Public Disclosure Authorized

State Planning Organization of the Republic of Turkey and World Bank Welfare and Social Policy Analytical Work Program

Working Paper Number 1: Public Disclosure Authorized Poverty and Inequality Changes in Turkey (2003-2006) Public Disclosure Authorized

Meltem Aran Oxford University & The World Bank

Sırma Demir State Planning Organization, Republic of Turkey

Özlem Sarıca Turkish Statistical Institute

Public Disclosure Authorized Hakan Yazıcı State Planning Organization, Republic of Turkey

Ankara, March 2010 State Planning Organization of the Republic of Turkey and World Bank Welfare and Social Policy Analytical Work Program

Working Paper Number 1:

Poverty and Inequality Changes in Turkey (2003-2006)

Meltem Aran Oxford University & The World Bank Sýrma Demir State Planning Organization, Republic of Turkey Özlem Sarýca Turkish Statistical Institute Hakan Yazýcý State Planning Organization, Republic of Turkey

Ankara, March 2010

State Planning Organization

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The World Bank enjoys copyright under protocol 2 of the Universal Copyright Convention. This material may nonetheless be copied for research, educational or scholarly purposes only in the member countries of The World Bank. Material in this report is subject to revision. Poverty and Inequality Changes in Turkey (2003-2006) iii

Poverty and Inequality Changes in Turkey (2003-2006)

Table of Contents

Abstract ...... v 1. Introduction ...... 1 2. Literature Review ...... 1 3. Data and Methodology ...... 2 3.1 Data...... 2 3.2 Methodology...... 2 (i) Construction of the consumption (or welfare) aggregate ...... 2 (ii) Construction of the food and non-food poverty lines...... 3 4. Analysis of Changes in Poverty and Inequality in Turkey ...... 4 4.1 Findings on Overall Changes in Poverty (2003-2006) ...... 4 4.2 Stochastic Dominance Tests ...... 6 4.3 Changes in Inequality Measures (2003-2006) ...... 8 5. Poverty Profiles and Relative Risk of Poverty Over Time...... 10 5.1 Poverty by Status and Sector of Employment ...... 10 5.2 Poverty by Educational Attainment ...... 11 5.3 Poverty by Age Groups...... 11 5.4 Poverty by Household Composition and Gender of Household Head...... 11 5.5 Changes in the Relative Risk of Poverty in Turkey...... 12 6. Correlates of Poverty: A Multivariate Analysis...... 15 6.1 Household Composition Variables...... 15 6.2 Educational Attainment ...... 17 6.3 Sector of Employment for Household Head...... 17 7. Conclusions ...... 17 Annex-Tables...... 19 References ...... 26

Figures

Figure 1: Growth Incidence Curves ...... 5 Figure 2: Probability Density Functions for Consumption in Turkey (2003-2006) ...... 7 Figure 3: First Order Stochastic Dominance Test: Poverty Incidence Curves ...... 7 Figure 4: The Gini Coefficient and Lorenz Curves for Turkey (2003-2006) ...... 9 Figure 5: Poverty by Age Groups and Gender (2006)...... 12

Poverty and Inequality Changes in Turkey (2003-2006) v

Abstract

Poverty in Turkey has declined significantly between 2003 and 2006, as a result of rapid poverty reduction in urban areas. In the same time period, the reduction in poverty in rural areas has been slow or non-existent. As a result, the relative risk of poverty has increased in this time period for those employed in the agricultural sector, living in rural areas and in large households. Inequality in urban areas has decreased as a result of higher growth in the consumption levels of the urban poor compared to richer deciles, while no significant changes to inequality measures have been noted in rural areas. In fact, the consumption levels of the poorest groups in rural Turkey have declined between 2003 and 2006. Child poverty has also been persistent in this time period, with the relative risk of poverty for children (ages 0-19) increasing over time.

This paper constitutes part of a collaborative analytical work program between the World Bank and the State Planning Organization. The findings of this paper have been previously presented at the Welfare and Social Policy Conference organized by these institutions in Ankara on October 22, 2008. The findings and statements in this research paper are the responsibility of the authors and do not reflect the official views of their respective institutions.

The authors would like to thank Jesko Hentschel, Francisco Ferreira, Erwin H. R. Tiongson and Edmundo Murrugarra for their valuable comments during the conference and in the process of writing this paper.

Poverty and Inequality Changes in Turkey (2003-2006) 1

1. Introduction tion and income measures (Dumanli (1996), Erdogan (1996), Dumanli and Bulutay (2000), Alici (2000), 1. This paper illustrates the changes in poverty and Oguzlar (2006)) while some studies follow a human consumption inequality in Turkey in recent years. The development approach focusing on the social settings official calculations for poverty in Turkey indicate that and natural endowments (See Akder (1999 and 2000)). there has been a significant decline in poverty levels Studies dating before 2000 have mainly used income from 23% in 2003 to 17% in 2006 (using the complete aggregates whereas after 2000, consumption expenditure poverty lines for food and non-food spending). By is heavily employed as a welfare indicator in poverty looking at changes in inequality and consumption measurement. patterns, the paper also aims to analyze who has benefited most from the recent rapid changes in poverty reduction 4. In the 2000s, following the 2001 economic crises, in Turkey. In many ways, this diagnostic paper updates recent academic work has focused on the changing the results of the Turkey Joint Poverty Assessment forms of poverty in Turkey (Buðra and Keyder, 2003, report which was carried out using data from 2001, in 2005; Keyder and Ustundag, 2006). Besides, some terms of the profiles of the poor and also provides more studies have touched on the determinants of poverty both at rural and urban levels (Atahan 2006, Pamuk detailed analysis on relative changes in welfare. 2002). For instance, Buðra and Keyder (2003 and 2006) focus on the changing nature of immigration and how 2. The paper is laid out as follows: A brief literature the new immigrants in urban areas are unable to link review is provided in Section 2. The data sources and up with social networks as the ones that came before methodology for constructing the poverty lines and were able to do. They name this phenomenon the end consumption aggregate are discussed in Section 3. In of “gecekondu-nization” whereby new arrivals in urban Section 4, we consider the overall changes in poverty towns are no longer able to locate themselves in newly and inequality levels in Turkey and provide analysis on created slum neighborhoods and have to find rental the changes in the consumption distribution over time. apartments in isolation. This reduces their ability to The distributional changes in consumption levels by access informal safety nets in the cities. urban and rural categories are analyzed in detail in this section. This section also provides sensitivity analyses 5. Adaman and Keyder (2005) focus on the poor and for poverty measures with changes to the poverty line marginalized people (the disabled, elderly, street vendor as well as stochastic dominance tests of the first and children, Roma people and internally displaced people) second order in order to establish the robustness of who are among the most vulnerable and socially poverty measures. Section 5 goes into detailed analysis excluded. The study’s focus is on the poor, but also on the poverty profiles in Turkey by various charac- considers the marginalized (disabled, elderly, street teristics of household heads and household members, vendor children, Roma people and internally displaced such as the sector of employment, age groups, educa- people) who are the most vulnerable and socially tional attainment and demographic composition of the excluded. The results drawn in this study are based on household. Section 6 considers some important cor- many interviews and meetings with other socially relates of poverty in Turkey using multivariate regres- excluded groups in slums of the selected cities. High sion analysis and a simulation that predicts changes in incidence of social exclusion is also associated with probability of being poor given certain life events and unemployment or employment in the informal sector, changes to individual and household endowments. where the marginalized groups have no social security Section 7 concludes with main findings. or health insurance. This study also suggests that informal social networks are loosening and the traditional 2. Literature Review mechanisms of cooperation and insurance against risks, such as family and other social networks are becoming 3. In the last decade, several studies have been under- less relevant for the marginalized poor in urban areas. taken in Turkey that tried to explain and quantify the levels of poverty in the country. Most of the studies 6. Studies on poverty in rural Turkey have examined have approached poverty measurement with consump- the dimensions, changes in characteristics of poverty Poverty and Inequality Changes in Turkey (2003-2006) 2 in rural areas. Yalman (2006) has noted that the highest estimations at the national as well as urban and rural risk of poverty is mostly seen in households in which levels in Turkey. The survey is collected over the course heads are employed in casual or seasonal jobs. He finds of 12 months in each year whereby 720 households are that the average age of the populations in the selected visited each month. The sampling strategy uses a 2- southeastern regions is lower than the national average stage cluster sampling method whereby the first stage and unemployment among them is rampant. He also blocks are selected from the sample frame of the 2000 finds that women and children are the most vulnerable census and at the second stage households are selected ones that suffer deeply from poverty. Yalman (2006) randomly within each block. has put forwarded a striking feature of the impoverished families in the southeast. Most of the households were 3.2 Methodology absent of the male figure as a breadwinner. Besides some households were lacking a husband or father, 9. This paper builds on poverty calculation metho- some were in a situation where the husband/father was dology officially used by TUIK and builds the poverty incapable due to poor health, labor conditions. profiles and determinants on the officially calculated consumption and poverty line levels. The paper makes 7. The World Bank’s Turkey Rural Finance Study use of the ADEPT poverty analysis software program (RFS), based on rural household survey 2004 and on developed by the World Bank.1 financial data compiled in 2005, demonstrates that the rural financial markets are ill-performing and a very 10. The variables used in the analysis were defined in low-proportion of rural households are using the financial a standard way across time (2003-2006) in order to services. The study finds that over 70 percent of the have comparable results.2 More specifically, the variables rural sector is credit constrained. The dynamics lying used in the analysis were the following: (i) at the house- behind this poor performance indicate high interest rates, significant price and output variability in the hold level: per adult equivalent consumption aggregate agricultural sector, poor credit supply given uncertainty (adjusted by regional price variations, economies of about potential government interventions and policies, scale in the household), education level of household and high transactions (RFS 2006:5). head, employment status of household head, sector of household head and urban/rural variable; (ii) at the 3. Data and Methodology individual level: gender, age, education level, employ- ment status, sector of employment and (iii) at the national level the food and non-food poverty line combined. 3.1 Data

11. The methodology used in this paper for constructing 8. The analysis in the paper uses the Household Budget Survey datasets from years 2003-2006 collected by the poverty lines and the consumption aggregate to TUIK. The household budget survey is collected annu- compare to this level is the same methodology that was ally in Turkey in order to provide estimations of con- implemented in 2002 for the Joint Poverty Assessment sumption levels in various categories at the household report between the World Bank and TUIK. This met- level. The poverty analysis carried out in this paper hodology follows closely along the lines of Deaton & takes into account poverty and inequality measures that Zaidi 2002. Since then TUIK has annually published depend on consumption poverty and the HBS survey official poverty statistics using this methodology. is selected for the analysis in this paper as it is the only data source that provides accurate estimations of con- (i) Construction of the consumption (or welfare) sumption by spending categories. The survey size in aggregate: 2003 was large enough to provide regional estimations at the NUTS1 level. In the following years, the survey 12. The total monthly spending is calculated from the size was reduced to 8,640 households and provided household expenditures module in the dataset. The

1 This software package allows for the standardized analysis of poverty data across countries. The program has been developed by Martin Ravallion, Michael Lokshin, Zurab Sajaia in the Development Research Group of the World Bank. For more information on the ADEPT software please visit http://econ.worldbank.org/programs/poverty/adept. 2 The food basket used for constructing the poverty line and the methodology for deflating the consumption aggregate were different in 2002. Therefore the analysis has only taken the years 2003 onward into consideration. Poverty and Inequality Changes in Turkey (2003-2006) 3 spending on durable goods (as defined by COICOP time and location, was then divided by the adjusted standard codes) is taken out of this total spending level. adult equivalence measure in order to get the adult equivalence and economies of scale adjusted · Adjustments for Cost-of-Living Differences: consumption aggregate at the individual level. The cost of basic needs may vary between areas This individual level consumption aggregate is and over time. In order to have a nationally compa- then compared to the national poverty line for rable consumption aggregate over time, the spen- the determination of poverty status. ding data needs to be adjusted for regional and over time price differences. HBS data is collected (ii) Construction of the food and non-food poverty every year over a 12 month period and an adjust- lines ment needs to be made for data collected within a year in order to reflect inflation over time.3 13. The national (or complete) poverty line used in this analysis has a food and non-food components. The food · Adjustments for Household Composition: component was determined according to the same basket Households of different size and composition that was used in the previous Turkey poverty report have different needs and two main adjustments (JPAR 2005). need to be made: (i) to reflect the age of the hou- sehold members (number of children versus · The food basket was determined as follows: adults), and (ii) to reflect household size and eco- Households were ranked by monthly food nomies of scale at the household level. The number expenditures and broken into 10 deciles. The 3rd of adult equivalents in the household is determined and 4th deciles according to food expenditures by the formula: were taken as the reference group for the poverty food basket and 80 food items they consumed AE i = (A + aC)q most were taken as the reference items that formed the minimum 2100 calorie requirement per adult. where A is the number of adults and C is the num- The cost of the food basket was taken as the food ber of children. The parameter a is the cost of a poverty line in Turkey. The basket that was child relative to that of an adult and lies somewhere determined in 2003 was used in the analysis for between 0 and 1. The other parameter q, which consequent years. The cost of the basket was also lies between 0 and 1, controls the extent of revised according to the average prices per item economies of scale. In the case of this analysis coming from consequent years of HBS data. these parameters were taken at a= 0.9 and q= 0.6. Children are defined as individuals ages · The non-food component of the basket was 14 or below. In the analysis in Turkey, a modal determined by looking at the non-food share of household of 2 adults and 2 children was taken expenditures in household spending just above as the point of departure therefore the formula the food poverty line. This Engel’s coefficient was adjusted in the following way, where A0=2 was allowed to vary over time and the food and C0=2: component was between 58% and 61% between 2003 and 2005.4 A + C AE i = 0 0 AEi ADJ q 14. The national (complete) poverty line was calculated (A0 + aC0) by adding the food and non-food components calculated The consumption aggregate at the household above. The poverty line was calculated on a daily basis level, adjusted above for price differences over and then multiplied by 30 days before being compared

3 In 2002 (initial analysis for JPAR) an index was built reflecting price differences for 7 geographical regions, 2 urban /rural dummies and 12 months resulting in an index that took on 168 different values (7x2x12=168). In the consequent years starting in 2003, an index was built using 12 NUTS1 regions, 2 urban/rural dummies and 12 months. This has resulted in an index that takes on 288 values (12x2x12=288). In order to make sure results were fully comparable over the years, this paper has focused only on the micro data from 2003 onward. Note that in 2003 the food basket in the poverty line was also changed, therefore dictating that the over the years comparable analysis start in 2003. The monthly adjustments were made using the CPI food price index base year (1994 for 2003-2004 and base year 2003 for 2005-2006 analysis.) 4 An alternative method would keep the Engel’s coefficient constant over time. The paper has followed the methodology followed by TUIK for those years and hence has allowed the Engel’s coefficient to vary in the poverty line. For future analysis the coefficient will be kept constant. Poverty and Inequality Changes in Turkey (2003-2006) 4 to the consumption aggregate which was also adjusted which squares the distance of each poor individual to for 30 day spending. Both the 30 day poverty line and the poverty line and gives more emphasis to the welfare the 30 day adult equivalent consumption aggregate were of the poorest in the distribution has also declined from deflated up from June prices of each year to June 2006 2.8 in 2003 to 1.8 in 2006.6 These measures suggest overall TUFE prices in order to make all years of poverty that poverty has declined in Turkey in this time period, lines and consumption aggregates comparable over the for those households who were right below the poverty years in real terms. line although it is difficult to say what happens to the poor in lower percentiles of the distribution. The poverty 4. Analysis of Changes in Poverty and numbers for the period 2003-2006 are summarized in Table 1.7 Inequality in Turkey 16. By all measures of poverty, the reduction in 4.1 Findings on Overall Changes in Poverty (2003- poverty was sharper in urban areas and quite weak 2006) in rural areas. Urban areas experienced a 12.9 percentage points reduction in the poverty headcount, 15. Turkey has experienced a rapid decline in from 22.3% in 2003 to 9.4% in 2006. The poverty gap consumption poverty between 2003 and 2006. The and poverty severity indices also came down more poverty headcount, which provides the share of the strongly in urban areas than in rural areas. Rural poverty population that has consumption below the national was reduced at a slower rate: with the poverty headcount poverty line, fell from 28.1% of the population in 2003 coming down only by 4.1 percentage points from 37.1% to 18.3 % in 2006. This represents a 9.8 percentage in 2003 to 33.1% in 2006. The poverty gap and poverty point reduction in poverty in this 3 year period. Poverty severity measures in rural areas also remained high has also declined in terms of the poverty gap and poverty with the poverty severity measure declining only from severity measures.5 The poverty gap (P1), often 4.1 to 3.9 in rural areas, while this measure declined considered as representing the depth of poverty, is the from 1.9 to 0.6 for urban areas in the same time period. mean distance separating the poor population from the poverty line (where the average is taken over the entire 17. Sensitivity analysis for different values of the population, with the gap set to zero for incomes above poverty line shows that the poverty level is sensitive the poverty line), and has come down from 7.3 to 5.4 to the poverty line in Turkey. Table A-1 shows that: from 2003 to 2006. Poverty severity (P2) measure a 5% increase in the poverty line increases the

Table 1: Overall Changes in Poverty

Note: Changes shown between 2003 and 2006.

5 The poverty gap (P1) is a measure of the poverty deficit of the entire population in which the notion of “poverty deficit” captures the resources that would be needed to lift all the poor out of poverty through perfectly targeted cash transfers. 6 Squared Poverty Gap (P2) is described as a measure of the severity of poverty. When using the squared poverty gap, the poverty gap is weighted by itself, so as to give more weight to the very poor. In other words, the squared poverty gap takes into account the inequality among the poor. 7 Please note that while these numbers follow closely the official poverty figures of Turkey published annually by TUIK, there is a slight difference between these numbers and the official figures. This is due to a definitional issue. The numbers in Table 1 consider all people with adult equivalent consumption aggregate below the national poverty line as poor. The TUIK definition also looks at the income levels of these households and redefines those people in households in the top quintile in terms of per capita income, as non-poor. This may be a legitimate redefinition that takes out richer households who have consumed less in a given month perhaps as a result of being away from the house for an extended part of the month. In this paper, in order to carry out further analysis on the decomposition of poverty changes, however, we stay with the original definition. Poverty and Inequality Changes in Turkey (2003-2006) 5 headcount rate by 2 percentage points in 2006 (a real consumption levels. The mean growth rate of change of around 12%). A 10% increase in the poverty real consumption in rural areas is only around 1%, line increases the poverty headcount by 4.5 percentage with the poorest quintile of the population in rural points (a change of 25%). This suggests that the near- areas having experienced negative real growth in poor in Turkey are highly vulnerable to changes in price level that may impact the poverty line. The Figure 1: Growth Incidence Curves recent increase in the food prices may therefore significantly hurt he near-poor and push them below the poverty line assuming no substitution effects in their food consumption bundle (especially in urban areas where there are no net benefits to higher food prices). The sensitivity analysis also shows that “vul- nerability” to falling below the poverty line may be reduced just as a result of the changes in the con- sumption distribution in recent years. Whereas in 2003, a 20% change in the poverty line implied a 12 percentage point increase in poverty (about 8.4 million more poor people) in 2006 it implies a 9.5 percentage point increase in poverty (about 6.8 million more poor people).8

18. Urban poor have benefited more from growth and redistribution of consumption in the time period analyzed. Following Ravallion and Chen (2002), the growth incidence curves in Figure 1 show the changes in the consumption aggregate between the two selected years for the percentiles of the consump-tion aggregate. Three panels on the figure show the growth-incidence curves for the country as a whole and separately for urban and rural samples. The steep negative slope of the growth incidence curve in urban areas for Figure 1 shows that as a percentage of their initial consumption level, the urban poor has seen a higher percentage increase in their consumption between 2003 and 2006. In urban areas, the percentage change in the welfare indicator for the poorest quintile is between 7-11% in real terms while for the richest quintile it varies between 0-3 %. In urban areas, the mean growth rate (expressed by the orange line going across Figure 1) is around 9% in real terms (total from 2003 to 2006).9

19. In contrast, the poorest percentiles in rural areas have experienced negative growth in their

8 Note: The calculation assumes that the population of Turkey was around 70 million people in 2003 and 72 million people in 2006. We can revise this calculation to get more accurate numbers once we have the finalized population figures from TUIK. 9 In this analysis all prices have been adjusted to the June 2006 prices therefore the percentage change in consumption reflects the real change net of inflation. Poverty and Inequality Changes in Turkey (2003-2006) 6 consumption in the time period analyzed. Similarly, the 4.05 percentage point reduction in rural poverty is the richest 10% of the rural population – usually attributable mostly to a redistribution effect. This is identified with larger landholdings, have also consistent with the fact that the annual increase in GDP experienced a decline in real consumption levels. for this time period in agriculture has been low at 3.5%. Only the middle-classes in rural areas have benefited In urban areas, growth and redistribution both account slightly from growth in this time period. The changes for poverty reduction with 7.9 percentage point reduction in rural areas that affect the richest consumption in urban poverty being attributable to growth and 5.9 decile, may be due to the shift in agricultural policies percentage point reduction being attributable to away from input and price based subsidies for redistribution of consumption. agricultural products, that tended to favor large land- 22. The probability density function for consumption owners in the past. The negative real growth in the provides the distribution of consumption levels across consumption of the poorest portions of rural society, the population (See Figure 2). The distribution of is a serious concern, the reasons for which should be consumption visibly shifts to the right in the time period considered in further detail in the rest of the report. analyzed, implying higher levels of real consumption, especially in urban areas. In 2006, the shape of the 20. The decomposition of the changes in poverty distribution curve is noticeably wider than the curve in levels allows us to differentiate between the growth 2003 particularly for urban areas, creating a stronger and redistribution components of poverty reduction. middle section in the consumption distribution chart. Lower poverty could result either from a general increase The mean level of consumption in rural areas is closer in the income of all households (without change in the to that in urban areas in 2003, while rural areas fall income distribution) or from a decrease in inequality behind and the gap between mean levels of expenditure (redistribution from the rich to the poor without change widens between urban and rural areas by 2006. in mean income or consumption). Following Datt and Ravallion (1992) and Ravallion (1994), Table A-2 shows 4.2 Stochastic Dominance Tests the poverty rates in two years, actual change in poverty rate (percentage points), changes in poverty due to the 23. Stochastic dominance tests have been applied for growth in the mean, changes in poverty due to changes the consumption aggregate between 2003 and 2006 in in the distribution, and the interaction components. order to establish the robustness of ordinal poverty ran- kings for the two years. First order stochastic dominance 21. Growth has played a dominant role in overall tests are presented in Figure 3 in the form of poverty 10 poverty reduction, with the redistribution incidence curves for 2003 and 2006. Figure 3 depicts component of poverty reduction also being strong, the distribution functions for 2003 and 2006 (which is particularly in urban areas. The drivers of poverty in essence the integral of the area under the probability reduction in urban and rural areas in Turkey for the density functions provided in Figure 2). First-order time period analyzed can be summarized as follows: stochastic dominance involves comparing the cumulative Overall, growth has played a dominant role in poverty distribution functions for the indicator of well-being reduction, with 7.03 percentage points in poverty (in this case adult equivalent consumption) for different reduction in this time period are attributable to growth. survey years. The x-axis in these charts presented below Redistribution accounts for 3.82 percentage points in is the consumption aggregate figures and the y-axis is overall poverty reduction, while the interaction term the percentage of the population that has access to a increases poverty by about 1 percentage point. This is particular level of per capita consumption (for each not surprising to see in that this time period represents consumption aggregate level in the x-axis). Whenever a period of high growth around 8.5% annual increase a growth incidence curve is entirely to the right of the in GDP.11 In rural areas, growth has been weaker and y-axis (in positive territory), there has been positive

10 Note that “redistribution” is used here as a term that defines changes in the Lorenz Curve and inequality rather than any specific programs that target the poor and redistribute wealth. The redistribution component can be positive even in the absence of such programs, as long as the consumption of the poorer percentiles increases faster than the consumption of the richer portions of the population. 11 Source: Turkish Statistical Institute (TUIK) Gross domestic product in constant prices (By kind of economic activity at basic prices at 1998, 1998- 2008) taken from www.tuik.gov.tr Poverty and Inequality Changes in Turkey (2003-2006) 7

Figure 2: Probability Density Functions for Consumption in Turkey (2003-2006)

Figure 3: First Order Stochastic Dominance Test: Poverty Incidence Curves Poverty and Inequality Changes in Turkey (2003-2006) 8 growth everywhere along the distribution.12 This implies the choice of where the poverty line is drawn for each first order stochastic dominance, which in turn implies year. In contrast, for rural areas there is no evidence that poverty comparisons are robust with respect to the of stochastic dominance for any of the poverty measures choice of poverty line. P0, P1 or P2. The reduction in poverty between 2003 and 2006 for rural areas depends on where the poverty 24. In urban areas the poverty incidence curve in 2006 line is drawn and we could have seen an increase in the first-order stochastically dominates the curve for 2003. poverty levels had the poverty line been drawn elsewhere In other words, for all percentiles in the distribution on the distribution. This observation is also consistent there is a higher level of per capita consumption in 2006 with the way that growth incidence curves in Figure 1 13 than in 2003 since the lines do not cross each other. for rural areas cross the x axis, suggesting that some This means that no matter where the poverty line was people are in fact worse off in rural areas in 2006 than drawn, the FGT poverty measured (P0, P1 and P2) they were in 2003. Drawing the poverty line in the would be lower for 2006 than in 2003. The comparison middle of the first decile in that figure would have between the poverty measures we obtain, do not depend resulted in an increase rather than decrease in rural on where the poverty line is drawn in these years. In poverty. rural areas, on the other hand, the poverty incidence curves cross each other, indicating that first order 4.3 Changes in Inequality Measures (2003-2006) stochastic dominance condition does not hold for rural areas. Depending on where the poverty line was drawn, 27. Inequality in terms of consumption has also we could get an increase or decrease in the poverty come down in Turkey in urban areas, while it has headcount measure in rural areas. stayed more stable in rural areas in the period 2003- 2006. The level of overall inequality in consumption 25. Second order stochastic dominance tests involve as measured by the Gini coefficient has been reduced analyzing “deficit” curves or integrals of the consumption from 34.34 in 2003 to 30.95 in 2006. In urban areas, distribution functions. This analysis similarly helps the Gini coefficient has come down from 33.41 to 28.45 determine whether poverty has improved or worsened while in rural areas there has been only a slight decrease over time for all poverty measures P1, P2 and higher. in the Gini coefficient from 31.59 to 31.19. Figure A-1 provides the poverty deficit curve for Turkey in 2003 and 2006 for urban and rural areas. In the graph, we can see that for urban areas the 2006 second order 28. The reduction in urban inequality is depicted stochastically dominates 2003 (an already established clearly in the Lorenz curves presented in Figure 4. fact in the poverty incidence curves as poverty incidence The Lorenz curve, which is a standard tool in inequality curves speak to all poverty measures P0 and higher). research, plots the proportion of income earned by For rural areas, it is difficult to say if there is second various portions of the population, when members of order stochastic dominance since the poverty deficit the population are ordered by their consumption levels curves lie on top of each other for these two years. (Gastwirth, 1972). The 45 degree line on the Lorenz curve represents the line of total equality and the further 26. Considering the poverty incidence and poverty away is the curve from the diagonal, the higher is severity figures, therefore, it is possible to say that inequality. In 2006, the distribution of the consumption changes in poverty in Turkey between 2003 and 2006 aggregate is closer to the diagonal line than in 2003 in are only stochastically dominant for urban areas for the urban areas. The inward shift in the Lorenz curve for poverty headcount, poverty gap and poverty severity urban areas reveals that the bottom percentiles of the measures (P0 measure and higher). The reduction in population has access to more of the total consumption poverty on these poverty indicators does not depend on in 2006 than they did in 2003.

12 The anonymity axiom is maintained here such that some individuals in the distribution may have been worse off but overall each percentile is better off when compared to the previous time period. 13 Note that this does not mean that all individuals are better off in 2006, only that each percentile has a higher level of consumption, although the percentiles do not have to include the same individuals. Poverty and Inequality Changes in Turkey (2003-2006) 9

Figure 4: The Gini Coefficient and Lorenz Curves for Turkey (2003-2006)

29. The changes in inequality levels by urban and decile and the median consumption group. Table A- rural areas are also confirmed by comparisons of 3b shows the ratios of selected expenditures percentiles consumption levels by percentile across time.14 Figure by urban and rural areas and compares their consumption 4 shows the relative comparison of per capita adult levels. As of 2006, the median level of consumption in equivalent consumption levels by percentiles in detail, urban areas is 1.5 times the median consumption level while providing the Gini coefficients by urban rural areas in rural areas (after regional price and adult equivalence over this time period. In urban areas, while the per capita adjustments). This level is up from 1.23 in 2003. In fact adult equivalent adjusted consumption level for the 90th for the 5 different percentile ranges in urban and rural percentile (in the richest decile) was 4.24 times that of areas, the relative consumption of urban households, the 10th percentile, the ratio has come down to 3.56 in when compared to rural households has increased. This 2006. In rural areas, there is an increase in the ratio of is especially significant for the comparison of the bottom consumption levels between the poorest and richest 10th percentile, where the consumption ratio has increased deciles as well as the consumption level of the 10th from 1.24 in 2003 to 1.64 in 2006. percentile and 25th percentile – suggesting that the poorest part of the population in rural areas has been most 31. The decomposition of inequality measures shows disadvantaged in this time period (Table A-3a for details). that between group inequality has increased in Turkey (between urban and rural areas) but within 30. The gap between urban and rural areas in terms group inequality still makes up the majority of of consumption levels has declined for the top decile inequality in the country. GE class inequality measures in both areas, while it has widened for the poorest and their decomposition by urban/rural areas in Turkey

14 Source: Blackorby et al. (1981), Shorrocks (1984). Poverty and Inequality Changes in Turkey (2003-2006) 10 are provided in Table A-4. In Turkey in this time period, 34. In fact as of 2006 the poverty headcount rate in the inequality that results from across group differences the agricultural sector is even higher than the poverty has increased from 4.1% of total inequality in 2003 to rate among the unemployed and inactive people in 10.5% of total inequality in 2006. However, as of 2006 the country. Among those people whose household within urban and within rural inequality still account heads were unemployed in 2003, 43% were in poverty for the rest (89.5%) of inequality in Turkey. while the headcount rate for those in the agriculture sector was close to 45% (See Table A-5b). In the years 5. Poverty Profiles and Relative Risk that followed, the likelihood of being poor among those of Poverty Over Time employed in agriculture did not decline much while for those people who were unemployed or inactive, the probability of being in poverty was lower. In 2006, 32. This section of the paper focuses on the profiles of while the headcount rate for people with household the poor in Turkey and considers the changes in poverty heads in the agricultural sector came down only to 41% profiles over time. The profiles of poverty considered (from 43% in 2003), among the unemployed and inactive in this section of the paper include poverty levels and this level was down to 36% (from 43%) and 14% (from the distribution of the poor across status and sector of 23%) respectively. employment, levels of educational attainment, age groups and the demographic composition of household. 35. Following the agriculture sector, the construction The tables for each characteristic at the individual and and mining sectors have the second and third highest household level are provided at the annex of the report poverty headcount rates. In 2006, the headcount rate (in Table A-5 - Table A-9) in terms of (i) the percentage among people where the household head was employed of the group who are poor (P0 – headcount) in the given in the construction sector was 28.5% and in the mining population, (ii) the share of total poor who are in the sector it was 20.5%. 12.1% of the poor live in households given group (the distribution of the poor) and the (iii) where the household head works in the construction the share of the total population in the given group (the sector, while only 7.8% of the population lives in such distribution of the population). households. The mining sector employs a very small percentage of the population (with only 0.6% of the 5.1 Poverty by Status and Sector of Employment population living in households where the household head is employed in the mining sector) though the 33. The poverty headcount rate is highest in Turkey headcount rate among those employed in this sector is among people employed in the agricultural sector. high. While only 12.3% of the population is employed in this sector, 27% of the poor are employed in this sector. 36. Between 2003 and 2006, the largest reduction in 35.3% of those in the agricultural sector have con- poverty has occurred in the commerce/tourism, sumption levels below the poverty line in 2006, com- manufacturing and construction sectors, all of which pared to 18.3% for the whole population. Table A-5a have experienced output growth of around 10-14%15 provides the poverty rates by sectors of employment annually compared to 8.5% annual growth in overall and work status as well as the distribution of the poor GDP. In terms of the distribution of the overall in those categories. Between 2003 and 2006, the population across these sectors, there has been little percentage of the people working in the agricultural change between 2003 and 2006: about 45% of the sector who are poor has declined from 40.3% to 35.3% population lives in households where the household following the general decline in poverty. However, the head is employed in one of these three sectors. However, decline in poverty in the agricultural sector was slower the share of the poor employed in these sectors has than other sectors and therefore the likelihood of the declined rapidly in the same period: whereas in 2003, poor in 2006 to be working in the agricultural sector is 33% of the poor were employed in these sectors, by higher than it was in 2003. 2006 this percentage has declined to 25%. Not surp-

15 Source: TUIK “Growth rates of gross domestic product in current prices - By kind of economic activity at basic prices, 1999-2008” (www.tuik.gov.tr/VeriBilgi.do?tb_id=55&ust_id=16 ) Poverty and Inequality Changes in Turkey (2003-2006) 11 risingly, in the same time period, the headcount rate in and one-in-five children between the ages of 15-19 these sectors has also come down more rapidly than for lived under the national poverty line. Turkey has a other sectors in the economy. (See also relative risk of young population and children under 14 make up 29% poverty calculations for these sectors in Table 2). of the total population in the country. But children make up a disproportionate percentage of the poor: making 5.2 Poverty by Educational Attainment up 40% of the poor population in the country. While the poverty headcount among children under the age 37. Educational attainment is a strong correlate of of 14 has come down along with national poverty levels poverty in Turkey. 84% of the poor in Turkey are from 2003 to 2006, the distribution of the poor who are either illiterate or have not completed basic education. children has increased in the same time period. Poverty headcount rate is highest among the illiterate population and 35% of those who are illiterate and 19% 40. Among the elderly, the poverty headcount is only who have not completed basic education are under the slightly higher than the national average. Close to poverty line. The poverty headcount rate among the 20% of the elderly above the age of 65 are below the illiterate population is twice the level for the general poverty line in terms of their consumption. Of the poor population of Turkey. The poverty headcount rate in Turkey, the elderly over the age of 65 make up 6.4%. declines with higher levels of educational attainment: Similar to children, the share of the elderly in the poor 6% of those who graduated from senior secondary population has also increased from 2003 and 2006. school and 1% of those who completed higher education Figure 5 provides an age pyramid for Turkey showing experience poverty as of 2006. Table A-6a provides the levels of poverty by age group and gender. The poverty levels and distribution of the poor for different analysis is carried out for 2006. Table A-7 provides a categories of educational attainment. The education similar set of information on poverty headcount rates level of the household head is also closely correlated by age group as well as the distribution of the poor with poverty levels for household members. In 2006, across the ages. the poverty headcount rate was 48.2 % among those living in households where the household head was 5.4 Poverty by Household Composition and Gender illiterate, and 21.5% in households where the household of Household Head head has not completed basic education. Table A-6b provides poverty levels and the distribution of the poor 41. In households where the dependency ratio is by the levels of educational attainment of household head. high, with a large number of children and less number of adults who are able to support the 38. In recent years, the largest reduction in poverty household, the poverty rate is also high. In fact in (headcount) has occurred for those who have not Turkey, among households where there are three or completed basic education, or have only completed more children between the ages of 0-6, the poverty basic education. Those who are illiterate or whose headcount rate is around 60%. Table A-8 summarizes household heads are illiterate have benefited less from poverty headcount rates and the distribution of the poor the rapid poverty reduction in the country between 2003 by household composition type. According to this table, and 2006. In the overall distribution of the poor, those a substantial share of poor people lives in large who are illiterate have come to represent a higher households: as of 2006, 44% of the poor lived in percentage in 2006 than in 2003: whereas in 2003 the households where there were 7 or more people (up from 16.9% of the poor were illiterate, this level has gone 35% of the poor in 2003). While the share of the total up to 22.2% in 2006 while the percentage share of those population living is such large households has slightly who have some level of schooling has come down. declined in this time period, the share of the poor living in such households has increased. 5.3 Poverty by Age Groups 42. In Turkey, the percentage of the population living 39. The age profiles of the poor in Turkey reveal the in households where there is a female household dramatically high rate of child poverty in the country. head is only around 8% as of 2006. The share of the As of 2006, one-in-four children under the age of 14 poor living in female headed households is also low at Poverty and Inequality Changes in Turkey (2003-2006) 12 around 9.3% of the poor population. Table A-9 sum- in Turkey among female headed households, with 22.3% marizes poverty by the gender of the household head. of people living in female headed households, being The percentage of female headed households has increa- below the poverty line in 2006. Poverty among female sed from 2003-2006 both in the overall population and headed households has also declined less rapidly than among the poor. The poverty headcount rate is higher male headed households in the time period analyzed.

Figure 5: Poverty by Age Groups and Gender (2006)

5.5 Changes in the Relative Risk of Poverty in Turkey The formulation for the relative risk of poverty in this calculation is as follows:

43. While poverty has been reduced in Turkey in Probability of the poor in Category A Relative Risk of Poverty = the time period analyzed, there are certain categories Probability of the being poor being in all other Categories in the population whose relative risk of poverty has The results of the above calculation are presented in increased. Table 2 for different sub-categories of the population.

44. The calculation of the relative risk of poverty helps 45. The relative risk of being poor in Turkey is one see the changes in the probability of the poor being highest in households mapped to the agricultural allocated to a certain group over time. It is calculated sector, among those who are illiterate, among children by dividing the percentage of poor in a certain category and in large households. Between 2003 and 2006, (the headcount ratio), by the ratio of the poor in all the the relative risk of poverty has also increased for these other categories. most vulnerable groups. Poverty and Inequality Changes in Turkey (2003-2006) 13

· By sector: The relative risk of poverty in the result that points toward the persistence of child agricultural sector has increased from 1.54 to poverty in large households over time. The elderly 2.63 between 2003 and 2006, while it has declined in Turkey have also experienced an increase in most significantly in households where the their relative risk of poverty from 0.90 in 2003 household head is in commerce, manufacturing to 1.09 in 2006. and construction sectors. · By household composition: Households where · By education level: The risk of poverty has there are more than 7 people or more than 3 increased among the least educated: The relative children between the ages of 0-6, are more likely risk of poverty has increased from 1.57 to 2.06 to be poor in Turkey. A person living in a large among the illiterate population while for the other household with more than 7 people was 2.16 groups the risk of poverty has been reduced. For times more likely to be poor than the rest of the instance in 2003, relative risk of poverty among population in 2003 and this level has increased those who had some schooling but no primary to 3.55 times in 2006. Similarly, in households school diploma was higher than those who are where there are many children (at least 3 children illiterate – but their relative risk of poverty has under the age of 6) the relative risk of poverty is declined in recent years coming down from 1.65 high in 2003 and has also increased by 2006 to in 2003 to 1.55 in 2006. 3.72.

· By age group: The relative risk of poverty for 46. This analysis shows that despite reductions in children has increased in Turkey in these years poverty, people in large agricultural households, for children (in the 0-19 year old group). For the people who have the lowest levels of education and 0-5 age group, the relative risk of poverty has children (between ages 0-19) face higher risks in increased from 1.40 to 1.44 and for the 6-14 year 2006 than in 2003. These groups represent a hardening old group it has increased even further from 1.40 core of poverty in Turkey: given their location and to 1.59. This means that while child poverty rates characteristics, these groups may be more difficult to have declined with overall poverty in Turkey reach with general policies that promote overall growth from 2003 to 2006, children’s relative well-being in the economy and therefore it may be necessary to and poverty rates have worsened when compared have more targeted programs in place in order to reach to the rest of the population. This is an important them. 14 Poverty and Inequality Changes in Turkey (2003-2006)

Table 2: Changes in the Relative Risk of Poverty in Turkey (2003-2006)

Note: Calculated from Poverty Profile tables in Annex. Poverty and Inequality Changes in Turkey (2003-2006) 15

6. Correlates of Poverty: increase in the household size in urban and rural areas A Multivariate Analysis is associated with a decline in consumption levels. In rural areas the increase in household size at first is associated with an increase in per capita consumption 47. The multivariate regression analysis in this but then it is associated with a reduction in per capita section estimates the partial correlation coefficient consumption for larger households: indicating that between consumption per capita and the included explanatory variables. The dependent variable in the consumption does not increase or decrease monotonically multivariate regression provided in Table 3 is the level with household size. In urban households, on the other monthly per capita adult equivalent consumption deflated hand, there is a monotonic relationship between by regional price variations. The regression is estimated household size and the level of consumption. separately on urban and rural samples. The multivariate regression analysis controls for (i) household charac- 49. The share of adults in the household is associated teristics such as the share of children, female/male with an increase in per capita consumption in both urban adults and elderly in the household (ii) landownership and rural areas: in urban areas when the percentage of of the household (iii) characteristics of the household male adults in the household is doubled, this is associated head such as gender, level of education completed and with a 51.7% increase in consumption in 2006, while sector of employment. The analysis does not make any in rural areas it is associated with a 70.8 % change in claims of causality between the explanatory variables per capita consumption. In large households with many and the dependent variable; rather it aims to establish children, consumption per adult equivalent capita drops the strongest correlates of poverty in Turkey holding both in urban and rural households when compared to all other characteristics constant. households that have more adults in them. In terms of the gender of the household head: in urban households, 6.1 Household Composition Variables being a female headed household is associated with a 9% increase in per capita consumption. In rural house- 48. In Turkey, the increase in the share of children 0- holds there is no statistically significant relationship 6 years old is associated with a decline in per capita between consumption levels and the gender of the consumption levels and an increase in poverty. The household head. Poverty and Inequality Changes in Turkey (2003-2006) 16 Table 3: Consumption Regressions Table Note: ***p<0.01, **p<0.05, *p<0.1 Poverty and Inequality Changes in Turkey (2003-2006) 17

6.2 Educational Attainment compared to other sectors, except for the construction sector.16 When the household head is unemployed, the 50. The education of the household head is still strongly individuals in the household have 18% lower per capita correlated with levels of per capita consumption at the consumption levels (over a household employed in household level, controlling for other factors such as agriculture) and their likelihood of being in poverty sector of employment. The increase in the household is higher. head’s educational attainment (from being illiterate to having completed basic education), is associated in 53. Following the stagnation in the agricultural sector urban areas with a 37%, and in rural areas with a 29% in the time period analyzed, the returns to landownership increase in per capita adult equivalent consumption. in rural areas has also declined. In 2003, in rural areas In a household where the household head has completed a change in having over 5 hectares of land (from having university level, per capita consumption is higher by no land at all) was associated with a 20% increase in 87% in urban areas and 78% in rural areas when per capita consumption levels at the household. By compared to households with illiterate household heads 2006, this level was down to only 7% increase in per (See Table 3 columns 7-8). capita consumption. For smaller landowners in rural areas (land size between 1-5 hectares), there was no 51. In urban areas, the returns to higher levels of statistically significant increase in consumption education (including senior secondary and tertiary associated with land ownership prior to 2006, and in education) may have declined in recent years with the 2006 there may have been a negative correlation between consumption level of less educated urban poor increasing small land ownership and consumption levels. more rapidly than other groups. This is observed in the fact that the coefficients for educational attainment 7. Conclusions including for these levels of schooling are higher in 2003 than in 2006. For instance the household head 54. This paper has outlined recent changes in poverty having a secondary school degree in 2003 was associated and consumption inequality in Turkey. Turkey has done with a 55.1% increase in per capita consumption at the well in recent years in terms of aggregate poverty household in 2003 (compared to an illiterate household reduction and inequality has fallen as a result of both head), while this coefficient declined to 49.8% in 2006. Another interesting fact is that in households where growth and redistribution in consumption. Poverty household heads have graduated from vocational senior reduction in Turkey in recent years has largely been an secondary schools, the poverty rate is likely to be lower urban story, with rural areas lagging significantly in than in households where the household head has poverty reduction. The urban poor have experienced completed regular senior secondary school (controlling increases in their consumption levels at a level of around for work status and sector). In rural areas on the other 9% in real terms while the urban elite has experienced hand, the coefficients for education are higher in 2006 little growth in their welfare aggregates. This has when compared to 2003. The household head holding resulted in a significant reduction in the consumption a secondary school degree in rural areas was associated Gini in urban areas this time period from 33.4 to 28.5. with a 48.2% increase in per capita consumption, while In contrast, the poorest and richest percentiles in rural the coefficient increased to 54.2% increase in per capita areas have experienced negative growth in their real consumption in 2006. consumption levels. Only the middle classes in rural areas have benefited from consumption growth in the 6.3 Sector of Employment for Household Head time period analyzed. The inequality level in rural areas has stayed stable as a result of the reduction in 52. Employment of the household head in the consumption level of the poorest and richest percentiles. agricultural sector is associated with lower levels of The gap between the urban and rural poor has increased per capita consumption for household members, when as a result consumption level shifts in opposite directions.

16 Employment in the construction sector not associated with an increase (or decrease) in per capita consumption (that is statistically significant) when compared to the agricultural sector. Poverty and Inequality Changes in Turkey (2003-2006) 18

55. Growth has played the dominant role in overall 57. The education level of the household head remains poverty reduction in Turkey, but the redistribution a strong determinant of poverty in Turkey, even after component of poverty reduction was also strong controlling for other factors such as employment sector particularly in urban areas. Vulnerability to poverty has and status. The increase in the household head’s declined in this time period as a result of changes to educational attainment (from being illiterate to having the shape of the distribution curve. However, it still completed basic education), is associated in urban areas remains high and price stability is key for maintaining with a 37% (and in rural areas with a 29%) increase in the strides made in poverty reduction. A sensitivity per capita consumption. However, the returns to analysis shows that with a 20% increase in the poverty education (for higher levels including senior schooling) line (which may be experienced due to a price shock has declined in recent years with the consumption level such as the increase in food prices), poverty in Turkey of less educated urban poor increasing more rapidly would increase by 52%, pushing about 6.8 million more than more educated groups. people into poverty. 58. The analysis in this paper has suggested that while poverty has been reduced in Turkey through a period 56. The analysis of relative risk of being in poverty of growth from 2003-2006, certain groups within the shows that the remaining poor in Turkey are increasingly population have remained poor and their relative risk in rural areas, among agricultural workers living in of poverty within the population has increased. Children large families with many of children, and among the are a key group whose relative risk of poverty has least educated. The poverty headcount rate is highest increased in recent years and the age profiles of poverty in Turkey among people employed in the agricultural presented in this paper signal the alarming situation of sector. Returns to landownership in rural areas have child poverty in the country: 1-in-4 children in Turkey declined in the time period analyzed: In 2003, a change under the age of 14 live in poverty and children make in having over 5 hectares of land (from having no land up 40% of the poor in the country. Unfortunately, child at all) was associated with a 20% increase in per capita poverty has persisted over time in Turkey with the consumption levels. By 2006, this level was down to reduction in child poverty being slower than overall only 7%. For smaller plots of land, there was no positive poverty reduction in the country, therefore increasing impact on consumption levels. the relative risk of poverty for children. Poverty and Inequality Changes in Turkey (2003-2006) 19

Annex - Tables

Table A-1: Sensitivity of Headcount Poverty Rate with Respect to the Choice of Poverty Line

Table A-2: Growth and Redistribution Decomposition of Poverty Changes

Table A-3a: Ratios of Selected Expenditure Percentiles

Total 2003 2004 2005 2006 Urban 2003 2004 2005 2006 Rural 2003 2004 2005 2006 Poverty and Inequality Changes in Turkey (2003-2006) 20

Table A-3b: Ratios of Selected Expenditure Percentiles in Urban and Rural Areas

Table A-4: Decomposition of Inequality by Urban and Rural Areas Poverty and Inequality Changes in Turkey (2003-2006) 21 Table A-5a: Poverty by The Status of Employment A-5a: Poverty Table by Household Head’s Status of Employment A-5b: Poverty Table Note: Changes shown between years 2003 and 2006 Poverty and Inequality Changes in Turkey (2003-2006) 22 Table A-6a: Poverty by Education Level A-6a: Poverty Table by Household Head’s Education Level A-6b: Poverty Table Note: Changes shown between years 2003 and 2006 Poverty and Inequality Changes in Turkey (2003-2006) 23 Table A-7: Poverty by Age Groups A-7: Poverty Table Poverty and Inequality Changes in Turkey (2003-2006) 24 Table A-8: Poverty by Demographic Composition A-8: Poverty Table by Household Head’s Gender A-9: Poverty Table Poverty and Inequality Changes in Turkey (2003-2006) 25

Figure A-1: Second-Order Stochastic Dominance Test: Poverty Deficit Curves

Figure A-2: Third-Order stochastic dominance test: Poverty Severity Curves Poverty and Inequality Changes in Turkey (2003-2006) 26

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