Poverty Reduction in Lao PDR

3.1 Issues in poverty measurement

Six kinds of issues are involved in quantitative measurement of poverty incidence over time.

1. Are we discussing absolute or relative poverty? Measures of ‘absolute poverty’ relate to that part of the population whose incomes (or expenditures) fall below a given level (the poverty line) whose value is held fixed in real purchasing power over time and across social groups. ‘Relative poverty’ means inequality, and to avoid confusion it is probably better to use that term. It compares the incomes (or expenditures) of the poor with those of the rich, or some other reference group. The two concepts are different because the overall size of the economic pie may change at the same time as its distribution is changing. Not surprisingly, when the overall size of the economic pie is changing significantly, measures of absolute poverty and inequality do not necessarily move together and may not even change in the same direction. In this paper, ‘poverty’ will mean absolute poverty incidence.
2. What variable is used for the calculations of poverty incidence? In Lao PDR, real expenditures per person are used, and this practice is followed in this paper. Use of expenditures is more consistent with economic theory than the common alternative, real incomes per person, in that expenditures are more directly related to household welfare than incomes. Other countries using expenditures include Indonesia, Viet Nam, Cambodia, India and PRC, while Thailand, Malaysia and the Philippines use real incomes per household member, adjusted for the gender and age distribution of the household. The distinction between income-based and expenditure-based measures of poverty is especially important when we are considering the impact on poverty of a short term reduction (or increase) in incomes. The recent Asian financial crisis provides a good example.
3. What is the poverty measure? Most studies of poverty focus on the headcount measure of absolute poverty incidence, which means the proportion of the population whose incomes fall below a given threshold, held constant in real terms over time and across regions. At a conceptual level, this measure has the disadvantage that changes in it are due mainly to changes in the living conditions of members of the population with incomes or expenditures close to the poverty line. Other measures of absolute poverty incidence lacking this disadvantage have been calculated from time to time, such as the poverty gap and poverty gap squared measures, but are normally highly correlated with the headcount measure. Concentration on the headcount measure therefore seems warranted and it will be used in this paper.
4. What data source is used for the calculations? Household level survey data are essential, but the statistical design and frequency of these surveys varies between countries. For example, in Lao PDR the Lao Expenditure and Consumption Survey (LECS) conducted by the government's National Statistical Centre (NSC) provides virtually the sole source of reliable information at the household level that can be compared over time. This survey was conducted in 1992-93 (LECS 1), then in 1997-98 (LECS 2) and again in 2002-03 (LECS 3).
5. How is the base level of the poverty line determined? Some concept of the minimum level of income or expenditure per person must be established for a household to be classified as non-poor. Although studies of poverty measurement often give great attention to this matter, drawing upon studies of minimum nutritional requirements and so forth, the level of this poverty line is essentially arbitrary.
6. What is the poverty line deflator? This involves the way the poverty line is adjusted over time to keep its real purchasing power constant. Although this may seem a minor technical matter, it is a central issue for poverty measurement over time and across regions where consumer prices vary. Empirical studies of poverty incidence differ in their handling of this issue. The ideal deflator uses the actual expenditure pattern of the poor to weight price changes at the commodity level. This deflator may, at times, behave differently from the overall consumer price index, which reflects ‘average’ expenditure patterns. But many studies use arbitrary baskets of goods and services in constructing the poverty line deflator. A common mistake is to confuse the determination of the base level of the poverty line with the determination of the appropriate cost of living deflator.

- The base level of the poverty line means the level of the poverty line in, say, 1997-98 prices, that distinguishes between poor and non-poor households in that year. Its determination usually involves judgments on the amount of food and non-food expenditures people ‘need’ to be non-poor. Inevitably, this involves arbitrariness. It entails constructing a bundle of goods and services that are ‘needed’ and then costing that bundle to give a minimum level of expenditure required to be non-poor. The composition of this bundle may differ considerably from the bundles actually consumed by households with that level of actual expenditure. This paper takes the poverty lines from the World Bank (Richter 2004).

- The poverty line deflator involves the way this amount of expenditure in 1997-98 prices (the 1997-98 poverty line) is adjusted to give the poverty line in, say 2002-03 prices. The composition of the appropriate deflator is the actual consumption shares of the poor, rather than the (arbitrarily chosen) composition of the poverty line. This paper uses provincial consumer price index data to deflate real expenditures, with the level of these indices in December 1999 normalized at 100 (Figure 9 [ PDF 135.5KB | 1 page ]).

3.2 Data on poverty and inequality

Available data on poverty incidence and inequality in Lao PDR are shown in Figure 10 [ PDF 131.7KB | 1 page ]. For comparison, data for three neighboring Southeast Asian countries – Cambodia, Viet Nam and Thailand – are summarized in Figure 11 [ PDF 131.1KB | 1 page ], Figure 12 [ PDF 131KB | 1 page ], and Figure 13 [ PDF 134.3KB | 1 page ]. The data for Lao PDR are repeated in Table 1 [ PDF 90.6KB | 1 page ]. In each case, the data are based on national household surveys conducted by the national statistical agencies of the countries concerned, converted to a constant real value of the poverty line. In the case of Lao PDR, Cambodia and Viet Nam the calculations shown are those reported by the World Bank.

It should be noted that the poverty incidence data for Lao PDR, Cambodia and Viet Nam are based on comparisons of household expenditures with an official poverty line adjusted over time to hold real purchasing power constant. The data for Thailand (as with Malaysia and the Philippines) are based on comparisons of household incomes with such a poverty line. This difference could introduce some inconsistencies and may partly explain the much higher level of measured inequality in Thailand. In addition, the real purchasing powers of the poverty lines used in each of the four countries are different. Even if the distributions of real incomes (expenditures) in the four countries were the same, which they are not, this would mean that the poverty lines would relate to different points on these distributions.

According to these data, over a 10 year period poverty incidence in Lao PDR declined from 46 per cent to 31 per cent of the population, that is, by 1.5 per cent of the population per year. This compares favorably with Cambodia (0.5 per cent decline per year) and is similar to Thailand (1.6 per cent per year over the 30 years for which data are available), but is less than Viet Nam’s reported rate of decline (roughly 3 per cent of the population per year over the 6 years for which data are available). The Lao rate of poverty reduction is clearly encouraging. Sustaining it over an extended period will reduce poverty incidence to very low levels.

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Comment(s)

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1. Ahmad Raza Khan
   (posted 28 November 2008 / 02:15:56 PM)
   
   It is very impressive and one can learn from the report and implement these findings in our own country. I am from Pakistan where the major portion of population lives in rural areas. The road network in Pakistan is not impressive especially in rural areas the situation is even more worse.
   by building road infrastructure and improving the alread existing , we can change the lives of people.
   
2. Arounyadeth
   (posted 22 October 2008 / 08:38:37 PM)
   
   Road is very important for development in Laos as many studies suggested. However, the project from ADB or other donors mostly concentrate on East-West road network. So far, North-South road network has been mostly untapped, except some maintenance project for route 13. However, the study on direct link road from North-South should be studied, because North-South regions hold comparative advantages, which they could trade to each other, e.g. livestock and paddy. I really hope that there will be more studying on this matter.
3. Karel Martens
   (posted 29 June 2007 / 05:44:52 PM)
   
   It is important to note that roads will only alleviate poverty if it goes together with a transport service that is accessible for the poor. The expectation that roads alleviate poverty is based on the assumption that some form of para-transit will be available to travel with or without goods.
   In current circumstances, such services will most likely be provided by the market. However, as affluence increases, so will car ownership, and the same roads build to alleviate poverty, may become instruments to increase the gaps between those with and those without cars.
   it is therefore important to stress what is alleviating poverty: not the roads as such but the transport service it provides to the poor. By focusing on the transport service rather than roads the proper link between poverty alleviation and accessibility is made.