Quantifying Vulnerability to Poverty: A Proposed Measure, Applied to Indonesia

Abstract

Typically only a small proportion of the population is chronically poor; many more are not always poor but are vulnerable to episodes or seasons of poverty and would be interested in programs that reduce the risks they face.

Vulnerability is an important aspect of households' experience of poverty. Many households, while not currently in poverty, recognize that they are vulnerable to events - a bad harvest, a lost job, an illness, an unexpected expense, an economic downturn - that could easily push them into poverty.

Most operational measures define poverty as some function of the shortfall of current income or consumption expenditures from a poverty line, and hence measure poverty only at a single point in time.

Pritchett, Suryahadi, and Sumarto propose a simple expansion of those measures to quantify vulnerability to poverty. They define vulnerability as a probability, the risk that a household will experience at least one episode of poverty in the near future. A household is defined as vulnerable if it has 50-50 odds or worse of falling into poverty.

Using those definitions, they calculate the vulnerability to poverty line (VPL) as the level of expenditures below which a household is vulnerable to poverty. The VPL allows the calculation of a headcount vulnerability rate (the proportion of households vulnerable to poverty), a direct analogue of the headcount poverty rate.

The authors implement this approach using two sets of panel data from Indonesia. First they show that if the poverty line is set so that the headcount poverty rate is 20 percent, the proportion of households vulnerable to poverty is roughly 30-50 percent. In addition to the 20 percent currently poor, an additional 10-30 percent of the population is at substantial risk of poverty.

They illustrate the usefulness of this approach for targeting by examining differences in vulnerability between households by gender, level of education, urban-rural residence, land-holding status, and sector of occupation of the head of household.

This paper - a product of the Environment and Social Development Sector Unit, East Asia and Pacific Region - is part of a larger effort in the region to develop a national poverty reduction strategy for Indonesia. Lant Pritchett may be contacted at [e-mail].