Estimating Utility-Consistent Poverty Lines with Applications to Egypt and Mozambique

Poverty reduction has become one of the primary objectives of development assistance. Changes in poverty have become the dominant yardsticks by which development assistance and accompanying government action are measured. Demand systems estimation constitutes a direct approach to setting poverty lines. Poverty lines may reflect notions of either absolute poverty or relative poverty. The concept of absolute poverty posits that there is a minimum acceptable standard of living below which one is considered poor and above which one is considered non-poor. The theory underlying absolute poverty lines is grounded in welfare economics and constrained utility maximization. It is important to emphasize that the proposed procedure is the last step in developing the cost-of-basic-needs (CBN) bundles and is only applied when the original bundles fail to satisfy conditions of utility consistency. Data from household surveys, analyzed using the CBN approach, provide prior information on the composition of the poverty line bundles.