Looking Forward: Theory-Based Measures of Chronic Poverty and Vulnerability

Abstract

Conventional poverty analysis is ill-equipped to answer questions concerning the future persistence of observed poverty. Are those observed to be poor at a particular point in time chronically poor, or are they simply in a transitory state? While a number of analysts have struggled with this question, this paper employs economic theory of asset accumulation and poverty traps to derive estimable chronic poverty measures. These measures in turn provide a conceptual foundation for understanding and measuring vulnerability. The analysis identifies two sorts of chronic poverty. The first type (intrinsic chronic poverty) is experienced by those who are intrinsically disadvantaged by lack of skill or unfavourable economic environment. The second (multiple equilibrium chronic poverty) is experienced by those who have the potential to be non-poor given their skills and circumstances, but who lack sufficient assets to craft a pathway out of poverty. The policies needed to address these two types of chronic poverty are distinct. Moreover, the analysis shows that the second group of chronically poor are especially vulnerable to shocks. Social protection policies are likely to be an especially effective means for addressing this multiple equilibrium chronic poverty. After illustrating these concepts with simulated data, the paper closes with an empirical application to South Africa.

Keywords: Poverty Measures, Chronic Poverty, Poverty Traps, South Africa