Confused about Poverty Measures for Timor-Leste?

Posted by Brett Inder on May 18, 2016


It seems my talk at the National Development Forum in Dili last week has caused a bit of a stir. The talk itself related to challenges of development of the private sector, but the controversy appears to be focussed on one particular slide where I presented multidimensional poverty rates by district. Here is the slide:

The crux of the issue is that the national rate of 68% is much higher than other poverty figures that are often quoted: in particular the 49.9% for 2007. How can this be? It all comes down to the methods used, and the definition of “poverty”.

What is “poverty”?

Measures of poverty reflect different ideas about what constitutes a basic standard of living: the extent to which basic, day-to-day needs are being met and the extent to which people are able to create and take opportunities to enrich their lives. It requires a judgement where to draw the line between the poor and non-poor.

Consumption poverty

The 49.9% for 2007 is an estimate of consumption poverty (the proportion of the population below the poverty line) calculated using the 2007 Survey of Living Standards. This is the most recent official poverty figure to date (and yes, 2007 was a long time ago!).

The poverty line reflects the dollar value of the minimum amount of food, housing and other essential items a person needs each day. In 2007, the poverty line in Timor-Leste was 88 cents per person per day.

A household is therefore defined as “poor” if the dollar value of their total consumption (actual or imputed value of food, housing, etc) is below $0.88 per person per day. Using data from the 2007 Survey of Living Standards, it is estimated that 49.9% of the population were below this poverty line in 2007.

The poverty line is very low, and focuses on the minimum number of calories needed to produce sufficient energy for daily functioning. It also sets no minimum requirement for what is needed in the areas of diversity of food intake, access to services, educational achievement, etc, in order for a household to classify as non-poor.

Multidimensional poverty

The 68% for 2009/10 is an estimate of multidimensional poverty calculated using the 2009/10 Demographic and Health Survey.

Multidimensional poverty is a broader measure of poverty in that it allows for non-monetary aspects of poverty / wellbeing to be captured. It is widely reported in UNDP Human Development Reports.

A household is defined as “poor” if they are deprived in more than a minimum proportion of wellbeing indicators relating to health, education and living standards (e.g. house has a dirt floor, children are not attending school, no access to adequate sanitation).

So the consumption poverty and multidimensional poverty rates are different because they define “poverty” in different ways: they are measuring different things.

The 49.9% consumption poverty rate for 2007 and the 68% multidimensional poverty rate for 2009/10 are in fact the most recent estimates that can be produced with the data that is currently publicly available. Until further data sets (e.g. HIES 2011, TLSLS 2014) are made available, it is not possible to obtain more recent estimates.

What about the other poverty figures being quoted?

A figure of 41% for 2009/10 published by the World Bank is often quoted: we strongly believe this figure is not a reliable estimate of consumption poverty and should not be used or quoted. You can read why in our report.

Do we have any idea of progress in poverty reduction?

In our report we compare the multidimensional poverty rate in 2007 (Survey of Living Standards) with 2009/10 (Demographic and Health Survey). This involved some tweaking of indicators to ensure comparability across surveys. We find a reduction in multidimensional poverty of 7 percentage points over these 2-3 years, suggesting some very good progress.

Poverty measures like these offer insight into the aspects of life where the people of Timor-Leste are most in need of support to improve their wellbeing, and allow objective monitoring of progress over time. Of course, behind numbers and measures are real people experiencing the challenges and joys of everyday life. And remember: Timor-Leste is a young nation with a difficult recent history.  It takes time to build a strong social and economic foundation, and the journey is full of complexities.  

Consider the trees

Posted by Katy Cornwell on April 27, 2016

Contributors: Brett Inder, Katy Cornwell, Sarah Meehan

In our last post Who’d grow coffee in Timor? we introduced the people behind the coffee industry: the coffee-growing households. Here, we focus on the trees. 

Our research in Ermera in 2011 found coffee yields a mere one-fifth of the average by world standards, a result of poor tree health and maintenance and reflective of the inefficiencies inherent in small-scale operations.

How could productivity be improved?

Training, expert advice and economic incentives have long been recognised as essential to boosting the productivity of the coffee sector. 

The trouble is, so far in Timor-Leste it appears training hasn’t been effective. Our study found:

How could training be more effective?

Economic research suggests that, to be most effective:

At this early stage of the coffee sector’s development, local cooperatives appear to provide the best means of delivering training based on trust and holistic support (where the needs of the growers’ families and village communities are taken into account).  


How about incentives?

In the world of economics, people respond to incentives – a well-known example in development economics is the success of the Oportunidades (PROGRESA) program in Mexico whereby families receive money conditional on their children attending school. 

With little price reward for productivity and quality in the coffee industry at the farmer level, a cash transfer tied to coffee quality and output may provide this incentive to improve yields. In our report Coffee, Poverty & Economic Development in Timor-Leste we discuss a potential scheme whereby an additional payment, tied to coffee production, is made to farmers in the non-harvest season. Being tied to coffee yield, this scheme has the potential to make it economically “worth it” for growers to put in the extra labour, and bear the initial risk, involved in undertaking tree maintenance and related practices, which is much-needed in order to boost the coffee sector. 

Economic incentives could also be considered at the “supply” level, with for example, performance-based bonuses paid to extension workers or other industry-based trainers for each farmer that receives training and subsequently follows it.

A range of trials might be needed to determine whether these economic incentives are effective in improving yield and quality. That then lays the platform for programs that can really make a difference to the livelihoods of these farmers and their families.

Who'd grow coffee in Timor?

Posted by Brett Inder on March 31, 2016

Contributors: Brett Inder, Katy Cornwell, Sarah Meehan

Building a post-oil, diversified economy has been the talk of the town in recent years around Dili. The message is clear that oil and gas revenues will not last forever, and hence economic activity needs to develop in other sectors.

To contribute to the thinking in this area, our next series of blog posts will explore some key industries in Timor-Leste; what are the current realities and what are the potentials.

Let’s start with coffee.

Coffee is an important part of Timor-Leste’s economy, being a key source of income for around about 20% of Timorese households, and the main export earner, besides oil and gas. Here, we start with the people: the coffee growing households. Later we’ll get to broader issues with developing the industry, etc.

What is it be like to be a coffee farmer in Timor-Leste? How much coffee do you grow? How much money do you make? What conditions do you live in?

In 2011, a group of researchers from Monash, Southern Cross Uni and UNTL interviewed 825 coffee-growing households in Ermera, the heart of coffee in Timor-Leste. The data confirmed the widely held views that the sector is characterised by low yields, low incomes and poor living conditions. There is also ample scope for improvement, which we’ll explore further in posts to follow. For now, here is a snapshot of the current realities:

Coffee-growing in Ermera

Stay tuned for more on coffee in the next post!

The Budget 2016 Impasse

Posted by Brett Inder on January 15, 2016 
It has been a controversial few months in Timor-Leste Fiscal Policy.  After much debate and discussion, the Parliament finally approved the Budget for 2016, only to have it vetoed by the President just before the end of 2015.  Then last week, the Parliament reconsidered the budget, and decided unanimously to make no changes (see ETAN TLGov post, Jan 9th). The ball is now back in The President's court...

I'll leave the constitutional and political aspects to others, but will make a few comments on the economics.

There are several potential criticisms of how the budget is allocated, but here is a few that I hear often.  The President’s Press Release focuses on points 3 and 4.

1. Overall spending is unsustainable - in recent years, drawings on the Petroleum Fund have well exceeded the pre-determined "sustainable level".  At this rate, this Fund will run out within 10 years or even sooner.

The budget papers acknowledge this, and refer to it as front-loading  spending - overspend now to invest in key projects, with the hope that they will generate future economic activity and revenue, that will 'kick-start' the economy.  They acknowledge this front-loading cannot be sustained, and suggest it will stop in a few years.  That’s going to be tough politically – expense-cutting governments are rarely popular!

Currently the budget (and most of the economy) is financed by Petroleum Fund reserves.  If spent at the “sustainable rate”, these reserves would be available for many years into the future, even if income from new Oil and Gas royalties stopped now.  Put simply, the looming “post-oil economy crisis” is not a problem of revenue: it is largely one of spending above sustainable levels.

2. The Veteran's Pension takes too much of the budget.  Numbers here are quite substantial: over $100m of the $1.4billion budget is spent funding these regular payments to those approved as veterans.  This exceeds the total Health and Agriculture Ministries’ budgets combined.  All other social transfers (aimed at children, families, elderly, etc) are tiny in comparison with this one.

What is the rationale? The veteran's payment are seen as compensation for past contribution to building the nation, and are a key strategy in retaining stability and peace now.  Timor-Leste’s story of peace and stability is indeed a miracle.  But I wonder how much the Veteran’s Pension can take credit for that, and what else that money could be used for?

3. Big spending on major projects of dubious economic value.  We are all familiar with the criticism of projects like the Oecusse ZEESM, Suai Supply Base, airport and port developments, etc.  A big share of the budget expenditure is going to these kinds of initiatives. The key question from a budgeting point of view is: will they will produce the boost in economic growth that justifies the expense? 

4. Not enough spending on the basics that affect the vast majority of the population - especially health, education and agriculture (which links to food security, basic livelihoods). Why is there so little of the budget allocated to these Ministries, and why is it declining this year compared to previous years?

One response could be that the government is prioritising long term investment in the infrastructure that underpins a prosperous, post-oil economy.  Then there will be ongoing funds to support public investment in health and education, etc. There is also a concern that simply allocating more money to these areas will not necessarily deliver the ultimate outcomes (better education, health and agricultural productivity); the critical issue is not money, it is greater capacity to design and implement effective programs. 

Where do you sit on these issues?  Are you persuaded by the arguments on either side? There is much detail and analysis to be done on each issue.  The Parliament and key political leaders see things very differently to those in the President’s Office and many others in civil society.  How does a society promote healthy public debate about these and so many important issues?  

 Too many questions…

Big Infrastructure Projects and Timor-Leste Part II

Posted by Brett Inder on January 05, 2016

In my last post I wrote about the hazards of projecting costs and benefits of large scale infrastructure projects.  Here I want to write about some academic research on the topic.  It turns out that there is a pattern of underestimating costs, and overstating benefits.  

Bent Flyvbjerg (Professor of Economic Geography at Oxford University) is a leading researcher in the area of planning for large scale infrastructure projects.  With his colleagues, he assembled a big database of large scale transportation projects.  He finds 90% of projects went way over budget (ie underestimated costs), and a similar % significantly over-predicted demand (mainly traffic flow).  These systematic biases have persisted for decades, and it appears that the lessons are not being learned: the biases are still there in more recent projects.

So why do so-called experts consistently overestimate benefits and underestimate costs?

Flyvbjerg suggests 3 possible reasons:

1. Technical forecasting errors - experts use complex models to try and project into the future, and with much uncertainty, there is always going to be some error. Unforeseen circumstances always arise.

2. Optimism bias - psychologists argue that often in situations of uncertainty, planners and politicians err on the optimistic side, understating costs and overstating benefits.

3. Political incentives - often those who are developing the plans and proposals have an interest in seeing the project supported and receive funding.  Consultants earn future work, politicians get a legacy, public servants get achievements next to their resumes.  This gives all an incentive to exaggerate their project's benefits and understate costs.

Looking at the evidence, there are certainly cases where all three possible explanations apply, but the third seems to be most prominent.  The first two reasons are possible in particular cases, but implausible across so many projects over a long period of time.  Why would experts consistently get it wrong? If planning was a purely technical exercise, surely they would learn from previous mistakes and over time, forecasts would improve. Systematically biased forecasts, with no sign of learning from this, are unlikely.

How does political incentives thwart the objective nature of these cost-benefit analyses?  In many ways, but imagine a scenario like this: Development Advisers encourage the government to modernise their infrastructure, especially those that provide the public face of the country, like the main international airport.  Government leaders are persuaded by the arguments, but due diligence requires employing an international consultant to undertake a feasibility study.  The consultant knows the mood of the government is favourable to the project, so makes assumptions which err on the side of delivering the message they know the client wants to hear - that way their report will get a much easier run, and a favourable report may well lead to more work in future!

Acknowledging the inherently political nature of cost-benefit analyses in large scale projects, what can be done to avoid these problems?  There are many suggestions in the literature. 

Here are a few that stand out to me, as being relevant to Timor-Leste:

* Transparency: providing as much information as possible to the public about the rationale, the models and assumptions, etc, and allowing these to be challenged. No outside consultant knows the specific situation in Timor-Leste as well as the collective voice of the people.

* Peer review: don't just listen to one consultant or adviser's advice: get other experts (independent) to review an analysis or recommendation.

* Ask for a 'reality check' on projected costs and benefits by examples of similar completed projects in other countries, where actual costs and benefits are documented (this is a simplified version of Reference-class forecasting).

* Design Public-Private Partnerships to ensure significant risk lies with the private partners.  There is much more to say about this PPP topic, for another time, but the key point here is that partnerships with shared risk can be a good way to ensure the projections are realistic. Private investors who are putting their own money at risk tend to be much more careful with questioning and challenging the forecasts, because their profit is at stake if the numbers are wrong!

Big Infrastructure projects - Hmmm

Posted by Brett Inder on December 18, 2015

The future for Timor-Leste: a big new Port in Tibar, a new airport, new bridges over the Comoro river in Dili, 4-lane highways, large scale electrification, the Oecussi Social Market Economy Zone, Suai Supply Base and Port facility, etc, etc.

On hearing of this development agenda it feels like we are back in the days of the 1960s, when development was defined by multilateral support for big infrastructure projects - dams, airports, etc - as these were seen as the keys to development.

Many lessons were learned from that era, many failures documented.  Since then, and in the light of these lessons, development moved much more towards broad-based poverty alleviation, while still pursuing an agenda of economic growth.  There is much more that could be said about these lessons from history for what Timor-Leste faces now, but that is for another time.

Here I want to focus on how large scale projects are adopted.  Any large project should only proceed if a good economic and social case is made for it.  The economic argument looks at projected costs of the project, and then the long term projected benefits, and projects need to have benefits that outweigh the costs.  Often this cost-benefit analysis is also used to rank possible projects and determine priorities for spending scarce resources.

Imagine the challenges of accurately forecasting these costs and benefits!  Take the proposed new port facility in Tibar, 10km to the west of Dili.  Consultants have been asked to project flows of containers in and out of Dili to the Year 2045, presumably as a basis for the need to build a new port facility.  The projections are also used to inform the scale of the new facility.

I do have some issues with the projections that form the business case.  Briefly, there are two concerns: the projections rely on very optimistic forecasts of growth in economic activity for the next 30+ years.  With the decline in oil revenue that will come over the next few years, growth in non-oil GDP will need to no longer rely on the government-stimulated economic activity that derives from royalties on the oil and gas revenue.  Projecting economic growth from the base of non-oil-revenue-driven economic activity, I forsee substantially slower economic growth than the forecasts used in the Tibar Port projections.  Secondly, the projections ignore balance of trade considerations.  Currently, Imports in Timor-Leste comprise more than 100% of non-oil GDP.  This is manageable now, because the foreign funds are raised via oil revenue.  But this cannot be sustained, and import volumes must fall as a % of GDP.  None of this is allowed for in the Tibar Port projections.

My best estimate is that the Tibar Port projections are about quadruple what they should be.  Not just a little optimistic, but 4 times the realistic levels (I am happy to provide details if you'd like to discuss further).  Hmmm.

In my next post I will write about some academic research into why costs are often underestimated and benefits overestimated in large scale infrastructure projects.