Does Choice between an Endogenous and a Fixed Poverty Line Affect the Poverty Outcome of Policy Reforms?

Teguh Dartanto

.

DOI: 10.4236/me.2011.24074                

Abstract

Most of studies on the poverty impact of policy reforms assumed the poverty line as a fixed line; thus, the poverty outcome of policy reforms may underestimate (overestimate) and mislead in policy guidance. This research aims at theoretically investigating the difference of poverty outcomes between applying a fixed and an endogenous poverty line. Applying the microeconomic theory of consumer behavior and the properties of the poverty function, this study has theoretically proven that, if the fixed poverty line is applied, the poverty impact of policy reforms which significantly increase (decrease) price will always be underestimated (overestimated). Further, if the policy reforms do not change the price level in the economy, choice either an endogenous poverty line or a fixed poverty line does not affect the poverty outcome. However, this is difficult to guarantee that the policy reforms do not influence the price level, so applying an endogenous poverty line will result the best poverty outcome.

Keywords

Endogenous Poverty Line, Poverty Measures, Policy Reforms, Microeconomic Analysis

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	M. Ravallion, “Poverty Comparisons. Fundamentals of Pure and Applied Economic,” Vol. 56, Harwood Academic Press, Chur, Switzerland, 1994.
[2]	L. B. Decaluwé, L. Savard and E. Thorbecke, “General Equilibrium Approach for Poverty Analysis: with an Application to Cameroon,” African Development Review, Vol. 17, No. 2, 2005, pp. 213-243. HUdoi:10.1111/j.1017-6772.2005.00113.xU
[3]	Azis and J. Iwan, “Macro Stability Can Be Detrimental to Poverty,” Economics and Finance Indonesia, Vol. 57, No. 1, 2010, pp. 1-23.
[4]	Powers and T. Elizabeth, “Inflation, Unemployment and Poverty Revisited,” Economic Review, Federal Reserve Bank of Cleveland, Quarter 3, 1995, pp. 2-13.
[5]	Datt, Gaurav, and M. Ravallion, “Why Have Some Indian States Done Better Than Others at Reducing Rural Poverty?” World Bank Policy Research Working Paper 1594, April 1996.
[6]	Agenor and Pierre-Richard, “Stabilization Policies,” Poverty and the Labor Market Mimeo Paper, IMF and World Bank, 1998.
[7]	Son, H. Hyun and N. Kakwani, “Measuring the Impact of Price Changes on Poverty,” International Poverty Center, UNDP, Working Paper Number 33, November 2006, accessed at 7 July 2010. HUhttp://www.ipc-undp.org/pub/IPCWorkingPaper33.pdfUH
[8]	M. Ravallion, “Poverty Line in Theory and Practice,” The World Bank: LSMS Working Paper Number 133, 1998.
[9]	A. Hagenaars and V. de Klaas, “The Definition and Measurement of Poverty,” Journal of Human Resources, Vol. 23, No.2, 1988, pp. 211-221.
[10]	A. Mas-Collel, M. D. Whinston and J. R. Green, “Microeconomic Theory,” Oxford University Press, New York, 1995.
[11]	Atkinson and B. Anthony, “On the Measurement of Inequality,” Journal of Public Theory, Vol. 2, 1970, pp. 244- 263.
[12]	J. E. Foster, J. Greer and E. Thorbecke, “A Class of De- composable Poverty Measures,” Econometrica, Vol. 52, 1984, pp. 761-776.
[13]	N. Kakwani, “On a Class of Poverty Measures,” Econometrica, Vol. 48, No. 2, 1980, pp. 437-446.
[14]	N. Kakwani, “Poverty and Economic Growth with Application to Cote D’Ivore,” Review of Income and Wealth, Series 39, Number 2, June 1993.
[15]	A. Sen, “An Ordinal Approach to Measurement,” Econometrica, Vol. 44, No. 2, March 1976, pp. 219-231.
[16]	A. Sen, “On Economic Inequality,” Clarendon Press, Oxford, 1973.