48338 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Handbook on Poverty and Inequality Handbook on Poverty and Inequality Jonathan Haughton Shahidur R. Khandker © 2009 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: [email protected] All rights reserved 1 2 3 4 12 11 10 09 This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN: 978-0-8213-7613-3 eISBN: 978-0-8213-7614-0 DOI: 10.1596/978-0-8213-7613-3 Library of Congress Cataloging-in-Publication Data Haughton, Jonathan Henry. Handbook on poverty and inequality / Jonathan Haughton and Shahidur R. Khandker. p. cm. Includes bibliographical references and indexes. ISBN 978-0-8213-7613-3—ISBN 978-0-8213-7614-0 (electronic) 1. Poverty—Statistical methods. 2. Poverty—Econometric models. 3. Equality— Economic aspects— Econometric models. I. Khandker, Shahidur R. II. Title. HC79.P6H344 2009 339.4'60727—dc22 2009000849 Cover design: Patricia Hord.Graphik Design Contents Preface xv Foreword xvii About the Authors xix Abbreviations xxi 1 What Is Poverty and Why Measure It?1 Summary1 Learning Objectives2 Introduction: The Concepts of Well-Being and Poverty2 Why Measure Poverty?3 Thinking Systematically: Poverty Reduction Strategy Papers 6 Notes7 References7 2Measuring Poverty9 Summary9 Learning Objectives 10 Introduction: Steps in Measuring Poverty 10 Household Surveys 11 Measuring Poverty: Choosing an Indicator of Welfare 20 Notes 35 References 35 3 Poverty Lines 39 Summary 39 Learning Objectives 40 Introduction: Defining a Poverty Line 40 Issues in Choosing an Absolute Poverty Line 46 Solution A: Objective Poverty Lines 49 v Contents Solution B: Subjective Poverty Lines 60 Notes 64 References 64 4 Measures of Poverty 67 Summary 67 Learning Objectives 68 Introduction 68 Headcount Index 68 Poverty Gap Index 70 Squared Poverty Gap (Poverty Severity) Index 71 Sen Index 74 The Sen-Shorrocks-Thon Index 74 The Watts Index 77 Time Taken to Exit 78 Other Measures 80 References 81 5 Poverty Indexes: Checking for Robustness 83 Summary 83 Learning Objectives 84 Introduction 84 Sampling Error 85 Measurement Error 87 Equivalence Scales 89 Choice of Poverty Line and Poverty Measure 92 A Single Measure of Standard of Living 93 Note 100 References 100 6 Inequality Measures 101 Summary 101 Learning Objectives 102 Introduction: Definition of Inequality 102 Commonly Used Summary Measures of Inequality 103 Inequality Comparisons 108 Measuring Pro-Poor Growth 110 Decomposition of Income Inequality 111 Income Distribution Dynamics 115 Note 119 vi References 119 Contents 7 Describing Poverty: Poverty Profiles 121 Summary 121 Learning Objectives 122 Introduction: What Is a Country Poverty Profile? 122 Additive Poverty Measures 126 Profile Presentation 126 Poverty Comparisons over Time 127 Excerpts from Poverty Profiles for Indonesia and Cambodia 130 Poverty Mapping 136 Automating Poverty Profiles: The ADePT 2.0 Program 140 Note 143 References 143 8 Understanding the Determinants of Poverty 145 Summary 145 Learning Objectives 146 Introduction: What Causes Poverty? 146 Household and Individual-Level Characteristics 149 Analyzing the Determinants of Poverty: Regression Techniques 152 Note 158 References 158 9 Poverty Reduction Policies 161 Summary 161 Learning Objectives 162 Introduction 162 Is Growth Good for the Poor? 162 Pro-Poor Growth 165 An Example: Tanzania 175 Note 179 References 179 10 International Poverty Comparisons 181 Summary 181 Learning Objectives 182 Introduction 182 Overview of Poverty Analysis 183 International Poverty Comparisons 184 Survey Data and National Accounts 191 Debate 1: Is World Poverty Falling? 194 Debate 2: Is World Poverty Really Falling? 196 vii Contents Conclusion 200 Notes 201 References 201 11 The Analysis of Poverty over Time 203 Summary 203 Learning Objectives 204 Introduction: Sources of Information on Poverty over Time 204 Advantages of Panel Surveys 208 Drawbacks of Panel Surveys 211 Other Issues in Panel and Repeated Cross-Sectional Data 213 Chronic versus Transient Poverty 214 Case Study: The Asian Financial Crisis and Poverty in Indonesia 218 Poverty Transition Matrix, December 1998–August 1999 227 Notes 227 References 228 12 Vulnerability to Poverty 231 Summary 231 Learning Objectives 232 Introduction: Why Measure Vulnerability? 232 Vulnerability to Poverty Defined 234 Quantifying Vulnerability to Poverty 236 Sources of Vulnerability 243 Lessons from Studies of Vulnerability to Poverty 246 Notes 247 References 247 13 Poverty Monitoring and Evaluation 249 Summary 249 Learning Objectives 250 Introduction 250 Poverty Monitoring 251 Impact Evaluation: Micro Projects 256 Impact Evaluation: Macro Projects 268 Notes 271 References 271 14 Using Regression 273 Summary 273 viii Learning Objectives 274 Contents Introduction 274 The Vocabulary of Regression Analysis 276 Examining a Regression Example 277 Problems in Regression Analysis 279 Solving Estimation Problems 285 Logistic Regression 287 Note 291 References 291 15 The Effects of Taxation and Spending on Inequality and Poverty 293 Summary 293 Learning Objectives 294 Introduction 294 Presenting Incidence Results 295 Tax Incidence 300 Benefit Incidence 305 Issues in Benefit Incidence Analysis 307 Conclusion 314 Annex A. Case Study: Health Spending in Ghana 315 Notes 317 References 317 16 Using Survey Data: Some Cautionary Tales 319 Summary 319 Learning Objectives 320 Introduction: Interpreting Survey Data 320 Caution 1. Do the Sampling Right 321 Caution 2. Use a Consistent Recall Method 322 Caution 3. Use a Consistent Recall Period 323 Caution 4. Remember That Price Indexes Matter (a lot) 324 Caution 5. Use Consistent Questions 328 Caution 6. Adjust for Nonresponse Bias (if possible) 329 Caution 7. Define Expenditure Consistently 331 Caution 8. Value Own-Farm Income Properly 333 Caution 9. Distinguish between Values That Are Zero and Those That Are Missing 333 Caution 10. Use Expenditure per Capita, Not Expenditure per Household 335 Caution 11. Use Weights When They Are Needed 335 Note 337 References 337 ix Contents Appendix 1 Data Introduction 339 Appendix 2 Stata Preliminary 343 Appendix 3 Exercises 369 Answers to the Review Questions 403 Index 405 Boxes 2.1 Calculating the Value of Durable Goods Consumption: An Illustration 26 3.1 The “$1/Day” Standard 46 3.2 The U.S. Poverty Line 50 5.1 First-Order Stochastic Dominance, Formally 97 13.1 Case Study: Workfare and Water in Argentina 261 13.2 Case Study: Microfinance and the Poor in Bangladesh 264 16.1 Constructing Price Indexes 326 Figures 2.1a Simple Random Sample 15 2.1b Cluster Sampling 15 2.2 Lifecycle Hypothesis: Income and Consumption Profile over Time 24 2.3 Engel Curve: Food Spending Rises Less Quickly Than Income 33 3.1 Poverty Lines across Countries 44 3.2 Food Expenditure Function 53 3.3 Calorie Income Function 55 3.4 Calorie Income Functions for Urban and Rural Indonesia 58 3.5 Cumulative Distribution Functions for Consumption, Indonesia, 1990 59 3.6 The Determination of Poverty Lines for Vietnam, 1993 and 1998 60 3.7 Estimating a Subjective Poverty Line 61 3.8 Self-Rated Poverty: Households That Are “Mahirap,” April 1983 to Second Quarter 2008 61 4.1 Comparison of Canada and the United States Using the SST Index, 1971–94 75 4.2 Average Exit Time from Poverty 79 5.1 Distribution of Log of Expenditure per Capita with and without Measurement Error, for Vietnam in 2006 89 x 5.2 Poverty Incidence Curves with First-Order Stochastic Dominance 94 Contents 5.3 Poverty Deficit Curves 95 5.4 Poverty Incidence Curves Showing Ambiguous Ranking 95 6.1 Lorenz Curve 105 6.2 Pen’s Parade (Quantile Function) for Expenditure per Capita, Vietnam, 1993 and 1998 109 6.3 Poverty Incidence Curve for Expenditure per Capita, Vietnam, 1993 and 1998 111 7.1 Headcount Poverty by Region, Cambodia, 1999 123 7.2 Poverty by Household Size, Cambodia, 1999 135 7.3 Poverty by Education Level of Household Head, Cambodia, 1999 136 7.4 Distribution of Real Expenditure