How Precisely Can We Estimate Vulnerability to Poverty?

There are alternative definitions of vulnerability to poverty. Most researchers prefer to define vulnerability to poverty as the probability of a household or individual falling into poverty in the future. Based on this definition and using household survey panel data from rural China, this paper attempts to assess the extent to which we can measure vulnerability to poverty. The assessment is based on comparisons between estimated vulnerability and actually observed poverty. The authors find that the precision of estimation, first, varies depending on the vulnerability line; their results suggest setting the line at 50% in order to improve predictive power. Second, precision depends on how permanent income is estimated. Assuming log-normal distribution of future income, it is preferable to use past weighted average income as an estimate of permanent income rather than using regressions to gauge permanent income. Third, estimation precision depends on the chosen poverty line. The percentage of overlap between households estimated to be vulnerable and those actually poor rises when a higher poverty line of US$2 is used instead of US$1.