Sensitivity of poverty and inequality statistics to alternative definitions of household welfare. Illustration using the NOBUS survey

In Russia, ROSSTAT, the Statistical Agency of the Federation, monitors poverty based on the annual Household Budget Survey. Although the HBS collects very detailed information on household consumption, the information on other dimensions of well-being is very limited. This has restricted both the analyses that can be undertaken with HBS, and the methodological choices for the construction of the welfare aggregate. Aware of these limitations, ROSSTAT revised the HBS questionnaire in the last quarter of 2005. In this paper, we use a multi-topic household survey, NOBUS, which collects a richer set of data on consumption and household characteristics, to illustrate two points. First, we show how household welfare and poverty can be measured with a survey specially designed for this purpose. Second, we investigate the impact of alternative methodological choices on poverty and inequality, such as accounting for the consumption of durables, housing, subsidies for privileged citizens and rural-urban differences in the cost of living. We compare different welfare aggregates – constructed to take into account the data limitations of HBS or the methodological choices currently endorsed by ROSSTAT –with a benchmark aggregate constructed according to the recommendations of renowned international experts, and highlight those situations with substantial loss of precision. We use simulations to highlight those changes in the official methodology for poverty measurement that will generate the highest payoffs in terms of precision, and indicate what additional data is required. We also point toward second-best solutions –methodological changes with smaller loss of precision – that can be implemented even without changing the HBS questionnaire. The simulations suggest that only the current treatment of durable goods – whose purchase price, not user-value, is included in the welfare aggregate estimated by ROSSTAT – results in an artificially large increase in inequality. The Gini index goes up from 0.28 to 0.41, placing Russia as an outlier in terms of inequality within all transition economies, and close to high-inequality countries in Latin America. Such imprecision can be eliminated, this paper illustrates, by collecting better information on durables and housing to estimate the user-value of these goods. If such an option is not endorsed, the next-best alternative would be to exclude the consumption of durable goods and housing from the welfare aggregate.

• http://www.socpol.ru/news/docs/Sensitivity_Poverty_Russia.pdf