# **4 An empirical approach for regional poverty counting in LAC**

This section details the technical approach proposed to derive a new set of poverty lines and to obtain an estimate of the proportion of Latin Americans who live on an income lower than those lines.

# _4.1 Updating the LAC regional poverty line_

Figure 1 shows the relationship between official per capita extreme (panel a) and moderate (panel b) poverty lines and log per-capita household income from harmonized household surveys in the SEDLAC database in 2011.<sup>20</sup> The figure reports the nominal value of poverty lines – at 2011 PPP values<sup>21</sup> – for 18 countries in LAC at the highest possible level of geographical disaggregation.<sup>22</sup> Given that the 2011 ICP round collected prices in LAC only for urban areas (World Bank 2014a),<sup>23</sup> we ignored all rural poverty lines and compensated by deflating all rural incomes to urban prices.<sup>24</sup> Unlike Ravallion, Chen, and Sangraula (2009) and Ferreira et al. (2015), no strong economic gradient emerges above some critical level of per capita household income. Also, unlike Jolliffe and Prydz (2015), there is no strong positive relationship between both indicators.<sup>25</sup> The lack of an economic gradient when only LAC countries are considered suggests that there is no reference group to quantify an absolute poverty line. These results are also valid for different regression specifications (see Table 1) using poverty lines both at the subnational, as well as at the national (i.e., population-weighted average of subnational lines) level. Therefore, we consider all available information, rather than only the poorest economies below an economic gradient – as done by Ravallion, Chen, and Sangraula (2009) – to estimate the regional comparable poverty lines in LAC.

> 20  The existing relationship in the graph may be considered spurious if poverty lines were calculated based the same households surveys used in the graph. This is not the case for the countries covered in this paper; all poverty lines have been computed in different household surveys from the ones used in the figure. 21

> For those cases for which the poverty lines were not reported at 2011 PPP values, we deflated the closest value using national CPIs. Although countries have already published lines for 2012 and 2013, and in some cases also for 2014, we prefer to use the figures corresponding to the same year as the latest 2011 PPP round. 22  For the case of Chile, Ecuador, Haiti, and Nicaragua, the official poverty lines are published at the national level and there is no distinction between urban and rural areas or subnational regions.

> 23  Approximately 80 percent of LAC’s population lives in urban areas.

> 24

> The SEDLAC harmonization uniformly deflates all welfare aggregate to urban prices multiplying rural incomes by 15 percent. This practice might not be consistent with real price differences within each country, but we maintain it in this paper in order to make comparisons with the current methodology used to estimate regional poverty lines.

> 25  A similar result is found by Gasparini, Cicowiez, and Escudero (2013) for poverty lines in 2005 PPPs.

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