In many countries, markets for basic services such as electricity, water, or gas are characterized by rationing, subsidies, or increasing marginal tariff pricing. If consumption is used as a welfare indicator, household's different access to, and payments for, such publicly provided services have to be taken into account.
Hentschel and Lanjouw discuss when and how to adjust expenditures derived from household surveys to reflect the consumption of basic services.
They discuss simple adjustment methods for markets that are subsidized, rationed, or subject to increasing marginal tariff pricing.
Using Ecuador as an example, they show how incorporating adjustments in markets for water, electricity, and cooking gas can significantly alter estimates of poverty and are therefore important to a comprehensive measure of welfare.
For Ecuador, adjustments must be made for water, for example, because the nonpoor urban population often has access to subsidized public water and the poor depend on the private market; adjustments must be made for electricity because increasing marginal tariff rates lead to different prices per kWh. Adjustments need not be made for cooking gas, which is highly subsidized in Ecuador, because the amount consumers use is not rationed.
The authors compare the sensitivity of poverty indicators and the poverty profile in Ecuador to adjustments in nominal expenditures for basic services in Ecuador. The poverty profile showed relatively few changes, but poverty indicators (headcount and the poverty gap for extreme poverty) showed changes that were statistically significant.
The results dramatize how important it is to carefully analyze markets for basic services when deriving welfare measures from household surveys. Such adjustments, by improving the measure of welfare, can also encourage wider acceptance and use of consumption as a welfare indicator and a guide for developing public policy.
This paper—a joint product of the Poverty Group, Poverty Reduction and Economic Management Network and the Development Research Group—is part of a larger effort in the Bank to develop guidelines and tools for welfare analyses based on household surveys. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact the PREM Advisory Service, room MC4-501, telephone 202-458-7736, fax 202-522-1135, Internet address premadvisory@worldbank.org. Jesko Hentschel may be contacted at jhentschel@worldbank.org. (23 pages)
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