Discerning transient from chronic poverty in Nicaragua: measurement with a two period panel data set

This paper deals with consumption dynamics and its effects on poverty. An econometric model is proposed in which changes in consumption across time are seen as fluctuations around the level of consumption that each family can sustain in the long term. The advantages of this approach are twofold. First, it allows identification of the main determinants of changes in poverty. Second, it allows distinguishing between chronic and transient poverty, by defining as chronically poor those households whose level of consumption sustainable in the long term lies below the poverty line. This definition of chronic poverty represents a change with respect to previous works on the subject, in which chronic poverty is defined with reference to the average level of consumption (or income) observed at the family level along the temporal interval of the panel. The innovation of our proposal lies in the fact that all the information from the panel data set, relative to all households, is exploited in order to identify which level of consumption each family is tending toward through time. Furthermore, our definition of chronic poverty allows one to identify four different groups of families that differ by level of observed consumption and by potential to generate income for consumption. The four groups are characterized by different incidences of chronic and transient poverty, and hence require different kinds of anti-poverty policies and public support. Data from two Living Standards Measurement Surveys (LSMS) carried out by the World Bank in Nicaragua in 1998 and 2001 are used, while accounting for potential problems of attrition.