The NUTS1 spatial effects interacted with a vector of other observable household characteristics have shown to be a good proxy for welfare dynamics and increase the accuracy of the imputation model, as shown by a number of external validation exercises conducted (See Annex). Poverty trends using imputed income can be compared at the NUTS1 level between the LFS and SILC. Figure 30 illustrates an external validation exercise for 2007 where observed income poverty using the SILC data set is compared with imputed income poverty using the LFS at the NUTS1 level. As the results show, the imputed regional income poverty rates from the LFS are matched closely to the SILC. It is impossible to externally validate the LFS imputed income poverty at the NUTS2 level since there is no other data set where households can be regionally identified at the NUTS2 and also have a full income profile.

In terms of imputed income poverty, Turkey has been able to reduce its poverty level at the $5/day 2005PPP (moderate) line but has not been able to expand this performance to the $2.5/day 2005PPP (extreme) poverty line between 2006 and 2013 (Figure 13). During this period, moderate poverty decreased slightly from 23.80 to 22.22 percent while extreme poverty rose from 5.46 to 7.62 percent. A more detailed look at the annual change in Turkey’s poverty reduction shows that the country’s financial crisis experience significantly affected the number of poor. With the impact of the crisis, moderate poverty and extreme poverty both increased between 2006 and 2008. In the immediate aftermath of the crisis, Turkey was able to recover swiftly as poverty rates fell between 2009 and 2011. However after 2011, extreme poverty started to increase once again despite the continuing improvement in moderate poverty. This decoupling between the trends suggests that the poorest of the poor was not able to escape extreme poverty while those among the poor that were closer to the $5 line moved upward after 2011.

The overall findings are consistent with the poverty trends measured in consumption terms (Azevedo and Atamanov, 2014), although it is clear that an income based poverty measure, as one would expect, is able to capture the effect of the global financial crisis 2007-2009 much better than a consumption based poverty number. This results from the ability of households to make decisions that can smooth consumption, while wages and other sources of income cannot be similarly smoothed. As a result, during the financial crisis, Turkey experienced a larger increase in income poverty in comparison to consumption based poverty. An additional factor behind the difference of the two poverty measures might be the increasing level of household debt in Turkey, which almost tripled in real terms between 2006 and 2013. If households spend more than they earn, there could be a faster decline in consumption based poverty or even a decoupling between the trends of income and consumption measures (Figure 14).

At the NUTS2 level, 21 of 26 regions experienced moderate poverty reduction between 2006 and 2013 (Figure 1). Moderate poverty reduction was heterogeneous in Turkey both in terms of geography and the initial rate of poverty in the region.<sup>10</sup> Three of the five NUTS2 regions (TRA1, TRA2, and TRB1) that had increasing poverty rates between 2006 and 2013 were already among the poorest regions of Turkey in 2006. On the other hand, the three poorest regions (TRC1, TRC2, TRC3) in 2006 were successful in declining poverty over the next seven years, which suggests that the poverty reduction story in Turkey is too complex to pin down to one specific factor such as initial rate of poverty. Moreover, the two other regions that experienced an increase in poverty, TR10 and TR42, had significantly lower poverty rates than the national average in 2006. Differences in initial rates of poverty among these groups demonstrate the heterogeneity in Turkey’s poverty reduction performance.

> 10 The results discussed in this paper are based on the poverty measure after spatial deflation.

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