Quantifying Vulnerability to Poverty in a Developing Economy

The concept of vulnerability extends the idea of poverty to include idiosyncratic as well as aggregate risks which can be defined as the probability of being in poverty or to fall deeper into poverty in the future. It can be categorised on the micro-and macro level where macro vulnerability refers to worldwide threats to social welfare, e.g. globalisation and recent international financial crises. Conversely, micro vulnerability refers to the household level risks including health risks, economic shocks, social shocks, natural disasters, and demographic shocks [Tesliuc and Lindert (2004)]. To assess and estimate vulnerability to poverty, various approaches had been proposed. First, vulnerability can be seen as a probability of falling into poverty in near future [Chaudhuri (2003); Christaensen and Subbarao (2005)]. The other ways of measuring vulnerability consider it as low expected utility [Ligon and Schechter (2003)] and vulnerability as uninsured expose to risk, i.e., measures of cost, in terms of consumption [Tesliuc and Lindert (2004)]. The basic idea is that the state of poverty at a given point actually is not sufficient for assessing poverty and for drawing results to design poverty reduction programs. Households face various risks and do not know whether any possible shock will hit them in future. So the assessment of poverty at a given point in time is a static approach, not considering possible changes in the future. By assessing vulnerability it refers to the dynamic perspective, it is explicitly forward looking and tries to include the risks that may push people into poverty in future