MEASURING VULNERABILITY TO POVERTY: CURRENT LIVING STANDARDS AND FUTURE INCOME ARE KEY
An individual’s vulnerability to poverty depends on their current standard of living, their future income and how close these two are to the poverty line. Current standard of living is a measure of a person’s past income, suggesting that if someone has experienced poverty in the past, then a future drop in income will make them even more likely to fall below the poverty line.
These are among the findings of research by Indranil Dutta, James Foster and Ajit Mishra, which outlines a measure of vulnerability to poverty to inform policies that aim to reduce both vulnerability to poverty as well as actual poverty.
Their study, presented at the Royal Economic Society’s 2010 annual conference, also outlines axioms on which the measure should be based. A fundamental axiom is that any measure of vulnerability should increase if future income falls but standard of living and risks to income stay the same.
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In recent years, there has been a growing recognition of the idea that development efforts, especially in the context of anti-poverty policies, should target not just the poor but also those who are vulnerable to being poor. While we have a fairly good idea about identifying the poor and quantifying the extent of poverty by looking at income shortfall from a given poverty line, the same cannot be said about vulnerability.
Whom should we classify as vulnerable? Suppose we consider all those individuals who may or may not be poor at present but who have a positive probability of falling below the poverty line in future. Should we treat all these in the same manner? Should we consider an individual with a greater probability of falling below the poverty line more vulnerable than another with a lower probability but bigger shortfall? Can we have poor but not vulnerable?
Our paper proposes a measure of vulnerability to answer several of these questions. According to this proposed measure, an individual’s vulnerability depends on their distribution of future income, current standard of living and the objectively defined poverty line. Both the likelihood of income falling below certain reference line and the extent of shortfall are suitably weighted.
An individual’s current standard of living plays a crucial role in our framework: it can affect the reference line in two different ways. In some contexts, adverse consequences of income falling below the poverty line are likely to be higher for an individual with higher current standard of living. In some other contests, the exact opposite results are expected.
An individual with lower current standard of living or lower average income is likely to have already been adversely affected by deprivation and hence a further shortfall in future will prove disastrous. To capture the significance of the current living standard, we measure shortfall in income relative to a reference line that depends on current average income and the poverty line.
We postulate certain intuitively desirable properties that any measure of vulnerability should possess and derive our proposed measure from these. For example, no matter how we measure vulnerability, one would expect vulnerability to go up if future income falls in all possible states.
Likewise, if we were to redistribute an individual’s future income by transferring income from a state with higher shortfall in income to another state with lower shortfall in income, vulnerability is likely to go up. In keeping with the tradition in the measurement literature, our work provides axiomatic foundations for the proposed measure of vulnerability.
Our broad objective is to provide an analytical framework and operationalise the concept of vulnerability for further empirical work and policy analysis.
ENDS
‘On Measuring Vulnerability to Poverty’ by Indranil Dutta, James Foster and Ajit Mishra