Poverty Impact Analysis

Krishna Prasad Pant, Ph D

 What is Poverty?
• State of one who lacks a usual or socially acceptable
amount of money or material possessions
• Deprivation of minimum essential assets and
opportunities to which every human being is entitled
– Characterized by low skill, illiteracy, unemployment, working in
low-productive sectors, located in underdeveloped regions, or
belonging to certain ethnic groups.
• Poverty is a denial of choices and opportunities for living
a tolerable life (UNDP, 1997: 2; Vizard, 2001)
Poverty as a concept
Amartya Sen’s capability approach:
A person’s freedom or opportunities to achieve well-being.
Poverty: low levels of capability.
Sen: “the failure of basic capabilities to reach certain
minimally acceptable levels”.
Basic capabilities: being adequately nourished, clothed and
sheltered, avoiding preventable morbidity, taking part in
the life of a community and being able to appear in public
with dignity.
Poverty as a broad concept:

• Inadequate command over economic resources

(work generated income)
• Insufficient command over publicly provided
goods and services (housing, health, education)
• Inadequate command over or access to resources
that are made available through formal and
informal networks of support (social security and
social assistance)
 Pro-poor growth

• Growth is pro-poor when

– it is labor absorbing and
– accompanied by policies and programs that mitigate
inequalities and facilitate income and employment
generation for the poor, particularly women and other
traditionally excluded groups (ADB 2004).
• MDGs for poverty reduction
 Distribution and Poverty Impact Analysis
1. Distribution
– Distribution of project net benefits setting out the
effects of a project for the groups that gain or lose.
2. PIA
– The proportion of each group’s gains or loses that
goes to the poor is estimated.
 Distribution analysis
• Distribution analysis shows how the benefits and
costs of a proposed project will be distributed
among stakeholder groups, including the poor.
• Provides information on how different groups
affected by a project stand to gain or lose when
the project is implemented.
 Poverty Impact Analysis
• Examine whether a project or program has
generated the intended effects on the targeted
low-income group.
• For a pro-poor project, this means answering the
question of whether the project really benefits the
poor.
 7 Steps in Distribution and Poverty Impact Analysis
• Distribution Analysis
• Step 1. Set out the annual financial data on the project showing
– Inflows (revenue and loan receipts), and
– outflows (investment, operating costs, loan interest and principal
payments, and tax both on profits and purchased inputs)
– Also called return to equity calculation at constant prices
• Step 2. Discount each annual inflow and outflow to derive present
values for each category and a NPV.
– The financial NPV shows income change for the project owners.
– Gain to the govt from tax payments
– If subsidized loan is provided a loss to lenders
 Steps in Distribution and Poverty Impact Analysis

• Step 3. Identify the economic value to be used for each

project input/output category.
– The ratio between this economic value and the financial price for
actual transactions is the conversion factor (CF) for the item
concerned
– Normally for distribution analysis it is simpler to conduct economic
appraisals in the domestic price numeraire
• This means that income from the financial and economic
calculations will then be in the same price units.
– Note: If a world price numeraire is required for the economic
calculations, to carry out a consistent distribution analysis, all
financial data from steps 1 and 2 must be converted to world prices
by multiplication by the standard conversion factor (SCF).
 Steps in Distribution and Poverty Impact Analysis

• Step 4. Express all project items in economic terms.

– Apply CFs to revalue the financial data from step 1.
• If CFs are taken as constant over the project’s life, only the present value
figures at step 2 need to be adjusted.
– For the items for which there is no financial value at step 1 (eg on
environmental costs for which a project itself is not charged), their
economic value, wherever estimated, should be entered directly in the
economic benefits flows.
• In practice, where project analyst did not foresee the need for distribution
analysis and has done the conventional economic analysis first, as would be
the case for most project preparations prior to the wider application of
distribution analysis, the analyst could work backward to arrive at financial
benefit and cost streams using CF and transfer payment.
 Steps in Distribution and Poverty Impact Analysis

• Step 5. Allocate any difference between financial and economic

values to particular groups.
• These plus the changes for project owners and others at step 2 give
the net benefits created by the project.
• The net benefit to different groups must sum to the economic NPV
of the project, since this measure the total net benefits of the
project.
 Steps in Distribution and Poverty Impact Analysis
• Poverty Impact Analysis
• Step 6. Estimate for each group affected by a project the proportion
of net benefits that will go to those below the poverty line.
– Groups involved will vary between projects but will typically include
consumers, workers, producers, government and the rest of the economy.
• For the govt what is required is an estimate of the counterfactual
(i.e. what proportion of govt expenditure diverted from other uses by the project under
consideration would have otherwise benefited the poor)
• If the project generates govt income a proportion of this will create
benefits for the poor, which will be indirectly caused by the project
concerned.
 Steps in Distribution and Poverty Impact Analysis

• Step 7. Finally, sum all net benefits going to the poor and divide by
the total net benefits (economic NPV).
• The result is termed as the Poverty Impact Ratio (PIR)
 Caution on the Interpretation of PIR
• PIR is not a summary indicator for PIA.
• It is a proportion of NPV accruing to the poor against the total
project NPV.
• PIR does not inform poverty impact ranking or efficiency of
poverty reduction among alternative projects designs.
• A project should maximize NPV going to the poor (absolute
poverty impact) or the NPV going to the project cost (efficiency of
poverty impact) not PIR.
• While PIR is superior to headcount, PIR is usually sensitive to
assumptions which are uncertain. Sensitivity tests are therefore
recommended with respect to uncertain parameters.
 Methodology for Conducting PIA
• Quantitative Methods.
• analytically more thorough than qualitative methods and can facilitate project
impact comparison.
• the most accurate quantitative method is the experimental design, in which the
program beneficiaries are randomly assessed.
• can answer questions of impact with and without the intervention, as well as impact
before and after the project.
Other quantitative methods: nonrandomized designs--matching methods or
constructed controls, double difference, instrumental variables and reflexive
comparison.
• Qualitative/ participatory Methods
• Provide critical insights into beneficiaries’ perspectives, the value of programs to
beneficiaries, the processes that may have affected outcomes, and a deeper
interpretation of results observed in quantitative analysis.
 Five different PIA tools of ADB
• Poverty predictor modeling (PPM)
– for identifying the poor at the household level using household survey data;
• Poverty mapping
– For identifying the poor over geographical areas or developing poverty indicators at
lower-level administrative regions that cannot be produced using household survey
data;
• CGE modeling
– for assessing the economy-wide effects and distributional implications of wide-ranging
issues on the economy with representative household groups (RHGs);
• CGE-microsimulation modeling
– for conducting assessments such as those in CGE modeling but with a complete
household data set instead; and
• Poverty reduction integrated simulation model (PRISM)
– which is essentially an integration of CGE-microsimulation and poverty mapping with
its dynamic, interactive, and user-friendly geographic information system (GIS).
 Problems with Poverty Impact Analysis (1/2)

1. There is no comprehensive PIA of any project which can be used as an example

on how PIAs should be conducted.
– Main reason for the lack of a comprehensive evaluation—defined here to include cost-
benefit, monitoring, process, and impact evaluations—is the difficulty in conducting such
evaluation (Baker 2000).
2. Problem 1: Getting the key stakeholders to agree to actually implement the
comprehensive evaluation
3. Problem 2: PIA is technically very complex and difficult, especially in identifying
a project’s beneficiaries and actual impact.
4. Problem 3: More difficult tasks of isolating and measuring the actual impact,
which should be attributed only to the project and free from biases due to
selection of participants or other factors.
5. The biases may arise from observable or unobservable factors, spillover effects,
and data and measurements (Ravallion 2005).
 Problems with Poverty Impact Analysis (2/2)
1. PIAs is costly and time consuming, which may not be consistent with the main purpose of the
project since the money spent for conducting PIAs could be used to further help the poor.
2. PIA results can be politically sensitive, especially if the results turn out to be negative.
3. Comparison group necessary for PIA, there might be compelling ethical objections for
excluding an equally needy group such as the elderly, malnourished, unemployed, and
uneducated from participating in a program under evaluation.
4. There is always a timing issue—whether PIA should be conducted ex ante, ex post, or at both
junctures.
5. Regarding methodology, there is the difficult task of answering questions of “with” and
“without” as well as “before” and “after” the project. Counterfactual is intrinsically
unobserved since it is physically impossible to observe someone in two conditions at the
same time, i.e., participating and not participating (Ravallion 2005).
6. There is no single method that dominates others, thus, anyone designing policy-relevant
evaluations should be open minded about methodology, including the use of quantitative or
qualitative methods, or both (Baker 2000, Ravallion 2005).
7. Whatever approach and methodology are used, there is an issue on the availability and
quality of data necessary for conducting a PIA.
 Key Issues in Poverty Impact Analysis

• PIA should be unique, depending on the main purpose of the project or

program, data availability, local capacity, budget constraints, and time frame.
• PIA should be made part of a comprehensive evaluation, which includes cost-
benefit, monitoring, process, and impact evaluations (Baker 2000, Bourguignon
and Pereira da Silva 2003a). PIA can also be a part of other impact assessments
such as economic and environmental assessments.
• PIA should occur at strategic junctures of and follow closely a program’s life
cycle—ex ante, mid-term, terminal, and ex post. PIA should ideally begin at
the earliest stage of project design and continue through the disbursement
cycle and beyond ( JICA 2004). The best ex post evaluations should be designed
ex ante, often side by side with program implementation (Ravallion 2005).
• PIA should include sensitivity and risk analyses to enhance project quality at
entry.
 Poverty measure

• Headcount index (P0) measures the proportion of the population that

is poor. It is popular because it is easy to understand and measure. But
it does not indicate how poor the poor are.

Np number of the
poor, N total
population

Here, I(·) is an indicator function that takes on a value of 1 if the

bracketed expression is true, and 0 otherwise.
So if expenditure (yi) is less than the poverty line (z), then I(·) equals 1
and the household would be counted as poor.
For z=Rs 14,430 per capita per year, P0= 25.2%
 Poverty measure
Poverty gap index (P1) measures the extent to which individuals fall below the
poverty line (the poverty gaps) as a proportion of the poverty line. The sum of these
poverty gaps gives the minimum cost of eliminating poverty, if transfers were
perfectly targeted. The measure does not reflect changes in inequality among the
poor.

Poverty gap (Gi) is the poverty line (z) less actual income (yi) for poor
individuals; the gap is considered to be zero for everyone else.

Using the index function

Poverty gap index (P1)

 Poverty measure

• Squared poverty gap (“poverty severity”) index (P2) averages the

squares of the poverty gaps relative to the poverty line. It is one of the
Foster-Greer-Thorbecke (FGT) class of poverty measures that may be
written as

where , α is a parameter;
N is the size of the sample, when α is larger than 1, the index puts
z is the poverty line, more weight on the position of the
Gi is the poverty gap and poorest.
When α=0, P0
α=1, P1
α=2, P2
 Sen-Shorrocks-Thon index
PSST is the product of the headcount index (P0), the poverty gap
index (P1), and a term with the Gini coefficient of the poverty gap
ratios. Great inequality in the incidence of poverty gaps.

• where P0 is the headcount index,

• P1P is the poverty gap index for the poor only,
• GP is the Gini index for the poverty gaps for the whole population.
• This measure allows one to decompose poverty into three components
and to ask:
– Are there more poor?
– Are the poor poorer?
– And is there higher inequality among the poor?
 Gini Index
• A measurement of the income distribution
of a country's residents.
• Gini Index ranges between 0 and 1 and is
based on net income, helps define the gap
between the rich and the poor, with 0
representing perfect equality and 1
representing perfect inequality.
 Millennium Development Goals

• UN Millennium Summit (2000) adopted the MDGs that enshrine

poverty reduction as the overarching objective of development.
• MDGs (http://mdgs.un.org/unsd/mdg/Data.aspx).
1. eradicate extreme poverty and hunger,
2. achieve universal primary education,
3. promote gender equality,
4. reduce child mortality,
5. improve maternal health,
6. combat HIV/AIDS and malaria,
7. provide access to safe water, and
8. ensure environmental sustainability
• Poverty reduction has become the ultimate goal of many
institutions and governments
 Goal 1: Eradicate extreme poverty and hunger
Goals and Targets Indicators for monitoring progress
Target 1.A: Halve, between 1990 1.1 Proportion of population below $1 (PPP) per day
and 2015, the proportion of 1.2 Poverty gap ratio
people whose income is less than 1.3 Share of poorest quintile in national consumption
$1 a day
Target 1.B: Achieve full and 1.4 Growth rate of GDP per person employed
productive employment and 1.5 Employment-to-population ratio
decent work for all, including 1.6 Prop of employed living below $1 (PPP) per day
women and young people 1.7 Proportion of own-account and contributing
family workers in total employment
Target 1.C: Halve, between 1990 1.8 Prevalence of underweight children under-five
and 2015, the proportion of years of age
people who suffer from hunger 1.9 Prop of population below minimum level of dietary
energy consumption
 Conclusions
• Poverty is a denial of choices and opportunities for living a
tolerable life
• MDG 1 is to eradicate extreme poverty and hunger
• Distribution analysis shows how the benefits and costs of a
proposed project will be distributed among stakeholder
groups, including the poor.
• Poverty Impact Analysis examines whether a project or
program has generated the intended effects on the targeted
low-income group.
• Five PIA tools are developed by ADB
 Case Studies
1. Social Cost-Benefit Analysis of Delhi Metro
– M N Murty, Kishore Kumar Dhavala, Meenakshi Ghosh
and Rashmi Singh
2. Guidelines for Conducting Extended Cost-benefit
Analysis of Dam Projects in Thailand
– Piyaluk Chutubtim
3. Cost-benefit analysis of measures for vulnerable
road users, Public P r o m i s i n g
 Case Studies on Externality in CBA

1. Raju, Sudhakar 2008 Project NPV, Positive Externalities, Social

Cost-Benefit Analysis— The Kansas City Light Rail Project, Journal
of Public Transportation, Vol. 11, No. 4.
2. European Commission, 2000 A Study on the Economic Valuation
of Environmental Externalities from Landfill Disposal and
Incineration of Waste, DG Environment
3. Liu, Wen-Fang and Turnovsky, Stephen J. 2003 Consumption
Externalities, Production Externalities, and Long-run
Macroeconomic Efficiency., University of Washington, Seattle