Poverty Comparisons with Noncompatible Data: Theory and Illustrations

Abstract

Poverty rates calculated on the basis of different definitions of consumption may reveal substantial biases, but under certain conditions robust comparisons are possible. Nonfood spending is often thought to be especially poorly measured, but the more comprehensive is the measure of consumption spending, the better it is as a measure of welfare.

Comparisons of poverty rates are only rarely based on identical underlying definitions of welfare. The authors examine the sensitivity of poverty rates calculated from alternative definitions of consumption. They consider what theory can say about the direction of bias in comparisons and show that under certain conditions robust comparisons are possible.

Data from Ecuador, El Salvador, and Pakistan show that the magnitude of biases can be substantial.

Their robustness result is used as a baseline to explore the tradeoffs involved in aggregating noisy expenditure components. Although nonfood expenditures are often thought to be especially poorly measured, the authors' data indicate that the more comprehensive is the measure of consumption spending, the better it is as a measure of welfare.

This paper - a product of the Poverty and Human Resources Division, Policy Research Department - is part of a larger effort in the department to improve the reliability and comparability of poverty measures.