Chapter
Vulnerability to Poverty
Summary Between one year and the next, many people move into or out of poverty. Thus measures of who is poor now are imperfect guides to who will be poor next year, yet it is the latter that is relevant for public policies that aim to reduce poverty. The solution is to identify those who are vulnerable to poverty—that is, who have a significant probability of being poor next year. People are highly vulnerable if they have more than an even chance of being poor in the next period, and moderately vulnerable if they are more likely than the typical person to be poor next year. Vulnerability can only be quantified by making some simplifying assumptions. With an estimation of expected consumption per capita (E(ct+1)), its variance (Ďƒ2), and the poverty line (z), and assuming that consumption per capita (or its log) is normally distributed, it is straightforward to estimate the probability that a household will be poor (vht) and so to determine whether the household may be considered to be vulnerable or not. Vulnerability to poverty is due to either low expected consumption or high variability in consumption. A measure of E(ct+1) is typically found by estimating a regression model of ct and using it to predict ct+1. The variance is best estimated using longitudinal or panel data; however, because such data are rare, variance is often inferred from crosssectional variation instead. Unfortunately, this misses the effects of unusual economywide shocks such as the Asian financial crisis of 1997. Studies of vulnerability typically find that the proportion of people who are vulnerable to poverty substantially exceeds the proportion who are currently poor. One implication is that this makes targeting more difficult. 231
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