Poverty Comparisons

Martin Ravallion

• Publisher: Routledge
• Year: 2017
• eBook ISBN: 9781135305840
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

First published in 1994. Drawing on a personal network, an economist can still relatively easily stay well informed in the narrow field in which he works, but to keep up with the development of economics as a whole is a much more formidable challenge. Economics are confronted with difficulties associated with the rapid development of their discipline. There is a risk of 'balkanization' in economics, which may not be favorable to its development. Fundamentals of Pure and Applied Economics has been created to meet this problem. Poverty comparisons — such as assessments of whether poverty has increased, or where it is greatest — are typically clouded in conceptual and methodological uncertainties. How should individual4 well-being' be assessed in deciding who is poor? Is a household survey a reliable guide? Where should the poverty line be drawn, and does the choice matter? What poverty measure should be used in aggregating data on individual well-being? Does that choice matter? This monograph surveys the issues that need to be considered in answering these questions.

Poverty Comparisons

MARTIN RAVALLION

The World Bank, Washington

1
Introduction

The most important reason for measuring poverty is probably not the need for a single number for some place and date, but rather to make a poverty comparison. This is an assessment of which of two situations has more poverty. Poverty comparisons may be either ordinal or cardinal. Examples of questions which only call for ordinal poverty comparisons are: Has poverty increased over time? Is it higher in one place than another? Is there more poverty with some policy change? Cardinal poverty comparisons, on the other hand, call for a quantification of how much difference there is in the amount of poverty. For some of the reasons that we make poverty comparisons, only an ordinal assessment is essential; the choice between two policies is an example. However, in other circumstances, such as in assessing how much impact on poverty is to be expected from a specific policy option, a cardinal poverty comparison is called for.

This monograph provides a guide to the main ways that the analyst could fruitfully go about making both sorts of poverty comparisons. While some direct light is thrown on some policy issues, that is incidental to the main aim, which is to expound methodological tools which can fruitfully serve analysis.¹ The exposition is oriented toward someone who wants to make poverty comparisons, and wants to be fully aware of their limitations. Little is assumed about the economist’s current knowledge of the concepts and methods of welfare and poverty analysis. But nor does the discussion shy away from possibly difficult analytical methods, as long as they show promise of facilitating sound poverty comparisons.

One theme is that much of the energy that often goes into poverty analysis is wasted. Agonizing over where to draw the ‘poverty line’ is a case in point; almost always there will exist a range of possible lines over which the ordinal poverty comparison and, hence, the policy conclusion, is unaffected, and in some applications that range may be very wide indeed. The same point also holds for poverty measures, which may or may not matter to the poverty comparison.

Another theme is that too little work typically goes into assessing the robustness of poverty comparisons — both ordinal and cardinal - to changes in the underlying measurement assumptions. Much of the data routinely used in poverty analysis are full of errors, and that is unlikely to change. There are also unavoidable value judgements underlying measurement practice. Our policy assessments and prescriptions may or may not depend on these errors and assumptions; an important task for the analyst is to find out just how confident we can really be in forming poverty comparisons.

How confident we need to be about a poverty comparison will also depend heavily on its purpose. This illustrates a more general point – another theme of this monograph — that ‘measurement’ and ‘policy’ are often inseparable. For example, the method used to identify the poor may depend on the loss one attaches to errors in identification; the error of missing someone who is actually poor would matter more in a situation in which the poverty comparison is being used to target relief than one in which it is only being used to monitor overall social progress. Similarly, while it may be deemed adequate to rely solely on a simple head-count of the poor when trying to make an easily interpreted summary assessment of a country’s overall progress in reducing poverty, this could be a very misleading basis for choosing one policy over another. Counting the poor reveals nothing about gains and losses amongst the poor, or the extent to which the poorest are reached by a policy.

There are other aspects of the specific context of a poverty comparison which can matter in deciding precisely how that comparison should be made. Circumstances of the set of people over which the comparison is called for — I shall call that set the ‘domain’ — can also have bearing on measurement choices. For example, a person at a given consumption level may be deemed poor in one domain (say a generally well-off country) but not another (a poor country). However, one does have to be careful in making such arguments. This monograph tries to offer a consistent framework for doing so.

Part 2 surveys the essential concepts and methods needed in applied work, while Part 3 illustrates their use, drawing on my own research and policy advice in this area. Recognizing the close link between measurement and policy, some readers would no doubt prefer a more integrated approach to theory and practice than I offer here (and some have already said so). However, the set of possible policy applications is large and diverse. It is not easy to anticipate the subtleties that might arise in every possible application, or even to neatly tailor a sub-set of applications to the theory. Rather, Part 2 tries to cover the full range of issues that may need to be considered – to set out the basic ideas in a reasonably generic way- leaving Part 3 to illustrate the practice in selected case-studies. While facilitating the exposition, this approach may also help accommodate the quite possibly low correlation between the initial familiarity of readers with the ‘theory’ and that for the ‘practice’. A summary of the methodological recommendations can be found in Part 4.

For a more policy-oriented discussion see Lipton and Ravallion (1993).

2
Concepts and Methods of Poverty Analysis

‘Poverty’ can be said to exist in a given society when one or more persons do not attain a level of economic well-being deemed to constitute a reasonable minimum by the standards of that society. Saying that poverty ‘exists’ is only the first step; for many purposes, including policy analysis, one must also say ‘how much’ poverty exists. The key questions for the applied economist to answer before measuring poverty are: How do we assess ‘economic well-being’? At what point do we say that a person is not poor? And: How do we aggregate this information into a measure of poverty? The first two questions are sometimes referred to as the ‘identification problem’ (which individuals are poor, and how poor are they?) while the third is called the ‘aggregation problem’ (how much poverty is there?).

My aim here is to provide a comprehensive, and critical, overview of the alternative approaches to answering these questions found in practice. I begin in Section 2.1 with an introduction to some of the more conceptual issues which underpin (explicitly or otherwise) common measurement methods. This material helps provide a theoretical background for understanding some of the more practical issues of measurement which are taken up in the rest of the monograph.

2.1 Conceptual Approaches to Measuring ‘Well-Being’

There are a number of quite different conceptual approaches to the measurement of well-being at the individual level. Approaches differ in terms of the importance the analyst attaches to the individual’s own judgements about his or her well-being. They also differ in terms of the range of factors they try to include; some focus solely on the essentially materialist idea of ‘economic welfare’ or ‘standard of living’ (I shall use these terms interchangably), determined in large part by command over commodities. Other approaches try to embrace less tangible but possibly no less important concepts such as ‘rights’. I will not go into detail on the various approaches, but only try to illustrate their bearing on the key choices about measurement which underlie poverty comparisons.

An important conceptual distinction which underlies measurement practice is between ‘welfarist and ‘non-welfarist” approaches. The former aims to base comparisons of well-being, and public policy decisions, solely on individual ‘utilities’ – the preferences of individuals themselves – while the latter approach typically prefers to base assessments on certain elementary achievements, such as being able to afford to be adequately nourished or clothed, and may pay little or no regard to information on utilities per se. In assessing individual well-being, a welfarist poverty assessment will avoid making judgements which are inconsistent with individual behavior. A non-welfarist measure, on the other hand, may well deem the poor to be worse off after some policy change (say), even if the poor do not agree. Suppose, for example, that all persons – both poor and non-poor – have a unanimous preference for their situation after a popular change of government, ending years of (say) colonial rule. A strictly welfarist poverty comparison would have to say that there is less poverty in the new situation; all utilities have increased. And yet suppose that one also finds that consumption of the poor has fallen in the transition from colonial rule. A conventional – non-welfarist – poverty comparison based on command over commodities would come to the opposite conclusion.

Some key elements of the theoretical foundations of the welfarist approach are provided by modem microeconomic theory, and there are a number of good expositions.² The essence of the approach is the concept of a preference ordering over goods, generally taken to be representable by a ‘utility function’, the value of which is deemed to be a sufficient statistic for assessing a persons’s well-being. Following this approach, utilities are the basis of social preferences, including poverty comparisons. There have been numerous empirical applications of this approach to various policy issues, and (though some issues have yet to be resolved) it is fair to say that the approach is now well-developed in both theory and practice.³

Non-welfarist ideas have been more diverse. Some long-standing approaches have been based on identifying specific forms of commodity deprivation, and have been common in both the developed and developing country literatures. The range spans both ‘absolute commodity deprivation’ (in nutrition oriented or other ‘basic needs’ approaches,⁴ which tend to be more common in the developing country literature), and ‘relative commodity deprivation’ (as in, for example, Townsend, 1979). A nagging worry about these approaches has been arbitrariness in deciding what commodities matter and (when necessary) how one should value one against another.

A rather different conceptual basis for the defense of non-welfarist comparisons - which does not rely directly on command over commodities — has been proposed by Sen (1980, 1985, 1987). Sen rejects both ‘utility’ as a metric of welfare, and non-welfarist commodity based formulations, and argues instead that ‘well-being’ is really to do with being well, which is about being able to live long, being well-nourished, being healthy, being literate, and so on; as Sen (1987, p. 25) puts it, the ‘…value of the living standard lies in the living, and not in the possessing of commodities…’ What is valued intrinsically are people’s ‘capabilities’ to function, and ‘poverty’ is interpreted as lack of capability. The task of poverty analysis is then to determine what those capabilities are in specific societies, and who fails to reach them. This task has not yet been convincingly confronted in applied work,⁵ and so the operationalization of the capabilities approach has a long way to go.

Views differ widely on the relative merits of welfarist and nonwelfarist approaches.⁶ Economists have often shunned non-welfarist ideas, aiming to base assessments of well-being solely on utility information. A number of problems are encountered in doing so. If one rules out the possibility of comparing utilities across different individuals, as well as precluding non-utility information, then there can be little hope of forming consistent poverty comparisons or other judgements about social welfare.⁷ Many economists are willing to admit explicit inter-personal comparisons of utility in formin...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Introduction to the Series
• Preface
• 1. Introduction
• 2. Concepts and Methods of Poverty Analysis
• 3. Putting Theory into Practice
• 4. Conclusions and Recommendations
• Appendix 1: A Method of Setting Poverty Lines
• Appendix 2: Ordinal Poverty Comparisons: A Summary of Definitions and Results for Continuous Distributions
• References
• Index