Measurement of Poverty: a Case Study of Pakistan

Ambar Narayan

(World Bank)

Regional Poverty Analysis and Monitoring Workshop

Islamabad, Pakistan

March 2002

Role of Poverty Lines

• Poverty lines have an element of subjectivity– E.g. the World Bank’s $1/day (PPP) poverty line; useful

for comparing across countries

– National poverty lines: better suited to individual countries

• Consistency in defining poverty lines needed for exploring poverty trends

• Poverty lines only useful to measure consumption/ income poverty– Non-income dimensions equally important to measure

“capability”

Outline of Presentation

• Choice of poverty lines– Important issues; different approaches

• Poverty lines used for Bank poverty studies for Pakistan– Why the choice of this line

– Need for consistent poverty lines to examine trends

• Important issues in poverty measurement– E.g. consumption aggregates, price adjustments

• Some results from poverty measurement– Poverty trends; issues of comparability between surveys

• Analysis using poverty estimates; a few examples

Choice of Poverty Lines

• Setting poverty line involves– Defining a minimum bundle of goods/services– identifying the cost of a minimum bundle

• Standard approach: define household as poor if their expenditure is insufficient to consume the minimum bundle

• How to define the minimum bundle– Calorie-based approach: minimum calorific requirements

are converted into minimum expenditure requirements– Basic-needs approach: cost of achieving a minimum

bundle of basic needs -- calorific needs and other purchasable needs such as fuel, housing and clothing

Expenditure-Based Poverty Lines for Pakistan

• Calorie-based approach looking at food expenditures only– Havinga et al (1989), Mahmood et al (1991)

• Cost of basic needs approach incorporating food and non-food expenditures– Ercelawn (1991), Jafri (1999), FBS (2001)

• Fundamental similarity between these approaches– The poverty line expenditure level corresponds to the

average or estimated expenditure of households which consumes the minimum calorie intake

Expenditure-Based Poverty Lines (Contd.)

• Why should the cost of minimum bundle depend only on calorie intakes ?– Food is the most important need ?– Calorie intakes (actual/expected) is a good proxy for all

basic needs ?– Non-calorific needs hard to specify ?

• Alternative: poverty line is the money value of a bundle of commodities that represents a minimally acceptable level of living selected a priori – Gazdar et al (1994), World Bank (1995); modified from

Ahmad (1993)

Poverty Line Used by Bank Studies

• Defining a basic needs bundle (like Ahmad, 93) requires intimate knowledge of the country

• Pakistan one of the few developing countries where this exercise has been undertaken

• Comprehensive, but somewhat subjective process:– “The proposed basic needs package consists of food, clothing,

housing, health, education, transport, social interaction and recreational facilities…...Discussions were held with professional economists in Federal Government, Provincial Governments, Research Institutes and Universities. A check list thus prepared was rechecked with heads of different families. A team of economists was constituted to arrive at the quantum and value of each componential item of various basic needs separately in the rural and urban areas. These were rechecked with the consumers in different areas” (Ahmad, 93; p28)

Poverty Line Used by Bank Studies

• Ahmad’s poverty line for a family of 2 adults & 4 children (91-92 prices)– Rural: Rs. 300 per capita out of which Rs. 150 allocated to food needs

– Urban: Rs. 419 per capita out of which Rs. 212 allocated to food needs

• Adjustments made by Gazdar et al (1994) using HIES (90-91)– Reducing the urban-rural food price differential, using cost-of-living

price deflator

– Adjusting housing expenditures by estimating expected rural and urban housing expenditure, given non-housing expenditure equal to that in the minimum required bundle

– With adjustments, rural poverty line falls to Rs 296 per capita; the urban line falls to Rs 334

Further Adjustments to Poverty Line

• Poverty lines have to be adjusted for inter-temporal price changes, and inter-province price differences

• Inter-temporal price changes: we have used inflation rates from CPIs– CPIs are only available sources for non-food prices

– Food inflation rates using household data over the years do not yield substantive changes to poverty lines

• Poverty lines not adjusted for inter-province price differences– Household expenditures adjusted for price differences instead

• Poverty lines adjusted by equivalence scale– Into “per equivalent adult” terms, using Ahmad’s equivalence scale (1

child = 0.8 adult)

Poverty Lines (Per Equivalent Adult) in Current Rupees

1990-91 1992-93 1993-94 1996-97 1998-99

Urban 346 424 472 655 767

Rural 307 376 418 581 680

More on the Basic Needs Poverty Line

• Comparison with calorie measures– Regression analysis (for 90-91) reveals that the rural and urban

poverty lines correspond to per capita calorie intake of 2250 (for a family of 2 adults and 4 children) and 1950 respectively

• Comparison with consumption patterns– Expenditure shares for food, housing and other (90-91 HIES) for

households 10% on either side of the poverty line, compare well with the shares implied by the construction of the poverty line

• Comparison with other poverty lines– Compares well with Naseem (77), Lanjouw (94); 10-20% higher

than lines by Malik (94), Ercelwan (91)

Constructing Expenditure Aggregates

• Include those expenditures that correspond to “basic needs”

• Include expenditures on flow of utilities only

• Decisions on what to include and what not may involve subjective judgments

• Critical to maintain consistency in methodology over time (across different household surveys)

Consumption Aggregates in our Study

• Following items are included in household consumption aggregates to determine poverty status– Food: Expenditure on consumed food items, irrespective of

whether they were paid for in cash or not– Non-durable goods: E.g. Fuel and lighting, personal care articles

and services, education, health, recreation and reading, personal transport and traveling, household laundry, cleaning, apparel, footwear, housing, maintenance and repair charges of household effects

• Important items excluded– Expenses on house, property, or any other tax, fines– Purchase of durable goods– Transfers paid out by household members

Adjusting Consumption Aggregates for Price Differences

• Methodology adopted:– Use food prices to construct household specific price

indices, separately for rural/urban

– Deflate household expenditures by corresponding price indices

– Implicit assumption that differences in food prices captures cost of living differences to a high degree

Comparing Poverty Across HIES (1990s) and PIHS (98-99)

• Factors in favor of comparability of data across years– Consistency in poverty lines and methodology for measuring

household expenditures

– Consumption module almost unchanged across surveys

– Sample sizes and sampling methodology: mostly similar since 92-93

• Factors that may compromise comparability across years– Change in recall period for some food items in PIHS 98-99

– Change in sampling framework for rural areas in PIHS 98-99

– Average household sizes higher in PIHS 98-99• Differences large for lower expenditure deciles in rural areas

• Especially large differences for rural Sindh and Balochistan

Average Rural Household Sizes Across Surveys

Per Capita Exp Deciles

HIES

1992-93

HIES

1993-94

HIES

1996-97

PIHS/HIES

1998-99

1 8.4 8.2 8.5 9.1

2 8.0 7.9 7.5 8.5

3 7.8 7.6 7.1 7.9

4 7.3 7.4 7.1 8.0

5 6.9 6.9 6.6 7.6

Total 6.3 6.3 6.1 6.8

Our Poverty Estimates(FBS Estimates in Parentheses)

1990-91 1992-93 1993-94 1996-97 1998-99

Head Count

Urban 28.0 20.8

(20.7) 17.2

(16.3) 16.9

(16.1) 24.2

(22.4)

Rural 36.9 27.7

(28.9) 33.4

(34.7) 27.1

(30.7) 35.9

(36.3)

Overall 34.0 25.7

(26.6) 28.6

(29.3) 24.0

(26.3) 32.6

(32.2)

Poverty Gap

Urban 5.7 3.6

(3.6) 3.0

(2.9) 2.7

(2.5) 5.0

(4.5)

Rural 7.8 4.8

(4.9) 6.4

(6.6) 4.9

(5.4) 7.9

(7.9)

Overall 7.1 4.5

(4.5) 5.4

(5.5) 4.3

(4.5) 7.0

(6.9)

Poverty Trends in Pakistan

Poverty in Pakistan

0

10

20

30

40

50

60

1984-85

1987-88

1990-91

1992-93

1993-94

1996-97

1998-99

Head

Co

un

t (%

Valu

es)

Urban

Rural

Overall

Analysis with Poverty Estimates: Examples

• Sensitivity analysis: how poverty estimates respond to shifts in poverty line– Additional insights from looking at distribution of population around

the poverty line

• Relating poverty to growth and redistribution– Growth-inequality decomposition of changes in poverty rates– Measuring “pro-poor” growth

• Non-income/consumption dimensions of poverty– Find associations between consumption poverty and indicators of

“capability”

• Analysis of vulnerability (the prob. of falling into poverty)– Measuring vulnerability; finding factors that determine vulnerability – Needs panel data ideally; “cohort” level analysis also possible using

repeated cross-sections, like HIES & PIHS

Sensitivity of Head Count to Poverty Line - I

Sensitivity of Head-Count Ratio to Poverty Line: 1998-99

0

10

20

30

40

50

60

7055%

70%

85%

100%

115%

130%

145%

% of Poverty Line

Hea

d-C

ou

nt R

atio

(%)

Urban Rural

Sensitivity of Head Count to Poverty Line - II

Sensitivity of Head-Count Ratio to Poverty Line: 1990s

0

10

20

30

40

50

60

70

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

% of Poverty Line

He

ad

-Co

un

t R

ati

o (

%)

1992-93 1993-94 1996-97 1998-99

A Snapshot of Vulnerability? Distribution of Population Around the Poverty Line

0

1

2

3

4

5

6

7

8

50%-55%

60%-65%

70%-75%

80%-85%

90%-95%

100%-105%

110%-115%

120%-125%

130%-135%

140%-145%

% of Pov Line

% (

of

Th

os

e in

50

-15

0 %

of

Po

v L

ine

) in

Ea

ch

Ra

ng

e

Urban Rural

Growth-Inequality Decomposition of Changes in Poverty Estimates

• Measures the impact of changes in mean consumption and distribution on poverty– Growth component: how much of the change in poverty

measures is due to variation in mean expenditure (per equiv adult) over time, holding the distribution constant.

– Redistribution component: how much of the change in poverty measures is due to a change in the distribution of expenditure, holding the mean expenditure constant

Growth-Inequality Decomposition of Changes in Poverty Measures between 90-91 and 98-99

Growth Redistribution Residual Total

Overall

Incidence 0.04 -2.12 0.04 -2.05

Gap 0.03 -0.31 0.00 -0.29

Severity 0.01 -0.02 0.00 -0.01

Urban

Incidence -8.04 3.88 -0.13 -4.30

Gap -2.01 1.51 -0.32 -0.82

Severity -0.70 0.65 -0.16 -0.21

Rural

Incidence 3.83 -5.29 -0.19 -1.65

Gap 1.30 -1.32 -0.17 -0.20

Severity 0.50 -0.39 -0.08 0.03

Note: A positive (negative) number implies an increase (decrease) in the poverty measure

Final Messages

• Choice of poverty line remains a largely subjective judgment– That said, any approach incorporating basic needs (beyond calories)

seems preferable in our opinion

• More than the exact line that is chosen, it is important to decide on a national poverty line– Choose a benchmark poverty line and update it only for inflation

• Comparability of surveys across years critical for examining poverty trends– Dependent on a number of factors, e.g. consistency in sampling

framework, questionnaires, methodology of field survey

• Poverty estimates useful for a broad range of analysis– Important to relate consumption poverty measures to

non-income/expenditure dimensions human deprivation