Measuring the effectiveness of fiscal policy in multidimensional poverty reduction

In this paper, we propose indicators of Impact Effectiveness (IE) and Spending Effectiveness (SE) for fiscal interventions aimed at reducing multidimensional poverty extending Enami's (2018, 2022) unidimensional indicators. IE compares the observed reduction in poverty with the maximum reduction that could have been achieved under an optimal allocation of resources. SE compares the actual budget used with the minimum budget required to achieve the same reduction under an optimal allocation. We introduce an overarching framework with two alternative optimal criteria for resource allocation. The first criterion maximizes the reduction in any given multidimensional poverty index (MPI) with the structure of the M0 measure of the Alkire and Foster (2011) family, also called the Adjusted Headcount Ratio. The second is a lexicographic Prioritarian criterion that sequentially prioritizes households from the multidimensionally poorest—those with the highest deprivation score— to the least intensely poor. This approach is equivalent to sequentially maximizing the reduction in an MPI with subsequent sufficiently high poverty cutoffs. Implementing the methodology requires three types of data: household survey data, estimates of the cost of eliminating each deprivation at the household level, and information on planned or executed public spending in the dimensions under study. The framework can be applied ex-post to evaluate effectiveness, or ex-ante to guide the design of multidimensional poverty reduction strategies. This approach provides policymakers with a transparent and rigorous tool to assess and improve the effectiveness of multidimensional poverty spending in line with the 2030 Agenda for Sustainable Development.