The poorest p% of population ranked by per capita income
An
nu
al g
row
th in
inco
me
per
per
son
(%
)
Mean
Median
Example 2: Indonesia in a crisis
-16
-15
-14
-13
-12
-11
-10
-9
Ann
ual g
row
th r
ate
%
0 20 40 60 80 100Percentiles
Growth incidence curve
Growth rate in mean
Growth Incidence curve: 1996-1998
Measuring the rate of “pro-poor growth”
Watts index for the level of poverty implies using the mean growth rate of the poor in measuring the rate of pro-poor economic growth. (Not growth rate in the mean for the poor.)
1990-99 1993-96 Growth rate in the mean
(% per annum) 6.9 8.4 Headcount index (%) Rate of pro-poor growth
(% per annum): 10 3.7 9.4 15 3.9 9.8 20 4.1 10.0 25 4.3 10.1
100 5.9 9.4
])([ ttHt HppgEg
Example: Growth rates for China
1.7: Measuring the poverty impacts of policies and programs
Various measures of “targeting performance:”• SHARE: the share of total payments going to those with
pre-transfer income y<z (or some fixed %)• Concentration index (CI): the area between the
concentration curve and the diagonal (along which everyone receives the same amount).
• SHARE normalized by headcount index• Targeting differential (TD) is the difference between the
participation rate for the poor and that for the non-poor
However, better “targeting” does not imply a higher impact on poverty
There can be no guarantee that better targeting by these measures will enhance a programs’ impact on poverty:
• Coverage maters: avoiding leakage to non-poor may entail weak coverage of the poor.
• Deadweight costs (incentive effects); e.g., income foregone by participants in workfare programs
• Political economy: fine targeting can undermine political support for anti-poverty programs
Example for China’s Di Bao program
Impacts on poverty measured across 35 municipalities Impact on (log) poverty measure: Headcount
index Poverty
gap index Squared
poverty gap
Constant -0.001 -0.056 -0.131 (-0.012) (-0.469) (-0.709) SHARE -0.016 -0.053 -0.039 (-0.316) (-0.870) (-0.340) Concentration index -0.029 0.021 0.075 (-0.181) (0.122) (0.264) SHARE/H 0.003 0.005 0.007 (1.071) (1.669) (1.203) Targeting differential 0.250 0.496 0.753 (4.927) (7.571) (6.689) R2 0.438 0.629 0.542
Only the targeting differential has any predictive power for poverty impacts!
Better to focus directly on the poverty impact, though decompositions help
understand that impact
For example, the impact of a targeted transfer program on poverty (by any FGT measure) can be decomposed into four components:
(1) the budget outlay per capita;
(2) the extent of leakage to the non-poor;
(3) a vertical equity component; and
(4) a horizontal equity component.
(Bibi and Duclos, 2005)
Part 2: Modeling poverty
2.1: Static models of poverty
• For all additive measures we can decompose the aggregate measure by sub-groups – e.g., “urban” vs “rural”, “large” vs “small” households
• The poverty profile can be thought of as a simple model of poverty:
Prob(y < z)=
m
jjj DP
1
Sub-group poverty measures (“poverty profile”)
But this is too simple a model
We would like to introduce a richer set of covariates (some continuous) to:
• Account better for the variance in circumstances leading to poverty
• Disentangle which are the key factors, given their inter-correlation.
For example: • poverty profile shows that rural incidence > urban incidence,
and that poverty is greater for those with least education. • But education is lower in rural areas. • Is it lack of education or living in rural areas that
increases poverty?
Multivariate poverty profiles
Welfare indicator modeled as a function of
multiple variables:
or xzy )/log(
xylog
Fixed effects, one for each sub-group with a different poverty line
Probits for poverty make little sense
Probit regression for poverty (normally distributed error):
However: • This is just an inefficient way of estimating the OLS regression parameters.• You do not need a probit/logit when the continuous variable is observed.• You can still estimate poverty impacts:
• And under weaker assumptions (e.g., normality of errors is not required)
/(.)fX
P
)/()Pr()Pr( xFxzy
2.2: Poverty mapping
Impute measure of welfare (e.g. comprehensive real consumption) from household survey into census, using estimated static model:
Note: • Constrained to using x’s that are available in the
census• Can’t have geographic fixed effects• Can’t allow for idiosyncratic local factors • Standard errors can allow for these sources of error
xzy )/log(
2.3: Studying poverty dynamics using
repeated cross-sectional data Decomposing changes in poverty
Decomposition 1: Growth versus redistribution
Growth component holds relative inequalities (Lorenz curve) constant; redistribution component holds mean constant
Change in poverty between two dates =
Change in poverty if distribution had not changed+Change in poverty if the mean had not changed+Interaction effects between growth and redistribution
Example for BrazilPoverty and inequality measures
1981 1988 Headcount index (H) (%) 26.5 26.5 Poverty gap index (PG) (x100) 10.1 10.7 Squared poverty gap index (SPG) (x100)
5.0 5.6
Gini index 0.58 0.62
Very little change in poverty; rising inequality
Example for BrazilPoverty and inequality measures
1981 1988 Headcount index (H) (%) 26.5 26.5 Poverty gap index (PG) (x100) 10.1 10.7 Squared poverty gap index (SPG) (x100)
5.0 5.6
Gini index 0.58 0.62
Very little change in poverty; rising inequality
Decomposition Growth
component Redistribution
component Interaction
effect H -4.5 4.5 0.0 PG -2.3 3.2 -0.2 SPG -1.4 2.3 -0.3
• No change in headcount index yet two strong opposing effects: growth (poverty reducing) + redistribution (poverty increasing). • Redistribution effect is dominant for PG and SPG.
Decomposition 2: Gains within sectors vs population shifts
• Gains within sectors at given pop. shares;
• Population shift effects hold initial poverty measures constant
• Interaction effects.
Example: urban-rural
tP = the poverty measure for date t=1,2
i
tP = the measure for sector i=u,r (urban, rural)
i
tn = population shares
)])([()]()([ 121112212212uuruuuurrr nnPPPPnPPnPP
Within-sector effect Population shift effect
Within-sector effect: the change in poverty weighted by the final year population shares; Population shift effect: the contribution of urbanization, weighted by the initial urban-rural difference in poverty measures. Note: The “population shift effect” should be interpreted as the partial effect of urban-rural migration; it does not allow for any effects of migration and remittances on poverty levels within sectors.
Example for China
Poverty measures (% point change 1981-2001)
H PG SPG
Within rural -32.53 -10.39 -4.51 (72.5) (74.0) (75.0)
Within urban -2.08 -0.32 -0.09 (4.6) (2.3) (1.5)
-10.27 -3.32 -1.42 Population shift (22.9) (23.7) (23.6)
Total change -44.87 -14.04 -6.01
• 75-80% of the drop in national poverty incidence is accountable to poverty reduction within the rural sector; • most of the rest is attributable to urbanization of the population.
Static models on repeated cross-
sections Two time periods, or two sets of households
Aii
Ai XY ln for Ai
Bii
Bi XY ln for Bi
How much has the change in poverty been due to:
• Change in the joint distribution of the X’s?• Change in the parameters (“return to the X’s)?
Example 1: in Vietnam, returns to education are significantly higher for the majority ethnic group than minorities
Example 2: in Bangladesh, returns to education are higher in urban areas. Strong geographic effects
2.4: Studying poverty dynamics using panel data
Persistently poor:
Poor in both years
Escaped poverty:
Poor in the first period, but not
in second
Poor in first period
Fell into poverty:
Not poor in the first period, but poor in second
Persistently non-poor:
Not poor in either period
Not poor in first period
Poor in second period
Not poor in second period
Panel population
PROT ("Protected") = Change in proportion who fell into poverty.
PROM ("Promotion") = Change in proportion who escaped poverty.
Transient vs. chronic poverty
Measure of poverty for household i over dates 1,2,…,D:
The transient component of poverty is the part attributed to variability in consumption:
The chronic component is:
iiiDi TCyyP ),..,( 1
),...,(),...,( 1 iiiDii yyPyyPT
),...,( iii yyPC
Models of transient and chronic poverty
Transient poverty model
Chronic poverty model
Tii
Ti XT
Cii
Ci XC
Example for rural China Determinants of chronic poverty look quite similar (though
not identical) to that for total poverty (chronic plus transient).
However, the determinants of transient poverty measure are quite different.
• Low foodgrain yields foster chronic poverty, but are not a significant determinant of transient poverty.
• Higher variability over time in wealth is associated with higher transient poverty but not chronic poverty.
• While smaller and better educated households have lower chronic poverty, these things matter little to transient poverty.
• And living in an area with better attainments in health and education reduces chronic poverty but is irrelevant to transient poverty.
Different models are determining chronic versus transient poverty in rural China.
2.5: Micro growth models
With panel data we can also investigate why some households do better than others over time.
• Initial conditions (incl. geographic variables)• Shocks• Policies
Examples of the questions that can be addressed: • Are there geographic poverty traps?• Does where you live matter independently of individual
(non-geographic) characteristics? Poor areas or just poor people?
• Are there genuine externalities in rural development?• Does this help explain under-development (under-
investment in the externality-generating activities)
Micro growth models cont.,
Micro model of the growth process
Latent heterogeneity in growth process can be dealt with allowing for time varying effects
Quasi-differencing to eliminate the fixed effect
itiitit zxC ln
(i=1,..,N; t=4,..,T)
ititit
1
11
)1(
)(ln)1(ln
ittitit
ittititttit
rzr
xrxCrrC
where 1/ tttr
As long as 1tr we can identify the impacts of the time-invariant observables on the growth process.
Example for China
Micro growth model estimated on six-year household panel (Jalan-Ravallion)
• Consumption growth at the household level is a function of household characteristics and geographic characteristics.
• Publicly provided goods, such as rural roads, generate non-negligible gains in consumption relative to the poverty line.– And since latent geographic effects included, these effects
cannot be ascribed to endogenous program placement.
• Convergent effects of private wealth; divergent effects of local geographic wealth
=> Geographic poverty traps
The results strengthen the equity and efficiency case for
public investment in lagging poor areas in this setting.
County wealth
Cou
nty
wea
lth (l
og)
Household wealth (log)2 4 6 8 10
5
6
7
8
Household wealth
Example for ChinaGeographic poverty traps
g<0
g>0