Transcript International Comparison Program (ICP)

A Framework for Poverty-PPP
Compilation
Proposed Methodology
D.S. Prasada Rao
School of Economics
University of Queensland
Brisbane, Australia
PPPs and Global Poverty
The World Bank Approach
Regular estimates of global and regional poverty
Uses $1-a day and $2- a day as international
poverty lines
The $-poverty line is converted into local currency
using PPPs from the ICP
Estimate poverty incidence using national
accounts and HES/LSMS data
Approach since the 1990 World Development
Report
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Which conversion factors to use?
Exchange rates
 PPPs from the ICP for the GDP as a whole –
used in real per capita income comparisons
PPPs for consumption
PPPs for food and beverages
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Why ICP PPPs are not appropriate?
 Items priced are usually representative of the consumption
of higher income groups – mainly due to adherence to
comparability
 Location of price surveys
 Urban/cities/rural
 Past ICP price surveys mainly located in metropolitan areas
 Outlets for price surveys
 Make sure the service component of outlets is comparable
 Inappropriate expenditure-share weights
 National average weights versus weights representative of
consumption pattern of poor
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Objective: Compilation of Povertyspecific PPPs
 PPPs for converting poverty lines expressed in different
national currencies
 Similar to price level adjustments for regional poverty lines
 Resulting PPPs may be used for purposes of converting the
World Bank $1 and $2-a-day into various national
currency units.
 Aims of the paper:
 Provide background material for discussions by the PAG and RAB
members
 Discuss a few options and put forward a suggested methodology
for the construction of Poverty-PPPs.
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Similarity with the ICP work
Project is very similar to the ICP but differs
significantly in terms of detail.
 ICP covers the whole of GDP while povertyPPPs refer only to consumption.
 ICP covers the whole population – this is a
definite advantage.
 Poverty-PPPs refer to the “poor” – but how do
we know the reference population?
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Iterative method to identify the
reference population
 Start with a poverty line a selected country.
 Convert it into other national currency units using PPPs
from the PWT or the World Bank
 Use household expenditure survey data on prices (unit
values) or some other price data and expenditure shares of
households around the poverty line to derive a new set of
PPPs.
 Repeat the process until the PPPs converge and use these
PPPs to define the reference population
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Identifying the reference population –
various alternatives
Poor as identified through country-specific
poverty lines and methodology
Use the existing estimates of poverty incidence
from the World Bank based on $1/day
international poverty lines
Use an arbitrary percentage of the population – the
poorest 30% from each country
Use an iterative scheme similar to the method used
in Deaton (2004)
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Iterative method to identify the
reference population - continued
Need household expenditure surveys for all the
countries included in the comparisons
Need further research on:
 The invariance of the reference population group and
PPPs to the starting values used.
 Investigate the base invariance property of the method
– are the results sensitive to the choice of the base
country?
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Country coverage and a regional
approach
Poverty PPP work to be undertaken on a regional
or sub-regional basis
 Consumption patterns of poor are likely to be
influenced by local products and customs
 Access to markets by the rural and urban poor may be
restricted – transport costs?
Coverage of countries to include only countries
with a “sizeable” poor populations – drop those
countries with insignificant poor populations on
the basis of the existing World Bank estimates
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Sources of price data – Option 1
Use price data collected as a part of the ICP
 Make use of data on consumption items from the
regional lists
 Easy to implement – no additional survey costs
 But ICP product lists may have little in common with
the consumption items of the poor.
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Sources of price data – Option 2
 Supplement/replace ICP lists with goods and services
considered representative of the consumption of the poor
 Follow an approach similar to that of the ICP
 Start with product lists from the countries
 Use local knowledge and expertise of national price
statisticians and involve poverty researchers
 This may have implications for the aggregation method used
 May need spatial chaining procedures
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Sources of price data – Option 2
 Advantages
 Product lists more relevant to the poor
 Approach consistent with the ICP approach
 Product lists can be used for further use in compiling temporal
price indices for poorer households
 Cover both food and non-food items
 A proper account of the outlets used by the poor
 Disadvantages
 Costs associated with the process
 Problems encountered in preparing the lists
 Circularity involved
 Reliability of judgement samples
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Sources of price data – Option 3
Use unit values from household expenditure
surveys
 Utilise existing data on household expenditure and
quantities for different consumption items
 Preliminary research shows the feasibility of using HES
data for regional price comparisons
 Coondoo et al (2004), Deaton (2004); Atten (2002)
and Rao (2003)
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Sources of price data – Option 3
 Advantages
 No additional resources required for price surveys
 This approach is consistent with work on poverty line
determination
 Process of identifying the poor and their consumption is well
integrated
 Disadvantages
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Analysis of HES could still be resource intensive
Comparability of unit values across countries may be problematic
Unit values are typically available for only food items
Availability of quantity data
 Some countries do not report data on quantities
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Linking regional PPPs to the US dollar
 Main problem: Reference population (poor under 1$/day)
in the US could be non-existent or very small
 Possible approaches:
 1. Use the ICP PPPs (expressed relative to the US dollar) for
consumption from the “ring-country” comparisons to link the
regional poverty PPPs to the US dollar.
 2. Use “basic-heading” PPPs from ring country comparisons and
derive PPPs for selected countries using expenditure weights of the
poor in the link country country.
 Use the HES data to derive “conversion factors” based on price
comparisons between higher and lower income groups.
 This approach can be used only for food items.
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Household Expenditure Data
Expenditure Share weights
For the poor: average weight for each commodity
for all those under poverty line
Weights at the poverty line: Average expenditure
share weights for those who are on the poverty
line (within certain bounds around the line).
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Aggregation methods
 Binary methods
 Multilateral methods
 Spatial linking methods
 Hill (1999) approach based on minimum spanning trees and
distance measures
 Alternative linking based on the overlap of item lists and coverage
– Rao and Timmer (2004)
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Proposed Methodology
 Country coverage: Exclude all countries with small or
negligible poverty incidence
 Use regional and sub-regional approach
 Price survey methodology
 Use the product list approach and cover food and non-food items
 Use HES data where appropriate and necessary
 Reference population and expenditure weights – Use
Deaton (2004) approach
 Aggregation methods – Use a method that can make use of
all the price data collected
 Linking regional parities to the US dollar
 Use ICP parities at the basic heading level from the ring country
comparisons
 Use only link country weights in deriving PPPs w.r.t. the US dollar
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