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.
More…
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