A Non‐parametric Measure of Poverty Elasticity

Abstract

We estimate the growth elasticity of poverty (GEP) using recently developed non‐parametric panel methods and the most up‐to‐date and extensive poverty data from the World Bank, which exceeds 500 observations in size and represents more than 96 percent of the developing world's population. Unlike previous studies which rely on parametric models, we employ a non‐parametric approach which captures the non‐linearity in the relationship between growth, inequality, and poverty. We find that the growth elasticity of poverty is higher for countries with fairly equal income distributions, and declines in nations with greater income disparities. Moreover, when controlling for differences in estimation technique, we find that the reported values of the GEP in the literature (based on the World Bank's now‐defunct 1993‐PPP based poverty data) are systematically larger in magnitude than estimates based on the latest 2005‐PPP based data.

The Pace of Poverty Reduction A Fractional Response Approach

“…It is generally difficult to test more involved hypotheses in a non-parametric framework. Nevertheless, we fully agree with Chambers and Dhongde (2011) that non-linear estimation of the conditional mean matters.…”

“…This is largely owed to parameter instability in linear approximations and changing data coverage. However, as Chambers and Dhongde (2011) report, estimates of the income elasticity using the new 2005 PPPs are also universally lower (in absolute value) than estimates based on the earlier 1993 PPPs.…”

“…Chambers and Dhongde (2011) argue that the functional form is the source of the non-linearity. They estimate non-parametric models of the conditional mean of the headcount (H it = m(ȳ it , G it )+ it ) and then obtain average elasticities.…”

“…Chambers and Dhongde, 2011;Kalwij and Verschoor, 2007;Adams, 2004) and the World Bank's methodology is described in more detail in Chen and Ravallion (2010). Here we only briefly summarize the main features.…”

“…Given the salience of this issue to both policy makers and academics, an increasingly large literature analyzes the impact of changes in incomes and inequality on poverty, as well as their respective contributions towards poverty reduction in the past decades (Ravallion and Chen, 1997;Besley and Burgess, 2003;Bourguignon, 2003;Kraay, 2006;Kalwij and Verschoor, 2007;Bresson, 2009;Chambers and Dhongde, 2011). Collectively, these studies established not only that income growth is crucial to achieving sustained decreases in poverty but also that the benefits of income growth strongly depend on the initial levels of income and inequality.…”