American University in Armenia:

Master of Science in Economics

2015
Determinant of Poverty in Developing Countries

Student: Vilen Yeretskinyan

Instructor: Vardan Baghdasaryan

Table of Contents
1. Introduction ...................................................................................................................................... 2

2. Literature Review & References............................................................................................... 3

3. Data description .............................................................................................................................. 4

3.1

Detailed data description ....................................................................................................... 4

3.2

Data sources ............................................................................................................................ 6

4. Methodology and Econometric Model.................................................................................... 6

4.1

Economic model ..................................................................................................................... 6

4.2

Econometric model ................................................................................................................ 6

5. Results & Conclusion .................................................................................................................. 10

5.1

Results .................................................................................................................................... 10

5.2

Conclusion ............................................................................................................................. 12

6. Appendix ..................................................................................................................... 14
6.1

Graphs for model choosing ................................................................................................. 14

6.2

Graph matrix for all variables ............................................................................................. 15

6.3

Leverage of data ................................................................................................................... 16

6.4

Graphs for normality test ..................................................................................................... 16

6.5

Graph for Heteroskedasticity test ....................................................................................... 17

6.6

List of countries .................................................................................................................... 18

1. Introduction
There are significant social and economic differences between developed and developing countries.
Many of the underlying causes of these differences are rooted in the long history of development of
such nations and include social, cultural and economic variables, historical and political elements,
international relations and geographical factors.
According to the UN, a developing country is a country with a relatively low standard of living,
undeveloped industrial base and moderate to low Human Development Index (HDI). This index is a
comparative measure of poverty, literacy, education, life expectancy and other factors for countries
worldwide. The index was developed in 1990 by Pakistani economist Mahbub ul Haq.
One of the causes of developing countries will be observed in this paper which is poverty.
A poverty profile depicts the example of destitution, yet is not basically worried with clarifying its
reasons. Yet an attractive clarification of why a few individuals are poor is crucial on the off chance
that we are to have the capacity to handle the roots of poverty.
Among the key reasons, or possibly connects, of poverty are:
Regional-level characteristics: these include vulnerability to flooding or typhoons; remoteness;
quality of governance; property rights and their enforcement.
Community level characteristics: these include the availability of infrastructure (roads, water and
electricity) and services (health, education), proximity to markets and social relationships.
Household and individual characteristics: Among the most important are:
Demographic: household side, age structure, dependency ratio, gender of head.
Economic: employment status, hours worked, property owned.
Social: health and nutritional status, education, shelter.
Regression analysis is expected to pick the free variables precisely, to make sure that they are in fact
showing correct picture.

Regression techniques are great at recognizing the quick ("proximate") reasons for poverty, however
are less effective at discovering the deep causes; they can show that a lack of education causes
poverty, but cannot so easily explain why some people lack education.
The weakest part of poverty analysis what Howard White calls the missing middle is
developing a clear understanding of the fundamental causes of poverty. Such an understanding is
needed if one is to develop an effective strategy to combat poverty.

2. Literature Review & References

1. Asian Development Bank (2002) and (2005) Key Indicators of Developing Asian and Pacific
Countries. Manila: The Asian Development Bank.
2. Trade, income distribution and poverty in developing countries: a survey UNITED
NATIONS
3. Minimum

Wages

and

Poverty

in

Developing

Countries

http://www.researchgate.net/profile/Darryl_Mcleod/publication/5059750_Minimum_Wages_
and_Poverty_in_Developing_Countries__Some_Empirical_Evidence/links/5474b98a0cf29af
ed60f984e.pdf
4. Grossman, Jonathan. "Fair Labor Standards Act of 1938: Maximum Struggle for a Minimum
Wage". Department of Labor. Retrieved 17 April 2014.
5.

Stone, Jon (1 October 2010). "History of the UK's minimum wage". Total Politics. Retrieved
17 April 2014.

6. R. Freeman, The Minimum Wage as a Redistributive Tool, The Economic Journal.

7. World Bank (1995), p. 75. The International Labor Organization has a different view. For the
ILO "...minimum wages are a potentially important labour market policy instrument for
reducing poverty.... (Rodgers ,1995, p. 48). For more on this issue see Lipton (1995), p. 130.
8. Although Carruth and Oswalds model was meant to analyze the impact of unions, their
analysis applies to minimum wage legislation as well.
9. Wages and equitable growth http://www.ilo.org/wcmsp5/groups/public/---dgreports/--dcomm/---publ/documents/publication/wcms_194843.pdf
10. Introduction to poverty analysis (World Bank Institute August 2005)
http://siteresources.worldbank.org/PGLP/Resources/PovertyManual.pdf
11. Socio-Economic
Determinants
of
Poverty
http://projekter.aau.dk/projekter/files/17509764/Microsoft_Word_-_Thesis_AAU.pdf

12. The
Determinants
of
Poverty
and
Inequality
http://siteresources.worldbank.org/SPLP/Resources/461653-1207162275268/48474121209400266362/Chapter3Determinants.pdf
13. DETERMINANTS
OF
POVERTY
IN
LAO
PDR
http://swopec.hhs.se/eijswp/papers/eijswp0223.pdf
14. Economic
Determinants
of
Poverty
in
Zimbabwe
http://www.ijeronline.com/documents/volumes/Vol%202%20issue%206/ijer20110206ND(1)
.pdf

3. Data Description
The observing data in this study is for all developing countries in 2012 from. The expected number
of observations will be up to 151. Not all variables have exact 151 observations as some of the
countries do not have data for some variables. You can see list of counters in Appendix 6.6.
The research and literature that I have observed for this study directs me to select variables that are
part of regional; community; demographic; economic and social fields. Studs and my personal
analysis, which I will introduce later, show that this variables at least indicates effect on poverty.
From the list I selected: POVERTY (Y), GDP PER CAPITA (2), UNEMPLOYMENT (3),
INFLATION (4), EDUCATION INDEX (5), IMPROVED WATER SOURCE (6), LAND
UNDER CEREAL PRODUCTION (7), ACCESS TO ELECTRICITY (8) and ROADS (9).

3.1 Detailed data description:*

POVERTY (POV)
Population below $2 a day is the percentage of the population living on less than $2.00 a day.
GDP PER CAPITA** (GDP)
GDP per capita is gross domestic product divided by midyear population. GDP is the sum of gross
value added by all resident producers in the economy plus any product taxes and minus any
subsidies not included in the value of the products. It is calculated without making deductions for
depreciation of fabricated assets or for depletion and degradation of natural resources.

UNEMPLOYMENT (UNEMP) (% of total labor force)

Unemployment refers to the share of the labor force that is without work but available for and
seeking employment.
INFLATION consumer prices (annual %) (INF)
Inflation as measured by the consumer price index reflects the annual percentage change in the cost
to the average consumer of acquiring a basket of goods and services that may be fixed or changed at
specified intervals, such as yearly. The Laspeyres formula is generally used.
EDUCATION INDEX (EDU)
The Education Index is calculated from the Mean years of schooling index and the Expected years of
schooling index.
IMPROVED WATER SOURCE (% OF POPULATION WITH ACCESS) (ATW)
Access to an improved water source refers to the percentage of the population using an improved
drinking water source. The improved drinking water source includes piped water on premises (piped
household water connection located inside the users dwelling, plot or yard), and other improved
drinking water sources (public taps or standpipes, tube wells or boreholes, protected dug wells,
protected springs, and rainwater collection).
LAND UNDER CEREAL PRODUCTION**** (HECTARES) (LUCP)
Land under cereal production refers to harvested area, although some countries report only sown or
cultivated area. Cereals include wheat, rice, maize, barley, oats, rye, millet, sorghum, buckwheat,
and mixed grains. Production data on cereals relate to crops harvested for dry grain only. Cereal
crops harvested for hay or harvested green for food, feed, or silage and those used for grazing are
excluded.
ACCESS TO ELECTRICITY (% OF POPULATION) (ATE)
Access to electricity is the percentage of population with access to electricity. Electrification data are
collected from industry, national surveys and international sources.

ROADS, TOTAL NETWORK (KM) (ROAD)**

Total road network includes motorways, highways, and main or national roads, secondary or
regional roads, and all other roads in a country. A motorway is a road designed and built for motor
traffic that separates the traffic flowing in opposite directions.
* Data are in U.S. dollars. **Data are divided to 1,000. *** Data are divided to 10,000.

3.2 Data sources

1. www.worldbank.org
2. www.unece.org
3. www.oecd.org
4. www.indexmundi.com

4. Methodology and Econometric Model

The main problem is to find the impact of the data to poverty level in developing countries. I have
selected several variables and will develop regression models to see how well the variables explain
poverty. For that reason I will test correlation in my data, see most suitable model and generate new
variables if needed, compare regression outcomes and do other relevant tests.

4.1 Economic model

POV = 1 + 2GDP + 3UNEMP + 4INF + 5EDU + 6ATW + 7LUCP + 8ATE + 9ROAD

4.2 Econometric model

Econometric model
POV = E (POV) +

= 1 + 2GDP + 3UNEMP + 4 INF + 5EDU + 6ATW + 7LUCP +

8ATE + 9ROAD + e
This is not my final econometric model, I need to do several testes to clarify the final variables and
see if I need to transform my variables.

Correlation test

POV
GDP
UNEMP
INF
EDU
ATW
LUCP
ATE
ROAD

POV

GDP

UNEMP

INF

EDU

ATW

LUCP

ATE

ROAD

1.0000
-0.3401
-0.1541
0.0748
-0.7100
-0.7057
-0.0308
-0.8083
-0.0545

1.0000
-0.0045
-0.0487
0.4634
0.2756
0.0424
0.4061
0.0210

1.0000
-0.0923
0.1361
0.1533
-0.1668
0.1262
-0.1079

1.0000
-0.0984
-0.1638
0.0191
-0.1319
-0.0224

1.0000
0.6369
0.0126
0.7473
0.0482

1.0000
0.0800
0.7454
0.1146

1.0000
0.1160
0.9584

1.0000
0.1334

1.0000

Here we can see that we have little correlation between variables besides EDU and ATW, EDU and
ATE, ATW and ATE, ROAD and LUCP which is the most highest. In this case I will omit ROAD as
I have 2 other community level characteristics and give more value to LUCP.
New econometric model
POV = E (POV) +

= 1 + 2GDP + 3UNEMP + 4 INF + 5EDU + 6ATW + 7LUCP +

8ATE + e
Regression 1
Source

SS

df

MS

Model
Residual

78645.5436
34021.6655

7
127

11235.0777
267.88713

Total

112667.209

134

840.800068

POV

Coef.

GDP
UNEMP
INF
EDU
ATW
LUCP
ATE
_cons

.0637176
-.0831026
-.1792067
-37.10315
-.3616318
.0011051
-.4796728
122.153

Std. Err.
.1930226
.1864863
.1895201
14.89976
.1416332
.0011884
.0781227
9.466145

t
0.33
-0.45
-0.95
-2.49
-2.55
0.93
-6.14
12.90

Number of obs
F( 7,
127)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
0.742
0.657
0.346
0.014
0.012
0.354
0.000
0.000

=
=
=
=
=
=

135
41.94
0.0000
0.6980
0.6814
16.367

[95% Conf. Interval]

-.3182393
-.4521253
-.5542329
-66.58708
-.6418983
-.0012466
-.6342635
103.4212

.4456746
.2859201
.1958194
-7.619227
-.0813654
.0034567
-.3250821
140.8848

. est store M1

The regression model shows that only 3 variables are significant. R-squared=0.6973 and Adj Rsquared=0.6775 are high so selected variables explain poverty, but most variables are insignificant
and not matches expected signs of coefficients. This can be due to other problems which I will try to

find out. Our next step is obtaining the model which will better explain impact of independent
variables to dependent one.
Joint hypothesis testing
H0: 2GDP = 3UNEMP = 4 INF = 5EDU = 6ATW = 7LUCP = 8ATE = 0
H1: At least one of the variables is not equal to zero
(
(
(
(
(
(
(

1)
2)
3)
4)
5)
6)
7)

GDP = 0
UNEMP = 0
INF = 0
EDU = 0
ATW = 0
LUCP = 0
ATE = 0
F(

7,
127) =
Prob > F =

41.94
0.0000

First last see if our variables are right selected and test them. We can see that p< so we reject H0
and accept alternative one that at least one of the variables are not equal to zero.
Second for understanding the model that will better fit, I will use graphical illustration, which
attached in Appendix 6.2 and 6.3. From this graphs I can conclude that log-log model is the one that
will better fit my data also its graphical illustration better explain economical intuition behind it.
Also from graph in Appendix 6.4, we can see that I have leverage in my data. It can be from the fact
that I have countries like China, Brazil and Russia at the same time Niger, Congo and some islands.
This can cause some problems but I will leave data as it is for this paper skipping the leverage
problem.
The next modification in model which will be applied due to grapes and testing of different models
is log-log model.
New econometric model
POVLN = E(POVLN) + e = 1 + 2ln(GDP) + 3ln(UNEMP) + 4ln(INF) + 5ln(EDU) +
6ln(ATW) + 7ln(LUCP) + 8ln(ATE) + e

Correlation Test
(obs=133)

POVLN
GDPLN
UNEMPLN
INFLN
EDULN
ATWLN
LUCPLN

POVLN

GDPLN

UNEMPLN

INFLN

EDULN

ATWLN

LUCPLN

1.0000
-0.5896
-0.1701
0.1333
-0.6066
-0.5600
-0.0631

1.0000
0.2570
-0.1680
0.7738
0.5732
-0.1968

1.0000
-0.0535
0.2020
0.1589
-0.3259

1.0000
-0.1488
-0.2267
0.2182

1.0000
0.6243
-0.1263

1.0000
-0.1988

1.0000

Here we can see that almost all variables are non-correlated and the highest correlation is 0.6243,
which I will keep for this step to see the impact of other tests.
Goodness-of-Fit and Information Criteria
To see if all variables are right selected and explain poverty and to see if there is irrelevant variable I
will use Akaike and Schwarz criterion test.
Goodness-of-Fit and Information Criteria
_
Included Variables
R2
R2
GDPLN
0.3064 0.3016
GDPLN UNEMPLN
0.3066 0.2971
GDPLN UNEMPLN INFLN
0.3072 0.2927
GDPLN UNEMPLN INFLN EDULN
0.3749 0.3568
GDPLN UNEMPLN INFLN EDULN 0.4166 0.3952

POVLN
POVLN
POVLN
POVLN
POVLN
ATWLN
POVLN GDPLN UNEMPLN
ATWLN LUCPLN
POVLN GDPLN UNEMPLN
ATWLN LUCPLN ATELN

AIC
506.6065
508.5482
507.9105
484.7613
474.2427

SC
512.6009
517.5399
519.8722
499.5755
491.9776

INFLN

EDULN

0.4918

0.4676

433.8876

454.12

INFLN

EDULN

0.4933

0.4649

435.4843

458.6071

Final econometric model

From above test we can see that the best model is:
POVLN = E(POVLN) + e = 1 + 2ln(GDP) + 3ln(UNEMP) + 4ln(INF) + 5ln(EDU) +
6ln(ATW) + 7ln(LUCP) + e
For interpretation of results we need to use the Slope = dy/dx =2 y/x and Elasticity = 2.

5. Results & Conclusion

5.1 Results
Summarize the Variables
Variable

Obs

Mean

CountryCod
POV
GDP
UNEMP
INF

0
148
151
151
151

EDU
ATW
LUCP
ATE
ROAD

147
150
140
151
149

Std. Dev.

Min

Max

36.08514
6.902649
9.754305
7.960927

28.23566
11.75861
8.210942
12.05758

.1
.2
.2
-.9

95.2
94.2
60
100

.529932
84.23667
403.7305
71.76291
134.5465

.150531
16.19384
1205.214
31.95859
534.4064

.2
30
0
5.1
.008

.8
100
9710
100
4689

Normality test
Skewness/Kurtosis tests for Normality
Variable

Obs

Pr(Skewness)

Pr(Kurtosis)

adj chi2(2)

POVLN
GDPLN
UNEMPLN
INFLN
EDULN
ATWLN
LUCPLN

148
151
151
150
147
150
139

0.0000
0.8737
0.0001
0.1308
0.0001
0.0000
0.0000

0.0045
0.0836
0.0003
0.0294
0.6508
0.0004
0.0659

31.89
3.07
22.31
6.62
13.84
38.38
20.80

joint
Prob>chi2
0.0000
0.2157
0.0000
0.0365
0.0010
0.0000
0.0000

In Appendix 6.4 you can find graphs for normality test. Pnorm is sensitive to non-normality in the
middle range of data and qnorm is sensitive to non-normality near the tails. As you can see, the
results from pnorm show indications of non-normality, while the qnorm command shows a deviation
from normal at the tails. Nevertheless, this seems to be deviation from normality. We gate same
results for 3 test we have gone. We can accept that the residuals are not normal distributed.

10

Heteroskedasticity Test (white test)

Source

chi2

df

Heteroskedasticity
Skewness
Kurtosis

58.37
28.18
4.93

27
6
1

0.0004
0.0001
0.0263

Total

91.48

34

0.0000

The graph In Appendix 6.5 and test illustrates that the data have heteroskedasticity problem. We will try to
solve the problem by running regression with robust.

11

5.2 Conclusion
Results of various specifications
M1
M2
M3
coef/se
coef/se
coef/se
GDP
0,064
(0,193)
UNEMP
-0,083
(0,186)
INF
-0,179
(0,190)
EDU
-37,103*
(14,900)
ATW
-0,362*
(0,142)
LUCP
0,001
(0,001)
ATE
-0,480***
(0,078)
GDPLN
-0,373*
-0,373*
(0,145)
(0,155)
UNEMPLN
-0,174
-0,174
(0,141)
(0,139)
INFLN
0,074
0,074
(0,137)
(0,170)
EDULN
-1,124*
-1,124*
(0,535)
(0,474)
ATWLN
-2,296*** -2,296***
(0,663)
(0,596)
LUCPLN
-0,118***
-0,118**
(0,034)
(0,036)
_cons
122,153***
13,264*** 13,264***
(9,466)
(3,143)
(2,740)
Number of observations
135
133
133
R2
0,698
0,492
0,492
Adjusted R2
0,681
0,468
0,468
note: .001 - ***; .01 - **; .05 - *;

My final regression model gives us following results:

1% change in GDP will decrease POV by 0.373%, 1% change in EDU will also decrease POV by
1.124, 1% change in ATW will decrease POV by 2.296% and 1% change in LUCP will decrease
POV by 0.118.

12

Also I have variables which are not significant: UNEMP and INF. Taking in facts the problems
which I have detected during my study: data leverage, missing data, normality problem and
heteroskedasticity I can except to get insignificant variables but in my opinion important once.
In case of inflation we can expect to see more long term effect not immediate one. For
unemployment it must have direct affect but if we take Armenian example that we can have high
unemployment, due to migration and finding job oversees which allows to covers family expanses
and there is no need for external employment in family. This can direct us that in some cases
unemployment also can have long term effect.
It is clear that more variables and more data analysis could help us to indicate more relationships and
impact on poverty. But not all data are available and it is one of the most harming problem for
research work.
Also review of literature and similar papers lead me to the conclusion that this work can identify
poverty superficial. We can find different significant effects on poverty but in general it will not
cover the overall effect. For example to detect the better result for ATW we need to detect dipper
problem why in exact country they have low level of ATW which are one of the main problems.
From the results and overall review I can conclude that for each variable we can make separate
researcher and do deleted observation to understand the problem from root.

13

6. Appendix
6.1 Graphs for model choosing

14

6.2 Graph matrix for all variables

15

6.3 Leverage of data

6.4 Graphs for normality test

16

Pnorm

Qnorm

6.5 Graph for Heteroskedasticity test

17

6.6 List of counties

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45

Afghanistan
Albania
Algeria
Angola
Antigua and Barbuda
Argentina
Armenia
Azerbaijan
Bahamas
Bahrain
Bangladesh
Barbados
Belarus
Belize
Benin
Bhutan
Bolivia
Bosnia and Herzegovina
Botswana
Brazil
Brunei
Bulgaria
Burkina Faso
Burma
Burundi
Cambodia
Cameroon
Cape Verde
Central African Republic
Chad
Chile
China
Colombia
Comoros
Democratic Republic of the Congo
Republic of the Congo
Costa Rica
Cte d'Ivoire
Croatia
Djibouti
Dominica
Dominican Republic
Ecuador
Egypt
El Salvador

AFG
ALB
DZA
AGO
ATG
ARG
ARM
AZE
BHS
BHR
BGD
BRB
BLR
BLZ
BEN
BTN
BOL
BIH
BWA
BRA
BRN
BGR
BFA
BMU
BDI
KHM
CMR
CPV
CAF
TCD
CHL
CHN
COL
COM
COD
COG
CRI
CIV
HRV
DJI
DMA
DOM
ECU
EGY
SLV

77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121

Macedonia
Madagascar
Malawi
Malaysia
Maldives
Mali
Marshall Islands
Mauritania
Mauritius
Mexico
Federated States of Micronesia
Moldova
Mongolia
Montenegro
Morocco
Mozambique
Namibia
Nepal
Nicaragua
Niger
Nigeria
Oman
Pakistan
Palau
Panama
Papua New Guinea
Paraguay
Peru
Philippines
Poland
Qatar
Romania
Russia
Rwanda
Saint Kitts and Nevis
Saint Lucia
Saint Vincent and the Grenadines
Samoa
So Tom and Prncipe
Saudi Arabia
Senegal
Serbia
Seychelles
Sierra Leone
Solomon Islands

MKD
MDG
MWI
MYS
MDV
MLI
MHL
MRT
MUS
MEX
FSM
MDA
MNG
MNE
MAR
MOZ
NAM
NPL
NIC
NER
NGA
OMN
PAK
PLW
PAN
PNG
PRY
PER
PHL
POL
QAT
ROU
RUS
RWA
KNA
LCA
VCT
WSM
STP
SAU
SEN
SRB
SYC
SLE
SLB

18

46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76

Equatorial Guinea
Eritrea
Ethiopia
Fiji
Gabon
The Gambia
Georgia
Ghana
Grenada
Guatemala
Guinea
Guinea-Bissau
Guyana
Haiti
Honduras
Hungary
India
Indonesia
Iran
Iraq
Jamaica
Jordan
Kazakhstan
Kenya
Kiribati
Kyrgyzstan
Lao PDR
Lebanon
Lesotho
Liberia
Libya

GNQ
ERI
ETH
FJI
GAB
GMB
GEO
GHA
GRD
GTM
GIN
GNB
GUY
HTI
HND
HUN
IND
IDN
IRN
IRQ
JAM
JOR
KAZ
KEN
KIR
KGZ
LAO
LBN
LSO
LBR
LBY

122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151

Somalia
South Africa
South Sudan
Sri Lanka
Sudan
Suriname
Swaziland
Syria
Tajikistan
Tanzania
Thailand
Timor-Leste
Togo
Tonga
Trinidad and Tobago
Tunisia
Turkey
Turkmenistan
Tuvalu
Uganda
Ukraine
United Arab Emirates
Uruguay
Uzbekistan
Vanuatu
Venezuela
Vietnam
Yemen
Zambia
Zimbabwe

SOM
ZAF
SSD
LKA
SDN
SUR
SWZ
SYR
TJK
TZA
THA
TLS
TGO
TON
TTO
TUN
TUR
TKM
TUV
UGA
UKR
ARE
URY
UZB
VUT
VEN
VNM
YEM
ZMB
ZWE

19