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IDENTIFYING VULNERABILITY TO POVERTY: A CRITICAL SURVEY
Article in Journal of Economic Surveys · June 2017

DOI: 10.1111/joes.12216
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doi: 10.1111/joes.12216
IDENTIFYING VULNERABILITY TO POVERTY:

A CRITICAL SURVEY
Mauricio Gallardo*
Escuela de Ciencias Empresariales
Universidad Católica del Norte
Abstract. In the economic literature on poverty, various methods have been proposed for measuring
a phenomenon known as ‘vulnerability’. However, after more than a quarter century of research, no
consensus has been reached on how to identify such vulnerable individuals within a given population.
Some misunderstandings have also arisen from the overlapping of other closely related concepts,
such as the expectation of being poor, expected poverty, multi-period poverty and risk exposure. This
paper offers a detailed conceptual discussion on vulnerability to poverty and its related elements,
reviewing a wide range of identifying criteria provided in the literature. It is found that according
to the state of the art in this field of research, two key elements stand out in identifying vulnerable
individuals: an expected well-being below the poverty line and a relevant risk of falling into poverty
due to downside deviation from a reference level of well-being. The traditional classification of
vulnerability approaches has been updated into four groups: (i) those that stress the element of
exposure to risk; (ii) those that emphasize the element of expected poverty; (iii) those that define
vulnerability through a utility gap and (iv) those that are supported by a mean-risk dominance criterion.
Keywords. Downside risk; Poverty; Vulnerability
1. Introduction
A wide range of indices aimed at measuring a phenomenon known as ‘vulnerability’ have been proposed
in the economic research literature on poverty, but little effort has been made to narrow the key elements of
this concept. Specifically, researchers have not yet reached agreement on the most basic issue, regarding
how to identify the vulnerable individuals within a given population in the context of poverty assessment.
This situation is not consonant with Sen’s (1976, p. 219) well-known statement regarding the two
problems that must be overcome in the measurement of poverty: ‘(i) identifying the poor among the
total population and (ii) constructing a poverty index using the available information on the poor’. Not
surprisingly, both questions are also relevant when measuring vulnerability to poverty, with the solution
of the first being a prerequisite to the subsequent development of an adequate measurement. However,
the literature on the subject has flourished in the opposite direction. It has placed great emphasis on
the development of different measurement indices, without having previously established who should be
considered as vulnerable individuals.
In addition, in the current literature on poverty, no clear delimitation exists between the concept of
vulnerability and other closely associated phenomena, such as risk exposure, expectation of being poor,
expected poverty and multi-period poverty. Some misunderstandings have also arisen among researchers
due to the overlapping of these concepts.
∗ Corresponding author contact email: megallardo@ucn.cl; Tel.: 56 51 2205927.
Journal of Economic Surveys (2018) Vol. 32, No. 4, pp. 1074–1105

C 2017 John Wiley & Sons Ltd.
IDENTIFYING VULNERABILITY TO POVERTY 1075
In this paper, we contribute to the research literature on poverty, offering a detailed conceptual discussion
on vulnerability and its related elements. We present a critical review of the identification criteria implicit
in the measurement approaches. We also contribute an updated version of the standard classification of
vulnerability approaches proposed by Hoddinott and Quisumbing (2003), according to the present state
of the art in this field.
Previous studies have already reviewed various approaches to vulnerability in the context of research
on poverty (Hoddinott and Quisumbing, 2003; Hoogeveen et al., 2004; Ligon and Schechter, 2004; Gaiha
and Imai, 2009; Klasen and Povel, 2013). Unlike these works, we focus exclusively on the identification
problem and offer a more complete survey of the defining criteria, which are implicit in the currently
proposed measurement.
To advance in clarifying the concept of vulnerability to poverty is of great relevance for public policy,
international cooperation aimed at development and applied economic research. Overcoming the existing
confusion and ambiguity regarding this concern could make this concept more practically useful in policy
interventions targeting poverty reduction. Extending the analysis from the concepts of effective poverty
towards a broader scope of vulnerability to poverty will allow distinctions to be made between those who
are poor, those who are expected to be poor and those who are at risk of becoming poor. The certainty
of public decisions on overcoming poverty depends on the accurate assessment of these circumstances,
which directly relates to the identification problem of vulnerability addressed in this paper.
In order to avoid misunderstandings in our presentation, some clarifications are required. First, this
paper focuses on unidimensional vulnerability, that is, the concept of vulnerability to multidimensional
poverty (Whelan and Maitre, 2005; Chakravarty, 2006; Abraham and Kumar, 2008; Calvo, 2008; Feeny
and McDonald, 2016) is not addressed here. Second, the review is focused on the criteria for identifying
individuals who are vulnerable to one-period poverty; thus, the most complex and little-studied topic of
multi-period vulnerability (e.g. Pritchett et al., 2000; McCuloch and Calandrino, 2003) is not covered in
this work. Third, we neither pretend to give a final solution to a debate that has been ranging for more
than a quarter century, nor do we intend to point out what is the best approach to vulnerability in the
context of poverty analysis. Our intention is rather to contribute to organizing the key points of the debate
towards a better understanding of those who are vulnerable to poverty within a given population. Fourth,
our scope is narrow from a conceptual perspective; therefore, we do not address the different proposals for
statistical estimation, except when the identification criterion is directly linked to a particular empirical
estimation strategy. Finally, because the current literature on the subject has focused on the measurement
problem rather than on the identification of vulnerable people, we infer the identification criteria through
the measurement proposals.
To be coherent in our presentation, throughout this paper, we will refer to consumption expenditure as
the focal variable of well-being,1 and the unit of analysis will be the individual.2 Furthermore, although
approaches to vulnerability have been reported in the literature on poverty in different notations, to be
consistent in the presentation, here we will follow a single notation.
The essay is structured as follows: Section 2 presents the conceptual framework; Section 3 updates
the classification of vulnerability approaches and reviews the identification criteria implicit in current
measurements and ultimately, the corresponding conclusions are offered.
2. Conceptual Framework
2.1 The Concept of Vulnerability to Poverty

The adjective ‘vulnerable’ and the noun ‘vulnerability’ are widely used in various areas of knowledge,
including medicine (e.g. Flaskerud and Winslow, 1998; Delor and Hubert, 2000), natural disaster risk
management (e.g. Wisner, 1993; Blaikie et al., 1994; Weichselgartner, 2001; Levine, 2004; Alexander,
1076 GALLARDO
2012), criminology (e.g. Killias and Clerici, 2000; Daniel, 2010), political science (e.g. Thompson, 1975)
and psychology (e.g. Flouri et al., 2010).
In a general context, vulnerability can be understood as a state of defencelessness against adverse shock
that could inflict damage to an agent or system (person, household, economy, financial system, climate
system, etc.). Consequently, a state of vulnerability can be characterized either by the presence of certain
weaknesses or internal conditions inherent to the agent or system in question (which determine their state
of defencelessness), or by the presence of certain probable external shocks, to which the agent or system
does not have the ability to cope.
In the context of poverty analysis, vulnerable individuals are those who are exposed to poverty, either
because they possess some structural characteristics that determine a low consumption or because they
are unable to cope with the risk of becoming poor. This basic insight can be summarized in the following
definition, which is commonly explicit in several seminal works on vulnerability (Chaudhuri et al.,
2002, p. 4; Christiansen and Subbarao, 2005, p. 522) and is also implicit in the research literature on
vulnerability as exposure to poverty (see, e.g. Christiaensen and Boisvert, 2000; Pritchett, et al. 2000;
Ligon and Schechter, 2003; Calvo, 2005, 2007, 2013; Chiwaula et al., 2011; Gallardo, 2013; Günther and
Maier, 2014):
Definition 1. An individual is vulnerable to poverty when she or he is at risk of becoming poor or at risk
of remaining poor.
In the literature on poverty, there exists another popular definition of vulnerability that is focused on
the exposure to risk rather than on exposure to poverty (e.g. Glewwe and Hall, 1998, p. 182; Word Bank,
2001, p. 139; Amin et al., 2003, p. 60; Povel, 2010, p. 11). However, following Klasen and Povel (2013),
we will associate this alternative definition to a more general concept of ‘vulnerability’ rather than to the
concept of ‘vulnerability to poverty’.
Definition 1, while intuitively clear, lacks specificity. For instance, the following questions could
emerge: What does it mean to be at risk of becoming poor or at risk of remaining poor? How do we
measure risk? Even if we had a satisfactory measure of risk, how much risk would be considered enough
to know that someone is exposed to poverty? These questions have been answered differently in the
literature on poverty, and these responses will be the subject of our discussion in Section 3. Prior to
this, however, in this section, we will introduce some notational definitions and present a framework to
introduce the discussion.
A basic point for understanding the concept of vulnerability is the distinction between the effective
outcome of well-being and the uncertain (or likely) outcome of well-being that people face. In what
follows, we denote as y jt the random consumption of the individual j at the time period t. Meanwhile, the
observed consumption during the same period of time is denoted by y jt . That is, y jt represents the effective
realization of the random variable y jt . Sometimes, we will also express y jt as y sjt , to remark that this
outcome is the realization of y jt in the state of nature s. The finite set of all possible realizations of y jt is
defined by the vector y jt = (y 1jt , y 2jt , ..., y Ijt ), y sjt < y s+1
jt ∀s < I , where s = 1, 2, ..., I indicates the state
of nature, while the probabilities of these states of nature are defined by the vector p = ( p1 , p2 , ..., p I ),
I
such that s=1 ps = 1. Therefore, y jt is a discrete random h variable with probability and cumulative
distribution functions ps = f s (y sjt ) and Fh = F(y hjt ) = s=1 ps , respectively. We use the conventional
symbols, E(.), V ar (.) and σ(.) , for the expected value, variance and standard deviation operators, while
the poverty line is denoted as z.
From the distinction between y jt and y jt , an essential difference between poverty and vulnerability
to poverty follows. Poverty corresponds to an effective outcome, that is, it is measured by y jt . As y jt
is observable, the identification of a poor individual is straightforward. All we need to do is to compare
y jt with a consumption threshold z. Moreover, getting a preference order between any pair of observed
outcomes y jt and ykt is trivial (we do this by a simple rule: y jt ykt whenever y jt > ykt , such that
indicates a strict preference relation). By contrast, vulnerability to poverty is a phenomenon related to an

uncertain level of well-being given by y jt , about which we can only have an estimate. In the words of
Chaudhuri et al. (2002, p. 5), ‘we can never directly observe a household’s current vulnerability level’.
Moreover, establishing a rational preference ordering between two random variables y jt and ykt is not
trivial. To do this, we must use a suitable mathematical model, such as stochastic dominance (Whitmore
and Findlay, 1978; Levy, 1992), mean-risk dominance (Markowitz, 1987) or the expected utility theory
(Von Neumann and Morgenstern, 1944).
In the research literature, such a distinction between poverty (as effective outcome) and vulnerability (as
uncertain possibility) has been commonly recognized using the terms ‘ex ante’ and ‘ex post’. Vulnerability
is said to be ‘ex ante’ in the sense that it corresponds to a situation that is experienced ‘before the veil of
uncertainty has been lifted’ (Calvo and Dercon, 2005, p. 2), while poverty is ‘ex post’ in the sense that it
is observed ‘after’ that uncertainty is revealed through a specific effective outcome.
Another widely claimed distinction between vulnerability and poverty is related with the time
perspectives in which these phenomena are assessed. The research literature on this topic has been
developed in the assessment of vulnerability to poverty from a ‘forward-looking’ perspective (see, e.g.
Christiaensen and Boisvert, 2000; Pritchett, et al. 2000; Chaudhuri et al., 2002; Suryahadi and Sumarto,
2003; Christiansen and Subbarao, 2005; Calvo and Dercon, 2007, 2013), in line with the goals of the
policy intervention to prevent future poverty. In contrast, poverty assessment, due to its ‘ex post’ nature,
is considered a ‘backward-looking’ analysis. Thus, the prevailing view is that vulnerability assessment
must be focused on y j,t+1 rather than on y jt .
Moreover, given our informational restrictions, the ‘forward-looking’ assessment of vulnerability
commonly forces us to appeal to the assumption of time stationarity. This assumption implies that the
essential features of a probability distribution of y jt (e.g. the expected value, variance, covariance or even
the whole probability distribution) are time invariant. That is, under such an assumption, y j,t+1 behaves
as y jt . Then, as in such an environment the risk conditions would remain invariant, we could estimate
‘ex ante’ the conditions of uncertainty that determine y jt , with the information available in t, and then
intervene to prevent the future poverty that could occur with the effective realization of y j,t+1 one period
ahead.
However, the time stationarity assumption is not necessarily true for all individuals in a population.
Even more, in a strict sense, there are no conceptual reasons to separate, in time, a random variable from
its effective realization. We provide two examples to clarify this point. First, let us consider the simple
random experiment of rolling a die, where the random variable, called X , could take values from 1 to 6,
with equal probabilities. Now suppose that as a result of the experiment, the die lands on 3. Note that at
the moment the die falls, the random variable X is the same. The result of the die having landed on 3 did
not change the values of X or the probabilities at all. By chance, the die could also have landed on 1, 2,
4, 5 or 6. Let us compare that to an example related to vulnerability to poverty. Suppose that a person is
at risk of losing her job in period t with a probability of 0.9. In that period, the variable y jt can only take
two values in two states of nature: y jt > z if she retains her job or y jt < z if she is fired. Suppose now
that during that period, she retains her job. Then, to assess her welfare in the period t, we must register her
as non-poor, given that y jt > z . However, we cannot disregard the fact that during the same period, she
experienced a welfare loss of being at high risk of falling into poverty. Therefore, in the same period t,
we must classify her as vulnerable. This is what Calvo and Dercon (2005, 2007, 2013) refer to when they
affirm that not only effective poverty but also ‘the threat’ of being poor constitutes a loss of well-being.
Thus, according to our understanding, poverty and vulnerability do not necessarily involve a time lag.
Moreover, the risk of being poor in the current period and in the past is also of interest for the assessment
of well-being.
In what follows, we will refer either to y jt and y j,t+1 , with the understanding that in the general case,
vulnerability can be assessed from the current period, and in a particular case, it can be assessed from a
‘forward-looking’ perspective, when we assume a time stationary environment.
1078 GALLARDO
Turning to Definition 1, to be more specific we will distinguish three groups of individuals depending on
the type of risk, they confront related to poverty. The first group includes those whose random consumption
is below the poverty line in any state of nature, that is, for any person in this group, the following condition
is fulfilled:
y jt < z, ∀s. The individuals belonging to this group are extremely vulnerable because, for
them, poverty is a certainty event. We have labelled this type ‘vulnerability by sure poverty’ (Group 1).
For the already cited literature that adheres to Definition 1, people in Group 1 will be identified as
vulnerable, because the risk of being poor that they experience is extreme. However, for some researchers
who emphasize the concept of vulnerability as exposure to risk (e.g. Povel, 2010; Dutta et al., 2011), not
all people in Group 1 will be considered vulnerable, as some of them do not confront any uncertainty.
Instead, according to these researchers, people in Group 1 will be classified only as ‘chronically poor’.
However, ‘chronic poverty’ and ‘vulnerability by sure poverty’ are not the same concepts. There is a
subtle difference between these two concepts to which we will return in Subsection 2.2, where we discuss
the relation of vulnerability with multi-period poverty.
In a second group, we include those individuals for whom poverty is the expected outcome, but they
could also experience non-poverty events in some states of nature. That is, for them, the following
condition is met: E( y jt ) < z, ∃y sjt ≥ z, ps > 0. These individuals are at a high risk of poverty. We have
labelled this type ‘vulnerability by expectation of being poor’ (Group 2).
For people in Groups 1 and 2, the risk of being poor is quite clear, and there is no trouble in classifying
them as vulnerable in line with Definition 1. There is, however, a third group of people who have some
risk of falling into poverty, but they are more difficult to identify as vulnerable. They are those individuals
whose expected consumption is out of poverty, but who still have a greater than zero probability of facing
states of nature below the poverty line. That is, this group includes the individuals who meet the following
condition: E( y jt ) ≥ z ∧ ∃y sjt < z, ps > 0. It would be unreasonable to classify everyone who meets this
condition as vulnerable because this group includes large sections of the middle class and even some rich
people, who have a very small probability of being poor. Thus, we require a relevant risk threshold to
identify this third group of vulnerable individuals. In the literature on poverty, various alternatives have
been proposed to measure such relevant risk. These measures include a contra-factual risky scenario (e.g.
Dercon and Krishnan, 2000), a probability threshold (e.g. Chaudhuri et al., 2002, Suryahadi and Sumarto,
2003), a utility gap (Ligon and Schechter, 2003), a downside risk deprivation threshold according to the
goals of the policy intervention (Povel, 2015), the standard mean-deviation (Chiwaula et al., 2011), the
standard downside mean-semi-deviation (Gallardo, 2013) and a reference utility gap (Günther and Maier,
2014). The definition of this relevant risk is the key point in defining the threshold of vulnerability to
poverty, and this is the issue that will be discussed in detail in Section 3. Until then, we will simply
indicate that there is a group of people vulnerable to poverty with an expected value of consumption
either at or above the poverty line but who have, nonetheless, a relevant risk of falling into poverty. We
have labelled this type ‘vulnerability by exposure to risk’ (Group 3).
2.2 Some Related Concepts

The concept of vulnerability to poverty is closely linked to other concepts, some of which may overlap or
be quite similar, which is often a source of confusion. The next step in narrowing our focal concept will
be distinguishing it from the following related phenomena: expectation of being poor, expected poverty,
exposure to risk and multi-period poverty.
2.2.1 Expectation of Being Poor

This concept refers to a situation in which the expected value of consumption is below the poverty
y jt ) < z. Thus, under this criterion, by estimation of E(
line: E( y jt ), we could identify the vulnerable
individuals belonging to Groups 1 and 2 defined above. However, it fails by leaving out those vulnerable
individuals in Group 3. Even more, the expected value just by itself is not a sufficient criterion for
assessing the well-being under uncertainty. This is because two random variables could have the same
expected values but different levels of dispersion, resulting in different levels of risk. It is clear that if we
are risk averse, we will prefer less dispersed random outcomes (we will return to this point in more detail
in Section 3).
2.2.2 Expected Poverty

The expected poverty is the expected value of all the possible poverty events that the individual could
face. Formally, it is defined as follows: E( P jt ) = s=1I
P js f s (y sjt ), where P jts is a measure of individual
poverty in the state of nature s, and P jt is a random variable that takes the value P jts in the state of nature
s. Notice that the expectation of being poor group is smaller in number than those who have an expected
poverty of more than zero, that is, E( y jt ) < z is a more restrictive condition than E( P jt ) > 0. Having a
single probable state of nature under the poverty line will be enough for a person to meet the condition
jt ) > 0, but it will not be sufficient to satisfy the condition E(
E( P y jt ) < z. All three groups of at risk to
poverty people defined above belong to the set of those for whom the expected poverty is more than zero.
However, as previously explained, the condition ∃y sjt < z, ps > 0 is not restrictive enough to identify
the vulnerable individuals. For that, as we will see in Section 3, those approaches to vulnerability to
poverty that are supported by the concept of expected poverty need to invoke an additional identification
condition, which is usually a probability threshold.
2.2.3 Multi-Period Poverty

Multi-period poverty refers to the retrospective measures of effective poverty over time. Denote
the experienced consumption stream of the individual j in T past periods of time, by the vector
y j,1−T = (y j1 , y j2 , ..., y j T ). Then, multi-period poverty is a summary measure of poverty experienced by
an individual during these T periods. The three common measures of multi-period poverty are total poverty,
chronic poverty and transient poverty. Total multi-period poverty for the individual j is a standard measure
of poverty calculated over the time dimension through the vector y j,1−T : P j,1−T TOT
= P(y j1 , y j2 , ..., y j T ).
Chronic poverty is understood as the structural, longer term poverty that persists over time. Meanwhile,
transient poverty is a measure of temporary or circumstantial episodes of poverty. With regard to the
measurement of chronic and transient poverty, there is still no agreement found in the literature. The
most common methodologies used can be grouped into three categories: the ‘component approach’
(e.g. Rodgers and Rodgers, 1993; Jalan and Ravallion, 2000), the ‘high-frequency approach’ (e.g.
McCuloch and Calandrino, 2003) and the ‘persistency approach’ (e.g. Hulme and Shepherd, 2003; Foster,
2009).
The ‘component approach’ measures chronic poverty through permanent consumption and then
obtains transitory poverty by the residual, subtracting the permanent component of poverty from the
total multi-period poverty. Formally, according to this approach, the chronic poverty of an individual
is defined as P j,1−TC
= P(y ∗j , y ∗j , ..., y ∗j ), where y ∗j is the permanent consumption (e.g. estimated
1 T
by y j,t−i = T i=1 y j,t−i ) in the periods t = 1, 2, ..., T . Transient poverty is defined as follows:
T
P j,1−T = P j,1−T
TOT
− P j,1−T
C
.
The ‘high-frequency approach’ classifies an individual as chronically poor when, judged by the
information given in the vector y j,1−T , it is expected that she has a high probability of being poor.
That is, it is expected that she would have experienced poverty for at least n of the T periods, where Tn
is a high frequency, for instance, Tn ≥ 0.5. Conversely, if she is expected to be poor with low frequency,
then she will be identified as transient poor.
1080 GALLARDO
The ‘persistency approach’ instead identifies an individual as chronically poor when she experiences
poverty with a persistence of n consecutive periods, 1 < n ≤ T , whereas transient poor individuals
are those who are sporadically poor, with little persistence. Notice that unlike the previous approach,
in this third conception, the high frequency of episodes of poverty must be observed in consecutive
periods.
Multi-period poverty and vulnerability are very closely linked, but they are conceptually different
phenomena. Notice that multi-period poverty is a measurement of effective events of poverty over time,
while vulnerability is the risk of being poor in a specific period of time,3 which is usually assessed one
period ahead in the standard ‘forward looking’ perspective. In other words, multi-period poverty concerns
the vector of observable consumption streams, y j,1−T , while vulnerability concerns the random variable

y jt , which is defined both through the vector of the uncertain states of nature in a specific period of time
y jt (see, e.g. Günther and Maier, 2014) and the vector of probabilities p.
In empirical practice, however, we will often have difficulties differentiating these two concepts
because when we assess vulnerability assuming a time stationary environment, we use the information
over time, focusing on the vector: y j,1−T = (
y j1 ,
y j2 , ...,
y j T ). Thus, we estimate vulnerability using
the same information, we use to estimate multi-period poverty, as the stochastic process of the
unobserved y j,1−T is revealed through the observed y j,1−T . Such a situation is often a source of
confusion and has even led some researchers to claim that vulnerability measures are, in fact,
chronic poverty measures (e.g. McCulloch and Calandrino, 2003; Schechter, 2006). Notice, however,
that this overlapping of concepts is given by our time stationary assumption and our informational
restrictions. If we had information about all states of nature and their probabilities facing an
individual in each period of time, we would be able to distinguish vulnerability from multi-period
poverty.
Let us now turn to the groups of people at risk that we defined earlier. Suppose, first, a time stationary
environment, where the risk conditions remain invariant. Then, those people vulnerable ‘by sure poverty’
(Group 1) will be chronically poor. The opposite will not be true because those people vulnerable ‘by
expectation of being poor’ (Group 2) will usually also be chronically poor (some exceptions could be
found, determined by luck, but also when the multi-period poverty is assessed under the persistence
approach). The transient poor, instead, will be usually those who belong to Group 3 (some exceptions
could also be found, determined by luck).
In reality however, for some people, the risk conditions will remain invariant, while for others they will
change over time. Thus, among those belonging to Group 1, the chronic poor will be those for whom the
certainty of poverty remains over time. In contrast, for someone who is poor with certainty for instance
in just one period of time, poverty will only be transient. Similar situations will occur with those who
belong to Group 2. Therefore, in reality, what we will have will be an overlapping of people at risk of
poverty with those who are chronic and transient poor.
2.2.4 Exposure to Risk

Exposure to risk has two meanings in the literature on poverty. The first concerns the inability to smooth
consumption over time (Cochrane, 1991; Townsend, 1994; Grimard, 1997; Ravallion and Chaudhuri,
1997; Glewwe and Hall, 1998; Jalan and Ravallion, 1999; Dercon and Krishnan, 2000; Amin et al.,
2003), while the second concerns the exposure to downside risk (Povel, 2010; Dutta et al. 2011). Both
concepts are related to the time stream. The inability to smooth consumption occurs when a person is
unable to sustain her spending at the level of permanent income over time. Her consumption stream varies,
conditional to changes in the current income stream. For those individuals with permanent consumption
above the poverty line but near to this threshold, this inability could be understood as vulnerability to
poverty because owing to the variations in their consumption stream over time, these individuals will be
exposed to poverty.
Instead, the exposure to downside risk concerns the likelihood of having a drop in the future consumption
with respect to the current level. This situation is also linked to vulnerability to poverty in a similar way
as the previous case. An individual will be vulnerable to poverty if the consumption fall to which she is
exposed would bring her below the poverty line.
Nevertheless, there are three important differences between these two concepts of risk exposure. First,
the inability to smooth consumption is a concept over time that is estimated ‘ex post’ and ‘backward-
looking’, on the basis of past information, such as multi-period poverty. In contrast, the exposure to
downside risk concerns the future risk and then is estimated ‘ex ante’ as a ‘forward-looking’ prediction
(e.g. Povel, 2010, 2015). Second, consumption smoothing is based on a symmetrical conception of
risk, while the exposure to downside risk is an asymmetrical concept. Third, the reference point for
consumption smoothing is the permanent consumption, whereas the reference point for the exposure to
downside risk is the current consumption.
Exposure to risk could be a very useful complementary approach in the vulnerability to poverty
assessment (see Povel, 2015), given that the exposure to risk is the key characteristic of the people
included in Group 3. Nonetheless, the exposure to risk is not a sufficient criterion to identify those
individuals vulnerable to poverty; first, because some middle class and wealthy people, for whom the risk
of falling into poverty is absent or irrelevant, could be exposed to the inability to consumption smooth
or to downside risk, and second, because an individual who is poor with certainty fails to be classified as
exposed to risk under this conception.
3. Vulnerability Approaches and Classification

Hoddinott and Quisumbing (2003) classify vulnerability approaches according to their defining elements:
vulnerability as uninsured exposure to risk (VER), vulnerability as expected poverty (VEP) and
vulnerability as low expected utility (VEU). The VER category now includes novel versions that
asymmetrically define the exposure to risk, either in terms of a lack of insurance to cover the risk of
falling under the poverty line (Cafiero and Vakis, 2006) or on the basis of an expected downside risk
(Dutta et al., 2011; Povel, 2010, 2015). The VEP approach is still popular in empirical applications (e.g.
Imai et al., 2011) and has been enriched with the decompositions proposed by Günther and Harttgen (2009)
and Celidoni (2015). To the VEU category can be assigned two new vulnerability approaches that have
been formulated in terms of expected utility (Calvo and Dercon, 2007, 2013) and reference-dependent
utility theory (Günther and Maier, 2014). Furthermore, two novel approaches have been proposed which
identify vulnerability in terms of a low mean outcome and the risk of divergence from that mean (Chiwaula
et al., 2011; Gallardo, 2013). We will consider these two approaches as a new category: Vulnerability by
mean risk (VMR).
Table 1 presents a summary of the key characteristics of the vulnerability approaches that we will
review in this section. The VER approaches share a common trait insofar as they consider the exposure
to risk as the key element of vulnerability. The VEP approaches, on the other hand, emphasize expected
poverty as the essential feature of vulnerability to poverty. The VEU approaches are also founded on the
concept of expected poverty; however, we will distinguish them from the VEP approaches because such
expected poverty measures are expressed in terms of utility gaps as the defining element of vulnerability.
Meanwhile, the VMR approaches are both founded on the mean-risk ordering of uncertain welfare
outcomes.
3.1 Vulnerability as Exposure to Risk (VER)

Under the VER category, we will review four approaches here: the first focuses on the inability of low-
income households to smooth consumption over time; the second defines the relevant exposure to risk
Table 1. Summary of Approaches to Vulnerability to Poverty.

Downside 1082
Vulnerability Poverty Risk risk
Category Approach Key articles Key element threshold sensitivity sensitivity sensitivity
Vulnerability as Inability to Glewwe and Hall Inability for Permanent No Yes In some ap-
exposure to smooth (1998), Jalan and consumption consumption plications

risk (VER) consumption Ravallion (1999), smoothing
Dercon and
Krishnan (2000),
Amin et al. (2003)
Extended Cafiero and Vakis Uninsurance risk in the z + η j Yes Yes Yes
poverty line (2006) poverty line
approach
Exposure to Povel (2010, 2015) Expected downside A relevant risk for No Yes Yes

downside risk risk policy
intervention
Exposure to Dutta et al. (2011) Expected downside A weighted mean Partially Yes Yes
downside risk risk with hybrid between y jt and
GALLARDO
with hybrid threshold z

threshold
Vulnerability as Expected Christiaensen and Probability of future Fixed probability Yes No No
expected poverty Boisvert (2000), poverty
poverty (VEP) approach Pritchett et al.
(2000), Chaudhuri
et al. (2002),
Chaudhuri and
Christiaensen
(2002), Kamanou
and Morduch
(2002), Suryahadi
and Sumarto (2003);
Christiansen and
Subbarao (2005)
(Continued)

Table 1. Continued

Downside
Vulnerability Poverty Risk risk
Category Approach Key articles Key element threshold sensitivity sensitivity sensitivity
Vulnerability as Expected utility Ligon and Schechter Expected poverty gap U (z) Yes Yes No
low expected approach (2003) in terms of utility
tility (VEU)

Threat of Calvo and Dercon Expected normalized z θ , for Yes Yes No
poverty (2005) poverty gap in terms θ < 1 ∧ θ
= 0 or
approach of utility ln z, for θ = 0
Reference- Günther and Maier Expected reference RU (z|y j,t−1 ) or Yes Yes Potentially in
dependence (2014) utility gap RU (z|z) some ap-
utility plications
approach
Vulnerability by Mean-deviation Chiwaula et al. (2011) Mean-deviation z Yes Yes No
mean risk approach
Downside Gallardo (2013) Mean-semi-deviation z Yes Yes Yes
IDENTIFYING VULNERABILITY TO POVERTY
mean-semi-
deviation
approach
1083
1084 GALLARDO
through an insurance instrument that could be used for extending the poverty line and thereby identify
vulnerable individuals; while the last two approaches define vulnerability in terms of the exposure to
downside risk. There is also an approach to vulnerability that could be assigned to the VER category,
although it is not reviewed here. This is the Béné (2009) proposal, which is based on the coefficient of
variation and on portfolio diversification. It is an interesting and creative approach, but it is also very
specific and reaches beyond the main concepts analysed here.
3.1.1 Vulnerability as the Risk of Poverty due to the Inability to Smooth Consumption
The first approaches to the concept of vulnerability to poverty were developed through empirical studies
that examined the relationship between poverty and the exposure of low-income households to risk owing
to the consumption variability. In the 1980s, various researchers found that low-income rural households
experienced significant changes in their welfare status due to seasonal fluctuations, climate variations
and price fluctuations (Chambers et al., 1981; Ahluwalia, 1985; Longhurst et al., 1986; among others).
Meanwhile, other studies (Levy, 1977; Gottschalk, 1982; Bane and Ellwood, 1986) noted a distinction
between those poor individuals for whom poverty persists over time (chronic poor) and those for whom
poverty is only determined by the variability of welfare outcomes in the neighbourhood of the poverty
line (transient poor). In the context of such research, the concept of vulnerability as the inability to smooth
consumption emerged.
A seminal contribution that addressed the relationship between poverty and exposure to risk was
the work of Ravallion (1988), who analysed whether the aggregate measures of absolute poverty
are affected by the risk associated with the variability of welfare outcomes. Ravallion concluded
that such variability leads to increased expected poverty as measured by the conventional FGT
(Foster et al., 1984) or Atkinson (1987) indices if certain conditions are met on the individual
welfare function and its distribution.4 Although Ravallion did not call the relationship between
poverty and risk ‘vulnerability’, the relationship described in his work is fundamentally linked to this
concept.
The term ‘vulnerability’ emerged in the literature on poverty during the 1990s. Watts and Bolhe (1993)
proposed the concept ‘space of vulnerability’ to refer to the locally and historically specific configuration
of poverty, hunger and famine. The work of Morduch (1994) on poverty and vulnerability introduced the
concept of ‘stochastic poverty’ to describe a situation in which a household’s consumption is below the
poverty line even though the household has a permanent income above that threshold. It was hypothesized
that this situation of ‘vulnerability’ leads to second-best portfolio decisions, which in turn lead to welfare
losses relative to the optimal portfolio decisions that could have been reached with adequate insurance
mechanisms and in the absence of liquidity restraints.
Kochar (1995) analysed the use of labour offer as an insurance mechanism for ‘vulnerable’
rural households facing idiosyncratic income shocks. In other studies conducted during this decade,
the hypothesis of uninsured exposure to risk started to be tested (Cochrane, 1991; Townsend,
1994; Grimard, 1997; Ravallion and Chaudhuri, 1997; Jalan and Ravallion, 1999). This ultimately
led to an approach to vulnerability as the inability of low-income households to smooth their
consumption over time (Glewwe and Hall, 1998; Dercon and Krishnan, 2000; Amin et al.,
2003).
According to this approach, the identification of vulnerable individuals involves an assessment of
the presence of uninsured exposure to risk via regression analysis, in which the impact of idiosyncratic
and covariate income shocks on consumption expenditure is estimated and tested. Cochrane (1991)
performed this test using cross-sectional data. However, the standard regression in this area has been
performed using panel data (Townsend, 1994; Ravallion and Chaudhuri, 1997; Jalan and Ravallion, 1999;
Glewwe and Hall, 1999; Dercon and Krishnan, 2000; Tesliuc and Lindert, 2002; Amin et al., 2003;
Skoufias and Quisumbing, 2005; among others). The various specifications that have been proposed for
this assessment can be summarized in the following equation from Hoddinott and Quisumbing (2003):

n1
n2
n3
ln y jtv = αi S(i)tv + βi S(i) jtv + δv Dv + γ X jv + ε jtv (1)
i=1 i=1 v=1
where ln y jtv is the change in the logarithm of y jt , located in the community v, in period t; S(i)tv denotes
the various covariate shocks that affect locality v (e.g. changes in precipitation that affect harvests, falling
agricultural prices, pests, natural disasters); S(i) jtv represents the idiosyncratic shocks that affect the
individual (or household) j (e.g. sickness or death of household members, involuntary job loss); Dv is a
dummy variable equal to one when j belongs to locality v and equal to zero otherwise; X jv is a vector
of some observable characteristics of j and ε jtv is a random component. Scalars αi , βi , δv and vector
γ are the parameters to be estimated. In this design, the shared risk of a community can be examined
through the statistical significance of parameter αi , whereas the idiosyncratic risk can be evaluated based
on the statistical significance of parameter βi .
In addition, the covariate shocks affecting each locality can be summarized through the rate of growth
of the mean income of v, ln y tv , and the idiosyncratic shocks can be summarized in a practical way
through the rate of growth of the income for each j, ln y jtv (see also Hoddinott and Quisumbing, 2003).
By taking ln y tv and ln y jtv as summary measures of S(i)tv and S(i) jtv , respectively, Equation (1)
can be simplified as follows:

n3
ln y jtv = αln y tv + β ln y jtv + δv Dv + γ X jv + ε jtv (2)
v=1
In this formulation, the parameters α and β act as measures of the risk exposure. The first parameter
summarizes the exposure to covariate shocks, while the second captures the exposure to idiosyncratic
shocks. Empirical evidence has shown that exposure to idiosyncratic risk is partial; that is, estimates have
yielded values for parameter β that are significantly different from zero but less than one (see, e.g. Mace,
1991; Townsend, 1994; Jacoby and Skoufias, 1997; Skoufias and Quisumbing, 2005). It has also been
found that exposure to covariate risk is significantly different from zero (e.g. Dercon and Krishnan, 2000).
Some authors in this line of research have focused on the idiosyncratic risk to define vulnerability.
For instance, Amin et al. (2003, p. 60) defined a household as vulnerable ‘if it is unable to smooth
consumption in the face of idiosyncratic income fluctuation’. These authors estimate a variation of (2)
with specific coefficients β j for each j, and then they identify an individual as ‘vulnerable’ based on
the statistical significance of β j . Notice, however, that according to our previous conceptual framework,
what they actually identify using this criterion is not vulnerability to poverty but rather the exposure to
idiosyncratic risk. Furthermore, Amin et al. (2003) also acknowledged that this type of exposure to risk
can affect people at any welfare level, not only those that are exposed to poverty. In addition to this, we
must bear in mind that exposure to poverty not only comes from the idiosyncratic risk but also from the
covariate risk (e.g. when an entire community is affected by natural disasters, droughts or floods, many
people could fall into poverty).
Conversely, other authors using this approach have also given bearing to covariate shocks to identify
vulnerability. For instance, Dercon and Krishnan (2000, p. 45) revealed that people that are predicted
to be at risk of experiencing a consumption shortfall under the poverty line in a ‘bad year’ (with
problems on all fronts for the whole community) are considerably more, in number, than those who
are predicted to be poor in a ‘normal year’. They define vulnerability as a measure of such risk
exposure.
In summary, according to this approach, the criterion for identifying vulnerable people in the context
of poverty analysis can be stated as follows:

1086 GALLARDO
Criterion 1. An individual is vulnerable to poverty when she is at risk of being poor given her inability
to smooth consumption over time.
The estimates of parameters in (1) or (2) provide information about the marginal effects to idiosyncratic
and covariate risks on average. However, by themselves, these parameters do not allow us to identify
people who are vulnerable to poverty. To do that, such estimates must be used to build counterfactual
scenarios in which we compare the estimated poverty in a ‘normal situation’ to the estimated poverty in
a ‘risky’ (‘bad’) situation. This is the method followed by Dercon and Krishnan (2000) to operationalize
Criterion 1. Such a procedure allows us to identify those people who are vulnerable to poverty
from those belonging to the Group 3 defined above. Nevertheless, given the usual informational
restrictions, the choice of a contra-factual risky scenario could be subject to certain arbitrariness.
Moreover, under this procedure, the relevant risk threshold for identifying the vulnerable people remains
diffuse.
By operationalizing Criterion 1, care should also be taken with the estimation strategy. As various
authors have noted (Ligon and Schechter, 2002; Hoddinott and Quisumbing, 2003; Amin et al., 2003;
Klasen and Povel, 2013), the inability to smooth consumption can affect households at any welfare level.
Consequently, the estimation of counterfactual scenarios from an average estimate given by (2) would be
misleading, given that when variants of (2) have been implemented separately for groups (e.g. Jalan and
Ravallion, 1999; Amin et al., 2003), there has been evidence that lower income people are less insured to
risk compared to those with higher income levels. Therefore, it would be more accurate to estimate (2)
with specific coefficients.
A point to take into account is that the coefficient β in equation (2) captures the sensitivity to changes
in consumption relative to changes in current income without differentiating whether these changes
correspond to an increase or decrease in income. This point has been highlighted by several authors
(e.g. Hoddinott and Quisumbing, 2003; Povel, 2010). However, this deficiency is not present when (1)
is estimated by including specific idiosyncratic and covariate negative shocks as regressors (e.g. Dercon
and Krishnan, 2000). Another solution is to re-specify (2) as a censored model that only includes negative
values for ln Y tv and ln Y jtv . More recent approaches to vulnerability that are focused on the risk
component have emphasized that this phenomenon is fundamentally asymmetric (Povel, 2010; Dutta
et al., 2011; Klasen and Povel, 2013); therefore, only downward changes to welfare are pertinent to the
vulnerability assessment.
3.1.2 Extended Poverty Line Approach

The use of an extended poverty line to identify vulnerable households is common in the reports of
international agencies (e.g. Ferreira et al., 2013). Ravallion (1996, p. 1330) used the term ‘vulnerable’ to
refer to those individuals that are just above the poverty line, following Lipton (1983), who previously
suggested using various poverty lines to capture different levels of hardship. However, the approach was
formalized in Cafiero and Vakis (2006). According to these authors, vulnerable individuals are identified
by an extended poverty line that includes the cost of insuring against socially unacceptable risk, that is,
‘the poverty line that includes the minimum amount of consumption required to achieve basic needs plus
the cost needed for acquiring enough insurance’.
Formally, the extended poverty line can be expressed as z + η jt , where η jt is the cost to insure
the individual j against the ‘socially unacceptable risk’ of falling below a current welfare level equal
to z. As a consequence, the individual poverty gap g jt includes this risk coverage in the following
manner:
g jt = (z + η jt ) − y jt
(3)
Given g jt , an extended poverty measure that accounts for the loss of welfare due to exposure to risk
(vulnerability) can be calculated at the aggregate level using the conventional FGT-type poverty index:
q α
1
g jt
Pα (y, η, z) = ,α ≥ 0 (4)
N j=1 z + η jt
where y and η are, respectively, the vector that contains the values y jt and η jt for the entire population.
The g jt in the previous formula is ordered from lowest to highest, up to value q, where q is the number
of households having g jt ≥ 0. N is the population size and α is the parameter of inequality aversion.
Given the above definitions, the criterion for identifying vulnerability to poverty under this approach is
as follows:
Criterion 2. An individual is defined as vulnerable to poverty if, and only if, y jt ≤ z + η jt .
A shortcoming of this approach is the complexity of estimating η jt . The number of η jt that must be
estimated is equal to the number of individuals in the target population; that is, we would have to calculate
N poverty lines. Cafiero and Vakis (2006) do not indicate how to resolve this issue. A possible solution
that has been adopted in practice by some international agencies is to assume a single η = η jt , ∀ j. Such
η may be defined, for example, as the average cost of insurance to guarantee the consumption smoothing
of those whose expected consumption is just at the poverty line. Seen in this way, the extended poverty
line approach could be very useful and easy to apply and interpret. However, this solution does not take
into account that the risk faced by different people varies (an element pointed out by Dutta et al., 2011
and Povel, 2010), meaning that having a single η could be an oversimplification.
Another drawback of this approach is that it is not based on a theoretical model for comparing welfare
outcomes under uncertainty, but rather it is simply based on adding the cost of insurance.
3.1.3 Vulnerability as Exposure to Downside Risk

The proposal by Povel (2010)5 follows the definition of the World Bank (2001, p. 139), according to
which ‘vulnerability measures the resilience against a shock – the likelihood that a shock will result in
a decline in welfare’. This approach develops a general concept of vulnerability focusing on the risk of
falling below the current status quo, rather than on the risk of being poor. Vulnerability is thus understood
as the risk of incurring future welfare losses.
Povel’s concept (2010, p. 3) is oriented to a downside risk conception. He maintains that ‘risk is a
negative future event whose occurrence has a certain probability’. Therefore, possible improvements in
welfare are not relevant to its assessment. Also, emphasized in this approach is the notion that vulnerability
assessment must be ‘forward-looking’. Povel (2010) criticizes previous approaches in this regard, arguing
that they incorrectly use information from the past to predict future events; thus, they are ‘backward-
looking’ approaches. According to Povel’s (2010) vision, backward-looking approaches do not account
for the fact that agents will use past experience to better manage or avoid risks in the future. Thus, we
should not expect the same unfortunate events to recur.
To predict the risks that people will face from a ‘forward-looking’ perspective, this author proposes using
subjective information contained in their perceptions about the future. Thus, in its empirical application,
Povel (2010) uses household survey data to collect information about the shocks that households expect
to face in the future and about the households’ subjective probabilities.
Intuitively, the concept of vulnerability proposed by Povel (2010) corresponds to an expected
deprivation measure, while the threshold of vulnerability is assumed that will be determined by the goals
of the policy intervention. According to this approach, vulnerability should be measured by assigning to
1088 GALLARDO
each individual j a deprivation index d js ∈ [0, 1], for each state of nature s with probability p js , in a
world of I j future states of nature faced by j. Then, the individual vulnerability index is defined as

Ij
Vj = p js d αjs (5)
s=1
I j
where 0 ≤ d ji ≤ 1, s=1 p js = 1 and α is a risk parameter. With risk aversion, we have α > 1. Both
Povel (2010, 2015) and Klasen and Waibel (2013) present empirical evidence derived from the application
of this measure to household survey data from Thailand and Vietnam.
Given (5), for an individual j to be vulnerable, it is sufficient to fulfil the following condition:
∃ p js d js > 0. However, as this condition is not restrictive enough, Povel (2015) indicates that the relevant
downside risk threshold must be chosen according to the aims of the public policy intervention. Thus,
assuming that the policy makers have decided to intervene in the cases of those people with a downside
risk that is greater than φ, then the identification criterion of vulnerability under this approach can be
inferred as follows:
I j
Criterion 3. The individual j is vulnerable if, and only if, s=1 p js d αjs > φ, 0 < φ < 1.
The strength of this approach is its ability to overcome the symmetrical view of risk that was present
in some earlier versions of VER as the inability to smooth consumption. Instead, Povel’s (2010) proposal
is built on the basis of an asymmetrical deprivation index for which the expected upward deviations from
the current welfare level do not compensate for the expected downside risk. This approach has the merit
of being the first to address the issue of subjective vulnerability. In addition, this proposal is consistent
with the reference-dependent utility theory (Kahneman and Tversky, 1979) as it is referenced in the
current level of welfare as a vulnerability threshold. Specifically, this point is important for downside risk
assessment because the welfare loss of experiencing a consumption fall is not only dependent on the final
outcome but also on the initial welfare level.
However, Povel’s (2010) proposal is not a vulnerability to poverty approach in itself; rather, it is an
approach to exposure to downside risk that is referenced in the current welfare level. This fact was
recognized by Povel (2010) and Klasen and Povel (2013) when they positioned this approach within
the concept of ‘vulnerability’, distinguishing it from the concept of ‘vulnerability to poverty’. More
recently, Povel (2015) has been even more specific in acknowledging that the ‘exposure to downside risk’
assessment differs from, while being complementary to, the vulnerability assessment.
Povel’s (2010) assertion that using perceptions about the future could provide better ‘forward-looking’
estimates than using past factual information is not very convincing for us. On the one hand, in a
time stationary environment, past events contain relevant factual information that can be used in the
assessment of future uncertainty. The argument that individuals adjust their behaviour based on past
events must consider that agents also behave in an optimized way in the past. On the other hand, as
Povel (2010) acknowledges, strong criticisms of the use of subjective information to estimate actual
risk have also been presented in the literature. This criticism comes from the so-called problem of the
‘heuristic of probabilities’ (Kahneman et al., 1982; Botterill and Mazur, 2004), according to which
the subjective prediction of probabilities is often guided by a speculative framework. People could
tend to, for instance, assign future probabilities on the basis of frequencies they observed in their past
experiences, although the actual probability distribution may be different (‘heuristic of availability’).
People could also tend to attribute a greater or lesser likelihood to an event based on the recent sequence
of events they have observed, although the probability distribution is independent of such a sequence
(‘heuristic of representativeness’). For example, during a coin toss, when it lands several times on
‘heads’, we tend to think that the next time it will land on ‘tails’, even though the probability of
it landing on ‘heads’ has not changed. According to these criticisms, even people’s perceptions of
the future can be influenced by looking backward at their past experiences. Moreover, the subjective
perception about the future could also be influenced by a person’s temperament and mood. Accordingly,
a fortunate millionaire who is pessimistic could be considered to be ‘vulnerable’ because his subjective
prediction of the future involves a loss of welfare. Conversely, an optimistic pauper who expects an
improvement in his welfare in the future could be considered to be ‘not vulnerable’. Finally, through
their own perceptions, it is doubtful that the average person is able to reasonably predict future
changes in the weather, rainfall, crops and price behaviours or even foresee future illness and other
shocks.
In spite of the above criticisms, it should be noted that Povel (2015) substantially improved his approach
by incorporating both past information and the subjective ‘forward-looking’ perceptions in his estimates
of the probabilities of risky future events. Thereby, he included these perceptions as complementary
information. Surely, when this approach is applied to low-income households, it can be used in a manner
that is complementary to the vulnerability to poverty assessment.
3.1.4 Exposure to Downside Risk with Hybrid Threshold

One of the most recent approaches to emphasizing the risk element is the proposal developed by Dutta
et al. (2011). As in Povel (2010), these authors maintain that vulnerability relates to the risk of falling
below a certain welfare threshold in the future. This threshold may correspond to various dimensions,
such as health, food, income, etc. Nevertheless, Dutta et al. (2011) focus on unidimensional vulnerability
that is linked in only a relative way to poverty. According to them, vulnerability to poverty is a concept
that should possess the characteristics described below.
First, vulnerability is an ‘ex ante’ situation concerning the risk of a potential future hardship. Thus, these
authors relate vulnerability to a prediction and indicate that the concept depends on the prediction horizon.
To develop their proposal, they opt to consider only a one-period prediction horizon. Nevertheless, Dutta
et al. (2011) maintain that vulnerability to poverty is a concept that is distinct from expected poverty.
In contrast, their key figure is the potential deficit that occurs when the welfare level falls below a
hybrid reference threshold that is determined based on both the poverty line and the individual’s initial
consumption (or income, in their explanation).
Second, similar to Povel (2010), these authors indicate that vulnerability is determined by downside
risk. That is, the concept of vulnerability relates to the risk of falling below a certain threshold and
therefore is not concerned with contingent states that generate welfare gains.
Third, and also similar to Povel (2010), these authors consider vulnerability to be a concept with
individual specificity, as each individual faces different risks. Equivalent decreases in y jt can create
different levels of vulnerability depending on the individual’s ability to manage risk. According to these
authors, the ability to manage risk depends on the initial status quo of the individual because an individual
with a higher income has a larger asset endowment and a better support network with which to protect
himself. The initial status quo is also considered to be relevant because a decrease in welfare to a level
below the poverty line generates greater losses for the individual with a higher initial welfare level.
Therefore, to evaluate vulnerability to poverty, these authors propose a hybrid threshold that includes
both the poverty line and the initial level of welfare.
Only individuals who have a non-zero probability of obtaining future states of nature below
the poverty line are considered for this measurement of vulnerability. The potential deficit of
future welfare is represented by a deprivation function, d(z, y jt , y j,t+1 ), which fulfils the three
following properties: (i) d(z, y jt , y j,t+1 ) ∈ R+ ; (ii) d(z, y jt , y j,t+1 ) is continuous in y jt , y j,t+1 and
z; and (iii) for any θ, λ > 0 and d(z, y jt , y j,t+1 ) > 0, the following inequalities are met: d(z +
θ, y jt , y j,t+1 ) > d(z, y jt , y j,t+1 ) and d(z, y jt , y j,t+1 ) > d(z, y jt , y j,t+1 + λ). The third property implies
that deprivation is greater at a higher poverty line and lower at a higher future consumption
level.

1090 GALLARDO
Given the reference threshold R(z, y jt ), which is a weighted mean of z and y jt , the deprivation function
in each state of nature is defined as d(z, y jt , y sj,t+1 ) = R(z, y jt ) − y sj,t+1 , if R(z, y jt ) > y sj,t+1 , and is equal
to zero otherwise.
It is assumed that a vulnerable individual faces the following deprivation lottery:

L jt = p1 , d z, y jt , y 1j,t+1 ; ...; p I d z, y jt , y Ij,t+1 (6)
Based on the above, the general class of vulnerability measures proposed by Dutta et al. (2011) is the
following:

I

V jt (L jt ) = ps f R(z, y jt ) − y sj,t+1 (7)
s=1
where f (.) should be a convex function to ensure that the measure satisfies an appropriate axiomatic
base.6 The class of individual vulnerability measures in (7) is general and depends on the function
f (R(z, y jt ) − y sj,t+1 ). A possible specification of this function proposed by the authors is f (R(z, y jt ) −
y sj,t+1 ) = (Az α y 1−α
jt − y sj,t+1 )γ , where γ > 1. With this specification, the index of expression (7) is
transformed into

I
γ
V jt (L jt ) = ps Az 1−α y αjt − y sj,t+1 , γ > 1 (8)
s=1
Notice that with the scale parameter A = 1, this indicator takes the form of an FGT-type expected
poverty index when α = 0 and is transformed into the Povel (2010, 2015) index when α = 1.
Given the above notation, the identification criterion of vulnerability to poverty derived from this
approach can be defined as follows:

Criterion 4. An individual j is vulnerable to poverty if, and only if, ∃y sj,t+1 < R(z, y jt ) and ∃y sj,t+1 <
z, ps > 0.
The intuition of this criterion is that to identify an individual as vulnerable to poverty, he must meet two
conditions: first, he must be at least minimally exposed to poverty one period ahead, which is given by

condition ∃y sj,t+1 < z, ps > 0 (as we have already discussed, this condition is not sufficiently restrictive);
and second, he must be exposed to experiencing a welfare drop one period ahead, which is given by the
condition ∃y sj,t+1 < R(z, y jt ).
This hybrid proposition has some strong similarities to the Povel (2010) approach. The proposal
underscores the importance of the initial welfare level as a variable related to the ability to manage risk,
and it is consistent with the reference-dependent utility theory (Kahneman and Tversky, 1979). It also
states that the downside risk has individual characteristics and emphasizes the asymmetric nature of
welfare variations linked to vulnerability.
Other virtues of this approach include its axiomatic foundations and the ordering of welfare outcomes
based on a commonly accepted criterion. Specifically, the deprivation lottery proposition is supported by
the theory of expected utility (Von Neumann and Morgenstern, 1944).
However, certain aspects of this approach may also invite criticism. The most important of these
criticisms is that, under this approach, some chronically poor individuals would not be considered
vulnerable to poverty at all. In an extreme case, there may be an individual with an initial consumption
of zero who faces a degenerated lottery in which all of his future consumptions are zero with absolute
certainty. We maintain that this individual is extremely vulnerable to poverty because he is faced with
a complete state of defencelessness, and is arguably facing a real risk of death. However, under this
approach, this individual would be considered to be poor but not vulnerable.7 This is made clear when
Dutta et al. (2011, p. 750) state ‘...we will be focusing only on individuals who have a chance of falling
into poverty in the future. Individuals whose future income in all states equals zero are not considered.
These individuals are the most deprived, but because maximum deprivation is certain vulnerability, which
essentially is about uncertainty regarding the future, this may not be a relevant issue for such individuals’.
In short, this approach focuses on the risk element that is fundamentally linked to uncertainty. The
authors do not take into account the fact that individuals who are certain to remain in poverty are also
vulnerable (arguably, they are extremely vulnerable). This is the issue to which Calvo and Dercon (2007,
p. 8) refer when they state, ‘If vulnerability is about the threat of poverty, certainty of being poor is but
a dominant, irresistible threat. The concept is not confined to those whom the winds might blow into
poverty or out from it. Vulnerability is about risk, but not only about it’.
Moreover, as the use of a hybrid threshold to identify vulnerability is not sufficiently parsimonious, it
could be difficult to implement in practice and complex to interpret for public policy purposes. Note also
that according to this approach, there would be as many reference thresholds as there are individuals in
the population. Despite that, this approach has already been applied to real data (see the work of Celidoni,
2013).
3.2 Vulnerability as Expected Poverty (VEP)

This line of research is based on the concept of risk as the expected value of suffering a fall below a
certain target threshold (Fishburn, 1977), which in this case is the poverty line.
The approach was first proposed in studies undertaken by Christiaensen and Boisvert (2000) and
Pritchett et al. (2000). In chronological order, these initial studies were followed by the works of
Chaudhuri et al. (2002), Chaudhuri and Christiaensen (2002), Kamanou and Morduch (2002), Chaudhuri
(2003), Suryahadi and Sumarto (2003) and Christiaensen and Subbarao (2005). This is perhaps the most
popular approach to vulnerability, both in the sphere of academic publications and in the methodological
documentation of some international agencies (see, e.g. the handbook of the World Bank by Haughton
and Khandker, 2009, chapter 12).
This approach follows the concept of expected poverty. Therefore, as we already explained in Subsection
2.2, they need to appeal to an additional threshold, in order to define the relevant risk that identifies those
vulnerable to poverty among the people in Group 3.
According to this approach, the vulnerability to poverty of the individual j, in period t, is defined as
the expected value of the FGT poverty index over the state of nature he faces in t + 1:8
I
z − y sj,t+1 α s
V jt = max 0, f y j,t+1 (9)
s=1
z
where α is the usual inequality aversion parameter of the FGT poverty index. Furthermore, by analogy
with conventional poverty FGT indices, for α = 1, the expression in (9) is the expected poverty gap,
whereas for α = 2, this indicator is the expected severity of poverty (see Christiaensen and Boisvert,
2000; Christiaensen and Subbarao, 2005). When α = 0, this index simply measures the probability that
the consumption will fall below the poverty line in the next period:
V jt = F(z) = Pr(
y j,t+1 ≤ z) (10)
The popularity of this approach can be explained by its potential to be easily implemented with cross-
sectional data (Chaudhuri et al., 2002; Chaudhuri and Christiaensen, 2002), which are more frequently
available in developing countries in comparison to panel data.9 However, the estimation of (9) or (10)
requires the inclusion of some strongly simplified assumptions. A probability distribution of y j,t+1 must
be assumed, which is usually a log-normal distribution. This distribution is also supposed to be the same
for all individuals in the population. Moreover, because future probability is estimated based on data
taken from the past, it must be assumed that this distribution and its parameters remain invariant in the
1092 GALLARDO
future (i.e. strong time stationarity is assumed). Additionally, the expected value and variance of the focal
variable in the current period is estimated based on a set of observable household characteristics X jt (i.e. it
is also assumed that the expected value and variance are the same for those who share the same observable
household characteristics). Considering these assumptions, the expression in (10) is transformed into:

ln z − E ln y j,t+1 X jt
V jt = (11)
σln y j,t+1 | X jt
where (·) is the Gaussian standard cumulative distribution, while E(ln y j,t+1 |X jt ) and σln y j,t+1 |X jt are the
conditional expected value and conditional standard deviations of random variable ln y j,t+1 , respectively.
Of course, as we already discussed in Subsection 2.2, the condition in (11) will not be restrictive enough
to identify the individuals vulnerable to poverty among the at risk people defined above in Group 3. Hence,
this approach appeals to a probability threshold for identifying those that are vulnerable to poverty. This
probability threshold is usually 0.5, which is justified in the following arguments provided by Pritchett
et al. (2000, p. 5) and by Suryahadi and Sumarto (2003, p. 48): ‘First, this is the point where the expected
consumption coincides with the poverty line. Second, it is intuitive to say a household is “vulnerable” if
it faces at least 50% probability of falling into poverty. Third, if a household is just at the poverty line and
faces a mean zero shock, then this household has a one period ahead vulnerability of 0.5. This implies
that, in the limit, as the time horizon goes to zero, then being “in current poverty” and being “currently
vulnerable to poverty” coincide’.10
In summary, the criterion for identifying an individual as vulnerable to poverty under this approach
can be defined as follows:
Criterion 5. An individual is vulnerable to poverty in period t if, and only if, her probability of being
poor in the period t + 1 is greater than or equal to 0.5.
The intuition for this is that only those who have a significant probability of being poor in the near future
should be considered vulnerable. Moreover, given that in a standard normal distribution (0) = 0.5, then,
the prior criterion is equivalent to the following:
Criterion 6. An individual j is vulnerable to poverty in period t if, and only if, E(ln c j,t+1 |X jt ) ≤ ln z.
Although this approach is among the most popular in the research literature, it has also been the most
criticized (Ligon and Schechter, 2002; Hoddinott and Quisumbing, 2003; Klasen and Povel, 2013; Calvo
and Dercon, 2005, 2007; Povel, 2010; Dutta et al., 2011).
Some of its limitations are apparent, such as the wide range of strong assumptions, it uses to predict the
future probability mentioned above. Another significant shortcoming of this approach is that a probability
threshold is not sensitive to risk as variability (see, e.g. Ligon and Schechter, 2002; Hoddinott and
Quisumbing, 2003). Moreover, following this vulnerability approach, we could perversely reduce the
probability of being poor in an individual by assigning her more risk. Hoddinott and Quisumbing (2003,
pp. 15–16) offer the following illustrative example of this problem: assume a scenario in which someone
is marginally below the poverty line with certainty. In a second scenario, the same person is assigned
dispersed welfare outcomes such that the expected value of her consumption remains the same, but now
she faces two states of nature: the first of being above the poverty line with a probability of 0.5, and the
other of being poor with the same probability of 0.5. If the individual is risk averse, she is worse off in
the second scenario. However, the probability of her being poor has been reduced from 1 to 0.5 owing
to the assignment of risk. Consequently, following this approach, policy makers would be incentivized to
assign more risk to some people to diminish their probability of being poor.
Figure 1 depicts a situation similar to the previous example to expand on our understanding of this
point. In the figure, the probability density of consumption for two people is represented. The data
are expressed in levels as the ratio of the poverty line z; thus, the poverty threshold equals one in the
8
Person A
Person B
Mean consumption
Poverty line
6
Density
4
2
0
0.6 0.7 0.8 0.9 1.0
Consumption in terms of poverty line

Figure 1. Consumption Distributions of Two Individuals, with the Same Mean and Different Variances.
graph. We can see that the two people have the same expected value of consumption, which is equal to
0.8. Nevertheless, Person A is better off because she has less dispersion (less variance) in her probable
consumption outcomes. However, under the approach described here, she is more vulnerable than Person
B because her probability of being poor is greater.
From our perspective, another shortcoming of this approach is that it aims to relate vulnerability to
the prediction of future poverty when actually, it only estimates or predicts current poverty (with current
information), which is conditional on a set of observable individual characteristics. Thus, it becomes
an approach of deterministic poverty. Under a time-stationary assumption, one can, of course, use this
estimate to predict future expected poverty. However, it is clear that data from the current period are more
informative with regard to the uncertainty of the present than about what will happen in the future, as
both the individual characteristics and the parameters that measure the effects of these characteristics on
consumption may vary over time.
Notwithstanding the above criticisms, this approach makes a fundamental contribution to the literature
on the subject because vulnerability to poverty is not only limited to the risk of variability in welfare
outcomes but also includes those for whom poverty is an expected outcome. The recent advances in
this approach include two useful decompositions of this vulnerability measure. The first (Celedoni,
2015) allows us to distinguish between the expected incidence, the expected intensity and the expected
variability of vulnerability to poverty. The second decomposition (Günther and Harttgen, 2009) allows us
to distinguish between the expected poverty by idiosyncratic risk and the expected poverty by covariate
risk.
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3.3 Vulnerability as Low Expected Utility (VEU)

Three approaches in this category are reviewed in this subsection. As outlined below, these approaches,
although different in their developments, share being defined by a low expected utility and measure
vulnerability in terms of utility gaps.
3.3.1 Expected Poverty Gap in Terms of Utility

This approach, proposed by Ligon and Schechter (2003), has the strength of being supported by the theory
of expected utility (Von Neumann and Morgenstern, 1944). The vulnerability measure is defined as the
difference between the utility of obtaining a reference level of consumption under certainty (e.g. as defined
by the poverty line) and the expected utility of consumption. In formal terms, individual vulnerability is
defined as follows:
V jt = U jt (z) − E[U jt (
y jt )] (12)
where U j (.) is the individual utility function in an economy where all consumers have the same preferences.
In the context of this framework, an individual is considered vulnerable when the expected utility of her
consumption is less than the utility of consuming z under certainty.
One of the advantages of this approach is its allowance of decomposing vulnerability into distinct
elements. Adding and subtracting the term U jt (E[ y jt ]) in (12), it is possible to rewrite this expression as
follows:
V jt = [U jt (z) − U jt (E[
y jt ])] + [U jt (E[
y jt ]) − E[U jt (
y jt )]] (13)
The first bracket in (13) is the expected poverty gap in terms of utility, and the second bracket is simply
the difference in the Jensen inequality as a conventional measure of risk in the sense of Rothschild and
Stiglitz (1970).
Equation (13) can be decomposed even further to distinguish between idiosyncratic risk (which only
affects agent j) and aggregate risk (which affects all agents at each moment of time). This decomposition
is achieved by adding and subtracting the term E[U jt (E[ y jt |xt ])] in the prior expression, where xt is the
centroid of observable characteristics of the population in the period t:
V jt = [U jt (z) − U jt (E[
y jt ])]

+ {U jt E y jt − E[U jt (E[
y jt |xt ])]} (14)
+ {E[U jt (E[
y jt |xt ])] − E[U jt (
y jt )]}
Now, we have the gap of expected poverty in the first bracket, idiosyncratic risk in the second bracket
and aggregate risk in the third bracket.
The estimation of this vulnerability index also requires the selection of the functional form
of U (.). Ligon and Schechter (2003) suggested using the CRRA (constant relative risk aversion)
function:
1−γ
cj
U (c j ) = ,γ > 0 (15)
1−γ
where γ is a constant risk aversion coefficient.
Based on (12), according to this approach, the identification criterion of vulnerability to poverty can
be expressed as follows:

y jt )] < U jt (z).
Criterion 7. An individual j is vulnerable to poverty if, and only if, E[U jt (
As pointed out by Dutta et al. (2011), this approach also follows the concept of expected poverty, if we
take the utility gap as a poverty measure. However, as opposed to the VEP approach, the measure in (12)
is not supported in a probability threshold, but in a more rigorous model that incorporates sensitivity to
risk. Moreover, incorporating the risk sensitivity in an expected poverty measure constitutes significant
progress in comparison with the VEP approach.
Nonetheless, this vulnerability approach has the shortcoming of having a symmetrical view of the
risk. The more recent literature on this subject (Povel, 2010; Dutta et al., 2011; Klasen and Povel, 2013;
Gallardo, 2013) stresses that the relevant risk for assessing vulnerability is fundamentally asymmetric
in nature because this phenomenon concerns the inability to exclusively manage negative (downside)
shocks. Consequently, the favourable upward deviations are irrelevant when assessing vulnerability.
Upward deviations do not cause damage, nor are they ‘threatening’ in the sense of Calvo and Dercon
(2007, p. 5). Furthermore, upward deviations do not protect people against possible decreases in their
welfare or mitigate the downside risk. That is, there is no compensation between the contingent states, as
stated by Calvo and Dercon (2013, p. 14). Therefore, upward deviations do not contribute at all to identify
vulnerability to poverty.
Another drawback of this approach is that the risk component in (13) depends on the researcher’s
specification of the utility function (more concavity implies more risk), which is assumed to be the same
for all individuals. Instead, the risk component must depend on the specific situation faced by each
individual, as pointed out by Povel (2010) and Dutta et al. (2011). Besides, individual preferences are not
necessarily the same for everyone.
3.3.2 The Threat of Poverty Approach

Calvo and Dercon (2005, 2007, 2009, 2013) have made very important contributions to the study of
vulnerability to poverty, and Calvo (2008) further extended this approach to the sphere of multidimensional
vulnerability. Notably, it was the first approach that endeavoured to construct an index of vulnerability to
poverty founded upon an axiomatic base,11 in line with the foundations of poverty measurement developed
by Sen (1976, 1979), Kakwani (1980), Foster et al. (1984) and Atkinson (1987). In addition, the authors
emphasized the use of the term ‘vulnerability to poverty’ rather than the generic term of ‘vulnerability’.
This novelty is not merely a matter of semantics. This term invokes an important distinction between
the concept of VER and another more specific type of vulnerability, namely, the threat of falling into, or
remaining in, poverty.
According to Calvo and Dercon, a measure of individual vulnerability is an assessment of the magnitude
of the threat that the individual will experience episodes of poverty in the future. Their vulnerability
measure is a function of the poverty line z and the vectors p and y jt that we previously defined in
Section 2:
V jt = v(z, p, y jt ) (16)
Calvo and Dercon (2013) base their proposal on a solid axiomatic base12 and show that the vulnerability
to poverty indicator that satisfies this foundation is the following:13
⎧
y jt ,z } θ
⎨ θ1 1 − E Min{
⎪
z
for θ < 1 ∧ θ
= 0
V jt = (17)
⎪
⎩ E ln z
{y ,z } for θ = 0
jt

1096 GALLARDO
y ,z}
)θ < 1,
Min{
where θ is a risk aversion parameter. Notice that according to (17), V jt > 0 whenever E( z
jt
for θ < 1 ∧ θ
= 0; or whenever ln(z) − E[ln(Min{ y jt , z})] > 1, for θ = 0. That is, V jt > 0 whenever
E(Min{ y jt , z})θ < z θ , for θ < 1 ∧ θ
= 0; or whenever ln(Min{ y jt , z}) < ln(z), for θ = 0.
To understand why we have classified this approach as VEU, let us to define the following utility
function: U (y jt ) = y θjt , for θ < 1 ∧ θ
= 0 or U (y jt ) = ln y jt , for θ = 0. Now, it becomes clear that the
identification criterion for vulnerability to poverty in this approach is the following:
Criterion 8. An individual j is vulnerable to poverty if, and only if, E[U jt (Min{ y jt , z})] < U jt (z), where
the utility function is defined as U (y jt ) = y θjt , for θ < 1 ∧ θ
= 0 or U (y jt ) = ln y jt , for θ = 0.
By this criterion, we observe that this approach is also based on the theory of expected utility. Moreover,
this criterion is quite similar to Criterion 7. There are, however, two important differences between these
two approaches. First, Calvo and Dercon (2013) specify a concrete utility function, which we have just
defined. More important, however, is the second difference: Criterion 8 is censored at the poverty line;
therefore, only the states of nature below the poverty line are considered relevant to the estimation of the
expected utility when measuring vulnerability. This interesting feature is based on the non-compensation
axiom, which is an original contribution of these authors. This axiom specifies that the contingent states
above the poverty line must not be considered relevant to the vulnerability assessment. Thus, these authors
assume an asymmetric perspective, at least in terms of the poverty line.
Nevertheless, Calvo and Dercon’s approach also shares some of the shortcoming that were present in
Ligon and Schechter’s approach. The individual risk is also measured through the concavity of a utility
function as defined by the researcher. The utility function here is also assumed to be the same for all
individuals. Moreover, notice that, although the focal variable is censored downside in this approach, here
the risk is also determined by Jensen’s Inequality,14 which by definition assesses the risk symmetrically.
For instance, if an individual is poor in all states of nature, when assessing his risk in this approach,
we will consider both the upward and the downward deviations from the expected utility. That is, this
approach is asymmetrical with respect to the poverty line, but it remains symmetrical in relation to the
expected value of the censored focal variable.
3.3.3 Reference-Dependence Utility Approach

Günther and Maier (2014) proposed new measures of multi-period poverty and vulnerability built on
a reference-dependent utility theory (Kahneman and Tversky, 1979). They argued that recent evidence
uncovered on an individual’s decision making has shown that the current perception of poverty status is
a function not only of the current consumption level but also of the losses and gains with respect to a
reference utility level, as, for example, in the utility of the past (e.g. Kanbur, 2001; Herrera et al., 2006;
D’Ambrosio and Frick, 2012). Thus, their viewpoint aligns with that of Dutta et al. (2011), according to
which an income drop below the poverty line will generate a greater welfare loss for an individual who
is falling from a higher income reference level.
Unlike the conventional utility function U (.), for the assessment of well-being, the reference utility
function RU (.) also includes a gain–loss component with respect to a reference point, as follows:
RU(y jt |r ) = U (y jt ) + δ(U (y jt ) − U (r )) (18)
where r is the reference point, and δ(.) is a gain–loss function. Günther and Maier (2014) offer two possible
definitions of vulnerability to poverty by incorporating the concept of reference utility into Chakravarty’s
(1983) poverty index. Recall that according to a measure proposed by Chakravarty, the poverty of the
individual j, at period t, is equal to a normalized utility gap of consuming y jt < z:
P jt = N [U (z) − U (y jt )] (19)

and zero otherwise, where the coefficient of normalization is N = 1/U (z). Then, taking current
consumption as the reference point and substituting the conventional utility function U (.) with the
reference utility function RU (.) in (19), for each probable future outcome y sj,t+1 in the state of nature s,
we can obtain a normalized per-state poverty gap in terms of reference utility, which Günther and Maier
(2014, p. 166) call ‘the per-state vulnerability’:

Vs1 y sj,t+1 , y jt , z = N RU z y jt − RU y sj,t+1 y jt (20)
which by definition (the focus axiom) will be equal to zero if y sj,t+1 ≥ z. Taking the expected value in
(20), the first way to define individual vulnerability under this approach is the following:

y j,t+1 , y jt , z) = E Vs1 = N RU z y jt − E RU
V 1 ( y j,t+1 y jt (21)
Notice that this definition takes N (RU(z|y jt )) as the vulnerability threshold. However, one can also
take the normalized reference utility of poverty line under certainty as the vulnerability threshold, arriving
at the second definition of vulnerability, as offered by these authors:

E RU y j,t+1 y jt
y j,t+1 , y jt , z) = N RU (z |z ) − E RU
V 2 ( y j,t+1 y jt =1− (22)
RU (z |z )
From (21) and (22), the following criteria are derived:
y j,t+1 |y jt )) < RU (z|y jt ).
Criterion 9. An individual j is vulnerable to poverty if, and only if, E(RU (
y j,t+1 |y jt )) < RU (z|z).
Criterion 10. An individual j is vulnerable to poverty if, and only if, E(RU (
Notice that with a gain–loss function equal to zero, Criterion 9 is equal to Criterion 7 of Ligon and
Schechter (2003), and it is similar to Criterion 8 when the utility function is defined according to Calvo
and Dercon (2013) (see Günther and Maier, 2014, p. 167).15
However, the difference between this approach and the other two in this category is substantial. The
gain–loss function can have an important role in adding value to the vulnerability measure; first, because
it acknowledges that the welfare loss associated with the risk of falling into poverty will be greater for
those who fall from a higher reference level, and second, because this function can be specified so that it
can capture the downside risk.
Nonetheless, similar to that of Dutta et al. (2011), this approach has the disadvantage of being very
general. Moreover, the vulnerability measure and the specificity of Criteria 9 and 10 will also depend on
the researcher’s decisions regarding the form of the utility and the gain–loss functions. In addition, as in
the approach of Dutta et al. (2011), here it has a hybrid vulnerability threshold, which could be difficult
to interpret in practice.
3.4 Vulnerability by Mean Risk (VMR)

The two approaches included in this category both identify vulnerable individuals according to a mean-risk
dominance criterion, although this criterion is not explicitly declared in the approach of Chiwaula et al.
(2011). Nevertheless, as we will see, both approaches identify vulnerable people based on a preference
ordering between the contingent welfare outcomes that is determined according to the expected value
and a risk parameter. In one case, the risk parameter is the standard deviation; in the other case, such a
parameter is the standard downside semi-deviation.
3.4.1 The Mean-Deviation Approach

Chiwaula et al. (2011) declare that their proposal belongs to the approach to vulnerability as the probability
of being poor. However, their proposal differentiates itself because it does not require the assumption
1098 GALLARDO
5
Person A
Person B
Mean consumption
4
Poverty line
3
Density
2
1
0
0.6 0.8 1.0 1.2

Consumption in terms of the poverty line
Figure 2. Consumption Distributions of Two Individuals, with the Same Mean and Variance But Different
Asymmetry.
of a specific probability distribution function. This approach is based only on expectation and variance
parameters. Thus, it is by definition a mean-risk-based approach.
In this proposal, the probability of being poor is calculated by taking the poverty gap as a proportion of
the interval [E(y jt ) − σy jt , E(
y jt ) + σy jt ], where σy jt is the standard deviation of y jt . Based on this, they
propose the following index for measuring vulnerability to poverty:
⎧
⎪ 0 if [E( y jt ) − σy jt ] ≥ z
⎪
⎨
Vjt = Pr ( yjt ≤ z) = z− E(yjt )−σyjt if [E( y jt ) − σyjt ] < z < [E(
yjt ) + σyjt ] (23)
⎪
⎪ 2σyjt
⎩
1 if [E( yjt ) + σyjt ] ≤ z
Thus, the identification criterion deduced from this expression is as follows:
y jt ) − σy jt < z.
Criterion 11. An individual is vulnerable to poverty if, and only if, E(
Using the standard deviation as an aggregate measure of risk, this approach thereby distances itself
from the concepts of risk that depend on the researcher’s decision regarding the form of a utility function.
The standard deviation is an understandable, simple to calculate measure of risk, and it is specific to each
individual.
However, this measure has the drawback of maintaining a symmetrical view of risk, which
is questionable because the distributions of welfare probability in households are not necessarily
symmetrical. Two households that have the same expected value and the same variance of consumption
can have different levels of exposure to downside risk because they can have different asymmetries in
their respective probability density functions. This concept is illustrated in Figure 2. In this figure, the
probability densities of the consumption outcomes for two people are represented. As in Figure 1, the
data are expressed in levels as ratios of the poverty line. In this example, both people have the same
consumption mean and the same variance, but their probability distributions have different asymmetries.
Person A faces greater downside risk (greater left-skewed asymmetry) and therefore she is in a worse
situation. Notice that the measure of Chiwaula et al. (2011) is sensitive to variability but not to asymmetry;
thus, it is not able to rationally order the welfare of the two individuals depicted in this example when
they are averse to downside risk.
In the financial literature, the concept of risk has evolved significantly, moving in the direction of
considering not only the dispersion but also the asymmetry of the contingent outcomes as relevant. The
use of variance as a measure of risk was first questioned by Markowitz (1959) and then later criticized in
the context of the development of asymmetric Capital Asset Pricing Model-CAPM (Hogan and Warren,
1974; Bawa and Linderberg, 1977; Harlow and Rao 1989; Estrada, 2002). The primary argument behind
these criticisms is that agents are not generally averse to variability per se; rather, they are only averse to
downside dispersion. Other risk measures that are more sensitive to asymmetry have been proposed in
the portfolio theory literature (for a summary, see Roman and Mitra, 2009).
3.4.2 The Downside Mean-Semi-Deviation Approach

Gallardo (2013) proposes a vulnerability to poverty approach that is based on the mean-risk dominance
criterion and uses the downside mean semi-deviation as the risk parameter.
The informational structure of this approach is as follows: the researcher does not know the probability
distribution of
y jt . However, she can reasonably estimate its expected value E( y jt ) and its downside
mean semi-deviation σ jt− . The latter represents the risk that
y jt deviates below E(
y jt ), according to the
following formulation:

σjt− = E Min[( yjt − E(yjt )), 0]2 (24)
Assuming preferences will satisfy local non-satiation and risk aversion, the following mean-risk
dominance relation holds among any pair of random variables y jt ,
ykt (where denotes the strict
preference relation):

y jt
ykt ⇔ E( ykt ) ∧ σ jt− ≤ σkt−
y jt ) ≥ E( (25)
with at least one strict inequality. It is also assumed that the political authority defines a social valuation
between the mean and risk through the trade-off coefficient γ ∈ (0, 1]. Then, according to Ogryczak and
Ruszczynski (1999, p. 15), this trade-off coefficient will allow for any pair of random variables y jt ,
ykt to
be compared by mean-risk dominance in the following manner, which in addition is consistent with the
second-order stochastic dominance criterion:

y jt
ykt ⇔ E(
y jt ) − γ r jt > E(
ykt ) − γ rkt (26)
This rational ordering of welfare outcomes under uncertainty yields the following identification criterion
(Gallardo, 2013, p. 417):
y jt ) − γ σ jt− ≤ z, for γ ∈ (0, 1].
Criterion 12. An individual j is vulnerable to poverty if, and only if, E(
Among the advantages of this approach, the following stand out: it is simple, it requires estimating only
two parameters and it is sensitive to asymmetric risk. This last advantage is noteworthy because it means
that, unlike other vulnerability approaches, this approach has the ability to rationally compare situations
such as the one provided in the example in Figure 2.
However, this approach requires a selection for the value of parameter γ . Gallardo (2013) maintains
that γ should be reasonably valued in the interval (0, 1], assuming that the political authority is risk
averse, which gives us γ > 0. In addition, assuming that the gains in the expected welfare outcomes
should be at least as preferable as avoiding losses due to risk, we obtain γ ≤ 1. Even with this condition,
1100 GALLARDO
the vulnerability threshold still depends on a certain arbitrariness and is subject to the will of the policy
maker. Furthermore, the definition of a unique γ implies the omission of the fact that risk aversion can be
different for different individuals and may also depend on the level of E(y jt ). One might also ask whether
the relationship between the mean and risk must be linear, as in (26), or whether it could possibly adopt
non-linear forms.
4. Conclusions
This paper has presented and discussed the problem of identifying vulnerability to poverty based on the
existing literature. The concept of vulnerability has been distinguished from other related concepts, such
as the expectation of being poor, expected poverty, multi-period poverty and exposure to risk.
It is concluded that, according to the current state of the art, the two elements that stand out for
identifying individuals that are vulnerable to poverty are (i) having an expected well-being below the
poverty line, and (ii) having a relevant risk of falling into poverty due to deviations of well-being below
a reference level (expected value or current welfare).
The relevant risk of exposure to poverty, for people whose expected consumption is above the poverty
line, has been assessed differently in the literature. This is the key point in defining a vulnerability
threshold, for which there is currently no agreement.
The approaches of vulnerability to poverty can be divided, up to the present, into four groups: (i) those
that stress the element of exposure to risk; (ii) those that emphasize the element of expected poverty;
(iii) those that define vulnerability through a utility gap and (iv) those that are supported by a mean-risk
dominance criterion.
The primary contribution of this paper has been to offer an analysis of the state of the art in
the conceptualization of vulnerability to poverty. A synthesis of the key elements of the approaches
to identifying vulnerable individuals has been provided in order to further our understanding of this
phenomenon.
Acknowledgements
A previous version of this paper was written in partial fulfillment of the requirements to qualify for the title of
Doctor in Economics at the Economics Faculty from the Universidad Nacional de La Plata, Argentina. The
author acknowledges for all the comments and suggestions of four anonymous referees of this journal.
Notes
1. As it is known, consumption must be considered a better variable for measuring vulnerability than
current income, as the latter demonstrates greater variability and therefore overstates the extent of
the risk (see Jalan and Ravallion, 1999). Of course, we are aware that when there is no data available
on consumption expenditure, vulnerability and poverty could be approximated using the data on
income.
2. We are aware that given the difficulty of empirically distinguishing the consumption of each person
inside the household, in current practice, individual consumption should be measured through
the equivalent of household consumption per adult. However, ‘the standard apparatus of welfare
economics and welfare measurement concerns the well-being of individuals’ (Deaton, 1997, p. 25).
3. There is also a concept of multi-period vulnerability, not covered in this work, which is referenced
in various periods of time but looking forward (e.g. Pritchett et al., 2000; McCuloch and Calandrino,
2003).
4. These conditions are the following: (i) the individual welfare function is quasi-concave both in its
constant argument and in its random argument (the risk component); (ii) this function is concave in
its risk component and (iii) the poverty line is less than the mode of distribution of the welfare index.
5. See also Klasen and Povel (2013).
6. For details on this axiomatic base, see Dutta et al. (2011).
7. Such an individual would not be considered vulnerable, according to Povel (2010).
8. Pritchett et al. (2000) propose a variant of this approach considering a time horizon spanning multiple
periods in the future.
9. This approach has also been estimated with pseudo panel empirical strategies. See, for instance,
Christiaensen and Subbarao (2005), Bourguignon et al. (2004) and Dang et al. (2014).
10. The first argument belongs to Suryahadi and Sumarto (2003, p. 48), while the other two arguments
were provided by Pritchett et al. (2000, p. 5).
11. This axiomatic base can be found in the works of Calvo and Dercon (2005, 2007); thus, they presented
such an approach before Dutta et al. (2011).
12. For details, see Calvo and Dercon (2013).
13. In Calvo and Dercon (2007), the following specific version of (17) was proposed: V j = 1 −
Min{y ,z}
E( z j )θ , θ ∈ (0, 1).
14. Here, Jensen’s Inequality takes the following form: U jt [E(Min{ y jt , z})] ≥ E[U jt (Min{
y jt , z})].
15. The difference will be that in Criterion 7, the focal variable is previously censored.
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IDENTIFYING VULNERABILITY TO POVERTY: A CRITICAL SURVEY

Article in Journal of Economic Surveys · June 2017

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IDENTIFYING VULNERABILITY TO POVERTY:

Journal of Economic Surveys (2018) Vol. 32, No. 4, pp. 1074–1105

2.1 The Concept of Vulnerability to Poverty

indicates a strict preference relation). By contrast, vulnerability to poverty is a phenomenon related to an

2.2 Some Related Concepts

2.2.1 Expectation of Being Poor

2.2.2 Expected Poverty

2.2.3 Multi-Period Poverty

2.2.4 Exposure to Risk

3. Vulnerability Approaches and Classification

3.1 Vulnerability as Exposure to Risk (VER)

C 2017 John Wiley & Sons Ltd.

Journal of Economic Surveys (2018) Vol. 32, No. 4, pp. 1074–1105

with hybrid threshold z

C 2017 John Wiley & Sons Ltd.

Journal of Economic Surveys (2018) Vol. 32, No. 4, pp. 1074–1105

Journal of Economic Surveys (2018) Vol. 32, No. 4, pp. 1074–1105

3.1.2 Extended Poverty Line Approach

Criterion 2. An individual is defined as vulnerable to poverty if, and only if, y jt ≤ z + η jt .

3.1.3 Vulnerability as Exposure to Downside Risk

3.1.4 Exposure to Downside Risk with Hybrid Threshold

3.2 Vulnerability as Expected Poverty (VEP)

0.6 0.7 0.8 0.9 1.0

Consumption in terms of poverty line

3.3 Vulnerability as Low Expected Utility (VEU)

3.3.1 Expected Poverty Gap in Terms of Utility

Journal of Economic Surveys (2018) Vol. 32, No. 4, pp. 1074–1105

3.3.2 The Threat of Poverty Approach

Journal of Economic Surveys (2018) Vol. 32, No. 4, pp. 1074–1105

3.3.3 Reference-Dependence Utility Approach

Journal of Economic Surveys (2018) Vol. 32, No. 4, pp. 1074–1105

3.4 Vulnerability by Mean Risk (VMR)

3.4.1 The Mean-Deviation Approach

0.6 0.8 1.0 1.2

3.4.2 The Downside Mean-Semi-Deviation Approach

Journal of Economic Surveys (2018) Vol. 32, No. 4, pp. 1074–1105

Journal of Economic Surveys (2018) Vol. 32, No. 4, pp. 1074–1105

Journal of Economic Surveys (2018) Vol. 32, No. 4, pp. 1074–1105

Journal of Economic Surveys (2018) Vol. 32, No. 4, pp. 1074–1105

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