Foster Greer Index

INSTITUTE OF ACCOUNTANCY ARUSHA (IAA)

INDIVIDUAL ASSIGNMENT
PROGRAM: BACHELOR IN ECONOMICS AND FINANCE
MODULE: DEVELOPMENT ECONOMICS
MODULE CODE: EFU 07421
SEMESTER: IV
YEAR: 2012/13
DUE DATE: 18th JUNE, 2013
MODULE FACILITATOR: WILLSON G. MTETI
PARTICIPANTS:
PETER, ALBERTO | BEF/0142/T.2011 | 0764654962 | [e-mail] | ANGELLO, VALERIUS R. | BEF/0126/T.2011 | 0718027959 | [e-mail] | MSECHU, JERRY F. | BEF/0111/T.2011 | 0713298717 | [e-mail] | KIPESHA, MANSWETUS | BEF/0141/T.2011 | 0762561701 | [e-mail] |
Question 3: Discuss The Foster Greer- Thorbecke Index as a method of measuring poverty.
Table of Contents 1 INTRODUCTION 2 1.1 POVERTY 2 1.2 CATEGORIES OF POVERTY 3 1.2.1 The absolute poverty standard 3 1.2.2 Measuring Absolute Poverty 4 1.3 Relative poverty standard: 4 1.3.1 Persistent poverty 4 1.3.2 Fighting poverty 4 1.4 CRITERIA FOR DESIRABLE POVERTY MEASURE 5 1.4.1 The anonymity principle 5 1.4.2 The population independence principle 6 1.4.3 The monotonicity principle 6 1.4.4 The distributional sensitivity principle 6 2 THE FOSTER, GREER and Thorbecke (FGT) Index 6 2.1 Poverty Indices (Planning): 7 2.1.1 Incidence of poverty 7 2.1.2 Intensity of poverty 7 2.1.3 Inequality of poverty 8 2.2 Advantages for class of poverty measures 9 3 APPLICABILITY 9 4 Conclusions 11 Measures of poverty reduction 11 4.1.1 Controlling overpopulation 11 4.1.2 Increasing personal income 11 4.1.3 Cultural factors to productivity; 11 4.1.4 Removing constraints on government services; 11 5 RECOMENDATIONS 12 6 REFERENCES 13

INTRODUCTION
POVERTY
According to The Scottish Poverty Information Unit (Information), “Poverty is defined relative to the standards of living in a society at a specific time. People live in poverty when they are denied an income sufficient for their material needs and when then these circumstances exclude them from taking part in activities which are an accepted part of daily life in that society.”
According to The Government of Tanzania (Tanzania), generally poverty is a result of many and often mutually reinforcing factors including lack of productive resources to generate material wealth, illiteracy prevalence of diseases, natural calamities such floods, drought and man-made calamities such as wars.
At the international level, an unequal economic and political partnership, as a reflected in unfavorable terms of trade and other transactions for developing countries is also a major cause of poverty in developing countries. Some causes of poverty are not direct for example, traditions and norms which hinder effective resource utilization and participation in income generating activities.
The assessment of poverty levels is complicated by lack of consistent information and absence of officially recognized poverty lines. The poverty line of One US$ per day in real terms has been used to facilitate comparison with other countries.
Poverty is the state of one who lacks a certain amount of material possessions or money.
CATEGORIES OF POVERTY
According to Poole and Henderson (J. Vernon Henderson, William Poole., 1991), poverty can be defined in categorized in terms of absolute term or relative term. Below the absolute and relative poverty are illustrated.
The absolute poverty standard
The absolute poverty standard refers to the cost of a specific bundle of goods (food, clothing, and housing/shelter) defined just sufficient to maintain a minimum, adequate standard of living. Hence, it is the income just adequate to buy that adequate bundle of goods. People with income below the absolute poverty standard are termed as poor. The term just sufficient or adequate means that depends in part on how well-off a society is.
We defined the extent of absolute poverty as the number of people who are unable to command sufficient resources to satisfy basic needs. They are counted as the total number living below a specified minimum level of real income-an international poverty line. That line knows no national boundaries, is independent of the level of national per capita income, and takes into account differing price levels by measuring poverty as anyone living on less than $1.25 a day or $2 per day in PPP dollars.

In the United States, the current absolute poverty standard was established in 1963 by the Social Security Administration. Society can eliminate absolute poverty through a combination of economic growth and transfer of fund/money from citizens with more than adequate income to the poor.
Absolute poverty refers to the situation of being unable or only barely able to meet the subsistence essentials of food, clothing, and shelter.
Measuring Absolute Poverty
According to (Michael P. Todaro, Stephen C. Smith, 2012), Absolute poverty is sometimes measured by the number, or “headcount,” H, of those whose incomes fall below the absolute poverty line. When the headcount is taken as a fraction of the total population, N, we define the headcount index, H/N. The poverty line is set at a level that remains constant in real terms so that we can chart our progress on an absolute level over time. The idea is to set this level at a standard below which we would consider a person to live in absolute human misery, such that the person’s health is in jeopardy.
Moreover the Total Poverty Gap can be used a measure of measuring Absolute Poverty.
Relative poverty standard:
According to (J. Vernon Henderson, William Poole., 1991), they defined as the standard of living below which a certain percentage of the population lives. Or Relative poverty is defined contextually as economic inequality in the location or society in which people live. If we choose the percentage to be 10%, the relative poverty standard would be the income of the family at the tenth percentile of the income distribution.
Persistent poverty
Refers to the poverty that continues to keep people below the poverty line year after year or keep generation after generation within the same family below the poverty standard.

Fighting poverty The war on poverty has two components:-

i. It attempts to alleviate poverty by transferring cash and benefits to those who are currently poor. These policies are based on notions of distributive justice.

ii. Is to fight persistent and intergenerational poverty by enhancing the earning power of the poor and their children. These policies are partly based on notions of equality of opportunity. Several programs that deal with persistent and intergenerational poverty includes: * Adult-literacy and job training programs to upgrade the skills of low-income adults. * Other programs to help the children of poor families include; Head start, school lunch, special education, and model-school programs. * Family planning, drug and dropout-prevention programs all alleviate persistent poverty.
Anything that contributes to school quality, social awareness, and the home environment helps to fight persistent poverty.

Relative poverty measures are used as official poverty rates in several developed countries. As such these poverty statistics measure inequality rather than material deprivation or hardship. The measurements are usually based on a person 's yearly income and frequently take no account of total wealth. The main poverty line used in the OECD and the European Union is based on "economic distance", a level of income set at 60% of the median household income

Such programs face two problems; i. It is unclear how successful they are. ii. Their support among the non-poor may be limited, on both cost and political grounds.
CRITERIA FOR DESIRABLE POVERTY MEASURE
In order to perform poverty measurements, there are some criteria to be taken into consideration in order for a desirable poverty measure to be widely accepted by the development economists. These criteria are the anonymity, population independence, monotonicity, and distributional sensitivity principles and are illustrated here under:
The anonymity principle
This principle simply means that our measure of inequality should not depend on who has the higher income. For example, it should not depend on whether we believe the rich or the poor to be good or bad people.
The population independence principle
The principle above states that the measure of inequality should not be based on the number of income recipients. For instance, the economy of China should be considered no more or less equal than the economy of Vietnam simply because China has a larger population than Vietnam.
The monotonicity principle
The criteria means that if you add income to someone below the poverty line, all other incomes held constant, poverty can be no greater than it was.
The distributional sensitivity principle
The principle states that, other things being equal, if you transfer income from a poor person to a richer person, the resulting economy should be deemed strictly poorer.
THE FOSTER, GREER and Thorbecke (FGT) Index
(Kerby, 2013) THE FOSTER, GREER and Thorbecke (FGT) Index is a poverty measure developed by Eric Thorbecke and Joel Greer of Cornell University and James Foster, a professor of economics at Vanderbilt University. The formula is used by economists to measure how income is distributed below the poverty line.
The Foster-Greer-Thorbecke (FGT) index, which is also known as the Pα class of poverty measures is a poverty index that contains certain forms satisfying all four criteria.

(Series, 2010), Provides the class of poverty measures as follows:
Pα=1ni=1q(z-yiz)α
Whereas: z is the poverty line, yi is the ith lowest income (or other standard of living indicator), n is the total population, q is the number of persons who are poor, and α≥0 is a measure of the sensitivity of the index to poverty

(Michael P. Todaro, Stephen C. Smith, 2012), portrays the Pα index is as:

Pα=1Ni=1HYP-YiYPα
Such that;
Yi is the Income of the ith poor person
YP is the poverty line
N is the population
Poverty Indices (Planning):
When individual consumption is compared with the corresponding poverty line value, classified as poor are those whose level of consumption is below the poverty line. A series of indexes may be derived for the purpose of describing and comparing situations.
The Pα index can be of different forms depending on the value of α. below are some of the forms resulting due to change in value ofα.
Incidence of poverty
Whenα=0, the above equation reduces to P0=HN the number of poor people in the population divided by the number of people in the same population. This very commonly used measure of incidence of poverty is called the headcount ratio or once turned into percentage, the headcount index. Although it is easy to interpret, the headcount index is not sensitive to how far below the poverty line poor people are.
Whereby: H is the headcount, N is the total population.
Intensity of poverty
Whenα=1, P1=1Ni=1HYP-YiYP1the poverty gap index: mean of gaps between poor people’s standard of living and the poverty line, which shows the shortfall of the poor’s expenditure from the poverty line expressed as an average of all the people in the population. The poverty gap, which is simply the sum of all the poverty gaps in the population, can be used as an indicator of the minimum cost of eliminating poverty using perfectly targeted transfers. The targeting transfers, however, usually involve leakages and administration costs so that it is not unusual for the actual cost of eliminating poverty to be a multiple of the poverty gap.
Otherwise, intensity indicates the difference between the average level of expenditures of poor people and the poverty.
Inequality of poverty
Whenα=2, this is the poverty severity index which is sensitive to the distribution of living standards among the poor. Even if its absolute value has no intuitive interpretation, this index is thought to provide relevant ranking among countries, as it takes into account the variations in distribution of welfare amongst the poor, the squared poverty gap index.
The impact on the measured poverty of a gain in income by a poor person increases in proportion to the distance of the person from the poverty line.

For example: Raising the income of a person from a household living at half the per capita poverty line by one penny per day would have five times the impact on poverty reduction as would raising by the same amount the income of a person living at 90% of the poverty line.

Hence, If α=2; then the resulting measure, P2, can be rewritten as:
P2=( HN )NIS²+(1-NIS)²(CVP)²
Whereby;
HN Is the headcount index
NIS is the normalized income shortfall,
CVP is the coefficient of variation (CV) of incomes among the poor.

From the equation above; P2 contains the coefficient of variation (CVP) measure and it satisfies all four of the poverty axioms. It is portrayed that P2 increases whenever the headcount index, the normalized income shortfall (NIS), the coefficient of variation (CV) of incomes among the poor (CVP) increases.
Furthermore the formula puts more emphasis on the distribution of income among the poor (CVP) when the normalized income shortfall is small and less emphasis when the normalized income shortfall (NIS) is large.

Unlike some other poverty measures, these three poverty measures have the useful property of being additively decomposable. For instance, the national poverty headcount will be equal to the weighted average of headcounts in rural and urban areas or different regions.
Advantages for class of poverty measures
Below are some of the advantages contained in using the class of poverty measures: a) It’s simple structure that is based on powers of normalized shortfalls facilitates communication with policymakers. b) It’s axiomatic properties are sound and include the helpful properties of additive decomposability and subgroup consistency, which allow poverty to be evaluated across population subgroups in a coherent way. c) They are naturally suited for targeting exercises and other policy implementations. They have a central role in the growing statistical literature on stochastic dominance and multidimensional dominance tests. d) Used to measure a host of other phenomena, such as the corruption, obesity, affordability of low-income housing, food insecurity, and the research productivity of economics departments. e) Used mostly on empirical work on poverty because of its sensitivity to the depth and severity of poverty. f) The index has brought enough impact on theory, application, and policy in the domain of poverty evaluation, as well as other unrelated domains. For instance, subsequent research has concluded that the indices are closely linked to stochastic dominance and provide a unifying structure linking poverty, inequality, and wellbeing. Also, data from the Social Sciences Citation Index reveals a steadily increasing number of annual citations, rising at an average rate of about 1.5 per year.
APPLICABILITY
The P2 class of poverty measures has rapidly become the standard for international evaluations of poverty, in which it has been regularly been used by the World Bank’s PovcalNet, by a host of UN agencies, and by individual countries such as Mexico to allocate funds for education, health and welfare programs for the poor.

(worldbank) The figure below shows the relationship between individual poverty (as implied by the various poverty measures) and well-being (as recorded) for HC, PGI and SPGI.
Figure 1 It shows that the PGI is more sensitive to the well-being of the poorest than HC; and the SPGI more than PGI.

Conclusions
According to The World Bank (worldbank); the headcount index, the Poverty gap (PG) and poverty gap index (PGI) and squared poverty gap all belong to the Foster-Greer-Thorbecke class of measures.
Measures of poverty reduction (wikipedia);
Controlling overpopulation
Some argue that overpopulation and lack of access to birth control leads to population increase to exceed food production and other resources. Empowering women with better education and more control of their lives makes them more successful in bringing down rapid population growth because they have more say in family planning.
Increasing personal income
The following are strategies used or proposed to increase personal incomes among the poor. Raising farm incomes is described as the core of the antipoverty effort as three quarters of the poor today are farmers. Estimates show that growth in the agricultural productivity of small farmers is, on average, at least twice as effective in benefiting the poorest half of a country’s population as growth generated in nonagricultural sectors.
Cultural factors to productivity;
Cultural factors, such as discrimination of various kinds, can negatively affect productivity suchas age discrimination, stereotyping, gender discrimination, racial discrimination, and caste discrimination. Max Weber and the modernization theory suggest that cultural values could affect economic success. However, researchers have gathered evidence that suggest that values are not as deeply ingrained and that changing economic opportunities explain most of the movement into and out of poverty, as opposed to shifts in values.
Removing constraints on government services;
Government revenue can be diverted away from basic services by corruption. Funds from aid and natural resources are often sent by government individuals for money laundering to overseas banks which insist on bank secrecy, instead of spending on the poor. A Global Witness report asked for more action from Western banks as they have proved capable of stanching the flow of funds linked to terrorism.

RECOMENDATIONS
The overall recommendation is to combine the headcount, PG/PGI and SPGI when analyzing Poverty. This is because all of them belong to the Foster-Greer-Thorbecke class of measures. If conclusions do not hold for the three measures, one has to be careful when interpreting the findings.

REFERENCES
Information, P. (n.d.). http://www.powerfulinformation.org. Retrieved June Sunday, 2013, from Powerful Information: http://www.powerfulinformation.org/page.cfm?pageid=pi-poverty
J. Vernon Henderson, William Poole. (1991). Principles of Economics. Pennsylvania State University: D.C. Heath.
Kerby, R. (2013). Sage knowledge. Foster, Greer and Thorbecke Index.
Michael P. Todaro, Stephen C. Smith. (2012). ECONOMIC DEVELOPMENT (11th ed.). United States of America.: Addison-Wenly, Pearson Education, Inc.
Planning, M. o. (n.d.). measuring poverty. Retrieved June Tuesday, 2013, from www.nscb.gov.ph: www.nscb.gov.ph/poverty/.../1_Cambodia%20-%20Poverty%20measure.
Series, I. f. (2010, April). The Foster–Greer–Thorbecke (FGT) Poverty Measures: Twenty- Five Years Later. 3.
Tanzania, G. o. (n.d.). www.tanzania.go.tz/poverty.html. Retrieved June Sunday, 2013, from Tanzania National Website: www.tanzania.go.tz/poverty.html wikipedia. (n.d.). Retrieved June Tuesday, 2013, from https://en.wikipedia.org: https://en.wikipedia.org/wiki/Poverty worldbank. (n.d.). http://info.worldbank.org/etools/docs/library. Retrieved April Saturday, 2013, from worldbank: http://info.worldbank.org/etools/docs/library/93518/Hung_0603/Hu_0603/Module4MeasuringPovertyMeasures.pdf.

References: Information, P. (n.d.). http://www.powerfulinformation.org. Retrieved June Sunday, 2013, from Powerful Information: http://www.powerfulinformation.org/page.cfm?pageid=pi-poverty J. Vernon Henderson, William Poole. (1991). Principles of Economics. Pennsylvania State University: D.C. Heath. Kerby, R. (2013). Sage knowledge. Foster, Greer and Thorbecke Index. Michael P. Todaro, Stephen C. Smith. (2012). ECONOMIC DEVELOPMENT (11th ed.). United States of America.: Addison-Wenly, Pearson Education, Inc. Planning, M. o. (n.d.). measuring poverty. Retrieved June Tuesday, 2013, from www.nscb.gov.ph: www.nscb.gov.ph/poverty/.../1_Cambodia%20-%20Poverty%20measure. Series, I. f. (2010, April). The Foster–Greer–Thorbecke (FGT) Poverty Measures: Twenty- Five Years Later. 3. Tanzania, G. o. (n.d.). www.tanzania.go.tz/poverty.html. Retrieved June Sunday, 2013, from Tanzania National Website: www.tanzania.go.tz/poverty.html wikipedia. (n.d.). Retrieved June Tuesday, 2013, from https://en.wikipedia.org: https://en.wikipedia.org/wiki/Poverty worldbank. (n.d.). http://info.worldbank.org/etools/docs/library. Retrieved April Saturday, 2013, from worldbank: http://info.worldbank.org/etools/docs/library/93518/Hung_0603/Hu_0603/Module4MeasuringPovertyMeasures.pdf.