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Measuring chronic non-income poverty

CPRC Working Paper 79

Isabel Günther and Stephan Klasen
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Chronic Poverty Research Centre

May 2007

SARPN acknowledges Chronic Poverty Research Centre as a source of this document: www.chronicpoverty.org
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Introduction

In recent years, the research agenda on poverty in developing countries has moved beyond static assessments of poverty levels to consider dynamic trajectories of wellbeing over time. The main reason for this shift in emphasis was the recognition that there is considerable mobility of wellbeing over time and that only a share of the poor are affected by persistent (or chronic) poverty, while a much larger share of the total population experiences transient poverty, or vulnerability to poverty.

Since the two groups were found to be quite different in terms of their characteristics and their needs regarding policy intervention, the research community has developed two largely distinct research agendas: one focuses on chronic poverty, the other on transient poverty or vulnerability to poverty. The research agendas complement one another, with chronic poverty focusing on poverty traps and poverty persistence, and vulnerability focusing on risks and shocks and poverty dynamics.

The distinction between chronic and transient poverty is usually closely linked to conceptualizing poverty in the monetary dimension. This is largely related to the fact that the stochastic nature of the income-generating process has been well-recognized in economics for decades, going back to Friedman’s permanent income hypothesis, which made the distinction between permanent and transitory income (Friedman 1957). In line with that hypothesis, consumption is the preferred welfare indicator in many applications in developing countries as it is believed to be a better reflection of long-term or permanent income.1 In this sense, low consumption (i.e. consumption below a poverty line) is seen as a reflection of a chronic inability to generate sufficient income to leave poverty, even though households may temporarily escape income poverty.

But empirically it has been shown that in developing countries the consumption of households also fluctuates greatly, in fact often almost as much as income. Three reasons may account for this. First, households, particularly poor households, are not able to smooth their consumption due to a lack of assets and access to credit and/or insurance markets (e.g. Townsend 1995; Deaton 1997). Second, ‘permanent’ incomes of households change as a result of permanent shocks affecting the life-time earning paths of individuals, thus forcing households to re-optimize their consumption decisions. And last, consumption (and/or incomes) is measured with error and thus much of the fluctuation is spurious and related to these errors.2

To determine which households permanently face low consumption, i.e. which are chronically poor, which households are ‘only’ transitory poor and which households (currently non-poor) face a high risk of becoming poor is thus a very important and quite a difficult task. It is not surprising that a large literature has been dedicated to this subject. And as panel data increase in the developing countries, dynamic assessments of consumption, i.e. an analysis of chronic poverty as well as vulnerability to poverty, have indeed become more feasible in many countries, thus underpinning the analysis of poverty dynamics.

At the same time, this exclusive emphasis on income in the assessment of chronic poverty and vulnerability has clear limitations and shortcomings (see also Hulme and McKay 2005), as it is well-recognized that income (or consumption) is an inadequate indicator of wellbeing. If we conceptualize wellbeing from a capability perspective, income is but one means (and for some capabilities a rather poor one at that) for generating such capabilities as the ability to be healthy, well-educated, integrated, clothed, housed and the like (see Sen 1985, 1999; Klasen 2000). Nor do equal incomes translate into equal capabilities for different individuals, due to the heterogeneity of people in translating income into wellbeing. It is therefore preferable to study wellbeing outcomes directly (e.g. capabilities or functionings, see Klasen 2000)3 rather than study a specific wellbeing input. However, there have been just a few attempts to integrate the insights from the static analysis of non-income dimensions of wellbeing into a dynamic setting and thus investigate chronic poverty and vulnerability from a non-income perspective. In addition, apart from the conceptual advantage of studying chronic poverty from this perspective, there are several advantages (but also limitations) from a measurement perspective in studying non-income chronic poverty. We discuss these in more detail below.

The purpose of this paper is to try to conceptualize chronic poverty and hence also poverty dynamics from a non-income perspective and then illustrate ways to explore this topic empirically. Section 2 discusses the potentials as well as limitations of conceptualizing chronic poverty in a non-income perspective. Section 3 introduces the first approach to empirically measure chronic non-income poverty focusing on critical functionings related to health and education, with the use of a panel survey from Vietnam from 1992/93 and 1997/98. Section 4 presents the results of this application, while Section 5 concludes and highlights open issues and suggestions for further research.


Footnotes:
  1. There are other reasons to prefer consumption over incomes as a welfare measure in developing countries; see Deaton (1997) and Deaton and Zaidi (2002).
  2. This is a difficult issue to sort out with the type of panel data available for developing countries which typically have only two or three waves and thus do not allow the application of common methods (such as instrumental variable techniques) to control for measurement error.
  3. In principle, it is preferable to study capabilities to understand the choices people have at their disposal. In practice, usually we can observe only functionings and thus most studies analyse these instead of capabilities (e.g. Klasen 2000).


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