Questioning the use of the Head-Count ratio

The Head-Count ratio (HC) is the indicator of poverty by far the most used by governments and international organizations. The HC was for example the indicator used in the definition of the millennium goal[1] for poverty reduction. The main objective of this post is to illustrate some of the weaknesses of the HC, by showing this indicator does not always reflect some of the core ideas we may hold about the concept of poverty.

Let us start by remembering its definition. For simplicity, we are going to assume that monthly income is the only variable that is relevant for the assessment of poverty[2]. The identification of poverty is based on a threshold: the income poverty line. In Belgium for example, an isolated individual earning less than 1000 Euros is considered to be poor [3]. The HC simply measures the percentage of individuals whose income falls below this poverty line. For Belgium, the HC fluctuates around 14 to 15% of the population[4].

One of the major advantages of the HC is that it is very easy to understand and interpret. It is then very convenient for communication towards the general public. But besides good communication properties, we also expect from an indicator of poverty that it reflects well the intuitions we have of this concept: does it react well to the changes of the underlying income distribution? By means of examples we shall now point to several weaknesses of the HC.

  1. Imagine that an individual in the Belgian society sees his monthly income pass from 500 to 900 Euros. Intuitively, poverty is decreased but it is not reflected by the HC, because it only acknowledges a difference when the income of someone crosses the poverty line. The HC does not go as far as saying that poverty has increased in that case, but it fails to react to this improvement. This shows that the HC does not reflect the depth of income deprivation, which is the gap between personal income and the poverty line. Earning 500 or 900 Euros is the same according to the HC.
  2. Imagine that a monthly transfer of 400 Euros takes place between two individuals, one earning 700 and the other 800 Euros. As a consequence, one of them now earns 300 Euros and the other 1200 Euros. This transfer is said to be regressive as it takes place from a poorer to a richer individual. Intuitively, it is difficult to imagine that such a transfer reduces poverty. Nevertheless, the HC counts this as an improvement because one of the two individuals, who were both initially poor, has crossed the poverty line and is hence not poor anymore.

The failure of the HC to correctly account for the natural intuitions in those examples may have undesired consequences. It indeed leads to perverse incentives for governments willing to decrease poverty, as measured by the HC. Indeed, the most efficient way to do it is to concentrate efforts towards the individuals whose income is close but below the poverty line. The HC encourages hence the decision maker to give full priority to these individuals whereas it is commonly admitted that priority should be given to the poorest individuals. As “what we measure affects what we do”[5], it is crucial that the indicators we use correspond closely to our intuitions of the concept we are interested in. Therefore it is very important to carefully choose the indicators on which the choice of policy might be based.

Does there exist alternative poverty measures that better deal with the two examples given above? Yes, an example of such an indicator is the Poverty Gap ratio (PG). What is this PG? Remember the gap is the difference between individual income and the poverty line. The PG is simply the average gap among poor individuals multiplied by the percentage of poor individuals. The PG measures therefore the average depth of income deprivation experienced by poor agents, weighted by the incidence of poverty in the population. If we use the PG, the change in the first example would lead to a decrease of poverty and the second one would never lead to a decrease of poverty. These advantages are nevertheless partly counterbalanced by its lower communicability: the PG is slightly more complicated to understand.

Besides the HC and PG, many indicators have been developed, all having their individual merits and drawbacks. It is then up to the decision maker to choose among them, but as shown in this post, this choice may have consequences on the policy put in place and therefore, on the fate of poor individuals.

[1] See the UNDP website related to the Millennium Development Goal 1

[2] This view is of course too restrictive and efforts are currently undertaken by academics, governments and international institutions in order to account for other dimensions of deprivations such as material deprivation or access to the labor market.

[3]  The poverty line is adapted in function of the composition of the household, but let us focus on households made of a single individual for simplicity.

[4] See the very informative and pedagogic barometer of poverty created by the Belgian authorities in charge of social integration and poverty reduction.

[5] Report of the Sen-Stiglitz-Fitoussi commission on the measurement of economic performance and social progress.

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