Robustness of Subjective Welfare Analysis In A Poor Developing Country

1. Robustness of Subjective Welfare Analysis In A Poor Developing Country Presented By: Nithin Umapathi Developing Economics Research Group (World Bank) October 2003

2. Outline • Motivation • Data • Methodology • Results • Conclusion

3. Motivation • Why subjective poverty ? • Alternative way of referencing • Complementarities for example: • Relative income effect • Life-cycle • Permanent income • Social Exclusion Country relevance & specificity • Limited relevance of money, e.g Russia

4. This paper: An attempt to operationalize use of subjective data First study that compares various indicators for which we specially designed a subjective module for this survey. Lack of appropriate data in developing country setting, very few studies Policy implication: Poverty targeting

5. Data & Definitions • Madagascar Household Survey 2001 • Multi-stage sampling with three strata – urban, rural and semi-urban. • A block of questions asks about consumption expenditure adequacy, in particular about food,clothing, housing • We use total household consumption as the objective welfare indicator • Objective poverty line based on Cost of Basic Needs • No adjustments to account for economies of scaleand household composition

6. Subjective Data • Concerning your expenses relative to food, which of the following is true ? • Your expenses are below the household’s needs • Your expenses are on the average to your household’s needs • Your expenses exceed your household’s needs

8. Z = f(y,x) z* Actual Income

9. Methodology • “income” is not a well-defined concept in a developing country, particularly in rural areas. Hence, zi is not directly observable • We rely on qualitative idea of the “adequacy” (Pradhan & Ravallion, 2000)

10. MethodologyThen the subjective poverty line can be defined asthe total expenditure that satisfied subjective norms for all k goods:

11. Poverty Definition

15. Poverty Estimates

18. Alternative Subjective Poverty Lines • Minimum Income Question • How much does your household need per month to live ?

20. Conclusion & Caveats • MIQ demonstrate only a weak correspondence • Subjective poverty measures based on CAQ can be used with the objective measures as a supplementary indicator • Importantly demonstrates tradeoffs for a household of monetary and non-monetary factors • Individual effects due to latent psychological factors – panel is ideal