Adjusting for Differences in Needs and Economies of Scale in the Measurement of Poverty in Morocco

This note considers whether and how to introduce adjustments for differences in needs across family members and economies of scale in household consumption into the measurement of poverty. We outline the basic role that such adjustments, captured in an equivalence scale, are intended to play and illustrate how they can be incorporated into procedures for measuring poverty. We assess to what extent analysis of household survey data can guide the selection of specific equivalence scales. We argue that, given the uncertain interpretation of equivalence scales estimated from survey data, the best way in which to incorporate adjustments for household composition and size is to assess sensitivity of the poverty profile to a wide variety of alternative adjustment parameters, without necessarily endorsing any one single scale. Introduction and Summary of Findings Poverty measurement in Morocco, as in many other countries, has conventionally been undertaken with a measure of per-capita income or consumption as the underlying concept of economic well-being. Strong, but often implicit, assumptions underpin such an approach. Notably, the utilization of a per capita measure of individual welfare is premised on the assumption that there exist no economies of size in household consumption, in the sense that the per capita cost of reaching a specific welfare level does not fall as household size increases. Similarly, a per capita measure does not allow for differences in needs arising from differences in family composition (in terms of age, gender, activity levels, etc., of family members). A growing literature is arguing that if these assumptions are relaxed, comparisons of poverty between large and small households, or between other demographically defined population groups (such as female-headed versus male-headed households) might not be robust. These warnings are important because they point to an underlying poverty profile in a country that may be sensitive, at least in certain dimensions, to seemingly arcane methodological assumptions. To the extent that government policy is informed by such poverty profiles, it too may be thrown into question as different assumptions are posited. This note considers options available to incorporate “equivalence scales” into the analysis of poverty. One of the objectives is to examine how adjustments for economies of scale in consumption and for differences in needs could be accommodated, without returning to the basic, fundamental, task of specifying new poverty lines for different household groups. The note proposes a normalization procedure whereby an existing poverty line, constructed in terms of a per-capita notion of wellbeing, can be modified in such a way that meaningful poverty estimates can be derived from an adult-equivalent consumption measure of wellbeing. 1 Dreze and Srinivasan (1997) study these issues in the context of India. There, anthropological, demographic and sociological evidence points strongly to widows being a highly vulnerable group in Indian society. But poverty rates based on per-capita consumption measures calculated from household surveys, indicate that widow-headed households are among the least poor in Indian society. By relaxing slightly the assumption of no economies of size, Dreze and Srinivasan (1997) overturned these poverty comparisons dramatically, bringing the consumption-based evidence much more into line with evidence from other sources. Deaton and Paxson (1997) have also investigated the sensitivity of poverty comparisons in a set of six developing countries (including one, Ukraine, among the transition economies). They note that particularly in the two richest countries of their sample (Ukraine and Taiwan), poverty rankings between the elderly and children were most sensitive to alternative assumptions regarding economies of size in consumption. 2 Lanjouw, Lanjouw, Milanovic and Paternostro (2004) illustrate how the expected distributional incidence of public pensions or child benefit could change dramatically with changes in assumptions concerning differences in needs or the extent of economies of scale in household consumption. The note then turns to a brief, intuitive, exposition of the arguments that prevail in the current economics literature against the idea of estimating an equivalence scale from household survey data. These arguments are compelling, and it is therefore doubtful that an equivalence scale produced on the basis of such econometric estimates will receive widespread acceptance and endorsement. Absent further progress in the methodologies underpinning the estimation of equivalence scales, it is hard to see how such empirically derived scales can be viewed as anything other than arbitrary. While there are few prospects for a widely supported empirically estimated equivalence scale, the issue remains of considerable importance. It is worth emphasizing that an analysis of poverty based on a per-capita measure of consumption is implicitly imposing an arbitrary, and very strong, assumption that there are no differences in needs across family members and no economies of scale in household consumption. This assumption is very unappealing and is increasingly rejected in conventional poverty analysis. Given a relatively straightforward method for incorporating equivalence scales into the analysis of poverty, but no clearly preferred, specific, equivalence scale, one way forward is to undertake extensive sensitivity analysis regarding the impact of alternative assumed equivalence scales on measured poverty. The note indicates that while, in the general approach proposed here, overall poverty rates are unlikely to change much as a result of postulating a particular equivalence scale, the poverty profile may well change sharply. As has been suggested above, the poverty profile is arguably the most important output from a basic analysis of poverty. While summary statistics on the extent of poverty, such as a headline poverty rate, often receive most attention in the popular press, it is the profile of poverty that provides the key information on patterns of poverty, and on the specific characteristics of population groups who are confronted by poverty. Such information is central to the design of policy. This note argues, therefore, that sensitivity in the poverty profile is extremely important. The note provides some initial exploratory calculations to suggest that the demographic profile of poverty in Morocco is indeed sensitive to alternative equivalence scale adjustments. Specifically, the analysis suggests that while adjustments for differences in needs between working age adults and dependents do not imply great sensitivity, adjustments that allow for economies of scale in consumption indicate considerable sensitivity. Conventional practice, which assumes away any economies of scale through the employment of a per-capita measure of welfare, tends to find that large households are more poor than small households. By association, household characteristics that are correlated with household size, also appear more poor in the conventional poverty profile. However, once a modest degree of economies of scale is allowed for, this relationship breaks down – the relationship between poverty and household size weakens noticeably. If a considerable degree of economies of scale is allowed for, a new demographic profile of poverty emerges: household characteristics such as female-headedness, become strongly associated with poverty. These initial impressions warrant more detailed investigation. If the emerging findings proposed here find confirmation in more detailed analysis, policy makers should be advised to exercise caution in pursuing poverty reduction objectives through measures that are closely linked to the demographic structure of the population. For example, the question of whether a pensions policy aimed at providing income support to the elderly is pro-poor or not, may well depend significantly on equivalence scale adjustments. Fortunately, the sensitivity analysis proposed here offers a straightforward way in which to examine such questions. Adult Equivalence Scales The concepts of economies of size and of differences in need are related, but not identical. Economies of size imply that there is a decreasing per capita cost for reaching a given welfare level as household size increases. For a given household size, the relevance of such economies can most easily be seen to depend on the share in total household’s expenditure on public goods, like housing or durables, within the household (see Deaton and Paxson, 1998, Dreze and Srinivasan, 1997, Lanjouw and Ravallion, 1995). On the other hand, households may also vary in terms of heterogeneous consumption needs that different household members have. For example children might have lower nutritional requirements and thus lower food costs than adults. A convenient way in which to jointly capture the effect of economies of scale and differences in need is to introduce a simple two parameter form of “equivalence scale” (Creedy and Sleeman, 2004). Let yi denote the consumption level of the i th household, for i=1,. ,N. The number of individuals in the household is ni, while the household’s demographic structure is described by the vector di. This vector provides the number of individuals in various demographic groups based on age and gender classifications. Using these definitions, the adult equivalent size of household i may be expressed as: ) , ( i i i d n m m = . (1) This size is normalized so that m(1,d=adult)=1. Household income is adjusted to obtain the equivalent income or ‘living standard’, given by: