COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

DETERMINANTS OF URBAN POVERTY IN WEST GURAGE ZONE (IN

CASE OF WOLKITE TOWN)

A SENIOR RESEARCH PROPOSAL SUBMITED TO THE

DEPARTMENT OF ECONOMICS FOR PARTIAL FULFILMENT OF THE

REQUIREMENTS FOR THE BACHELOR OF ART DEGREE IN ECONOMICS

NAME ID NO

BY: YITAYAL TEGEGNE.......... RU/0261/13

BY: HABTAMU TADIE..............RU/0439/13

ADVISOR: WORKITU, G

JANUARY, 2024

BONGA, ETHIOPIA

TOGETHER WE CAN!!
Table of Contents
Acronym........................................................................................................................................ iv

Chapter One...................................................................................................................................1

1, Introduction............................................................................................................................... 1

1.1 Background of the study...................................................................................................... 1

1.2 Statement of the Problem..................................................................................................... 2

1.3 Research Question............................................................................................................... 4

1.4 Objectives of the Study........................................................................................................ 4

1.4.1 General Objective of the Study......................................................................................4

1.4.2 Specific Objective of the Study......................................................................................4

1.5 Significance of the Study......................................................................................................4

1.6 Scope of the Study............................................................................................................... 5

1.7 Limitations of the study........................................................................................................5

1.8 Organization of the Study.....................................................................................................5

Chapter Two.................................................................................................................................. 7

2. Review of Related Literature..................................................................................................... 7

2.1 Theoretical Literature Review..............................................................................................7

2.1.1 Definition of Poverty......................................................................................................7

2.1.2 School of thought on poverty........................................................................................8

2.1.3. Poverty Lines and Types...............................................................................................9

2.1.3.1 Absolutes poverty line............................................................................................10

2.1.3.2 Subjective poverty line............................................................................................. 10

2.1.3.3 Relative poverty line...............................................................................................10

2.1.4 Setting poverty line......................................................................................................10

 2.1.4.1 Costs of basic need approach................................................................................11

2.1.4.2 Food energy intake approach...................................................................................11

2.1.5 Types of poverty..........................................................................................................12

2.1.5.1 Income poverty.........................................................................................................12

2.1.5.2 Non income poverty.................................................................................................12

2.1.6 Measures of Poverty....................................................................................................13

2.1.7 Poverty Indices............................................................................................................ 14

2.1.7.1 Head Count Index (P0)..............................................................................................14

2.1.7.2 Poverty Gap/Depth Index (P1)..................................................................................14

2.1.7.3 Severity Index (P2)................................................................................................15

2.2. Empirical literature review................................................................................................15

2.2.1. Determinants of poverty............................................................................................ 15

2.3. Conceptual Frame Work of the Study...............................................................................18

Chapter Three.............................................................................................................................. 20

3. Methodology of the Study.......................................................................................................20

3.1 Description of the Study Area............................................................................................20

3.2 Research Design.................................................................................................................20

3.3 Sampling Technique...........................................................................................................21

3.4 Sample Size........................................................................................................................21

3.5 Source of Data....................................................................................................................22

3.6 Data Collection Tools or Instruments.................................................................................23

3.7 Method of Data Analysis....................................................................................................23

3.8 Model Specification........................................................................................................... 23

3.8.1 Theoretical model specification...................................................................................23

 3.8.2 Empirical model specification......................................................................................24

3.8.3 Description of Variables...............................................................................................25

3.9 Diagnosis test..................................................................................................................... 27

3.9.1 Hetroscedasticity.........................................................................................................27

3.9.2. Multicollinarity........................................................................................................... 27

3.9.3. Goodness of Fit of the Model.....................................................................................27

Chapter Four................................................................................................................................ 28

4. Working Plan............................................................................................................................28

4.1 Budget Plan........................................................................................................................ 28

4.2. Time Schedule...................................................................................................................29

Reference.....................................................................................................................................30
Acronym

AAWSA—Addis Ababa Water and Sewerage Authority

AUDB ─ Amhara Urban Development Bureau

CBN—Christian Broad Cast Net work

CBN—cost basic need

CSA—Compliance Safety Accountability

EEA—Ethiopian economic association

FEI—food energy intake

GNP—Growth national product

HDI—Human development index

IFPRI—International Food Policy Research Institute

NGO—Non Governmental organization

UNDP-- United Nation Development Program

VIF—Variance influence factor

WB—World Bank

GNP—Growth national product

HDI—Human development index

HHS—Household size

IFPRI—International Food Policy Research Institute

NGO—Non Governmental organization

OLS—Ordinary least square

PPP—purchasing power party

v
UNDP-- United Nation Development Program

WB—World Bank

vi
 Chapter One

1, Introduction

1.1 Background of the study

Poverty was a pronounced inability in well-being and recognizes many dimensions. It includes
low income and the inability to acquire the basic goods and services necessary for survival with
dignity. Poverty also encompasses low level of health and education, poor access to clean water
and sanitation, inadequate physical security, lack voice, and insufficient capacity and opportunity
to better one’s life (World Bank (WB), 2007).

The problem of poverty was severe in the world. According to united nation report about 25,000
people die every day of hunger and hunger related cause. Yet there is plenty of food in the world
for everyone; they lacked money to buy enough food to nourish them. The problem was that
hungers people are tapped in sever poverty. Being constantly malnourished, they become weaker
and often sick. This makes them even poorer and hungrier. This was down ward spiral of
continuous until death for them and their families (WFP, 2011).

According to World Bank, in 2012 just over 77.8 percent of the extremely poor lived in south
Asia (309 million) and sub- Saharan Africa (388.7 million). In addition, 147 million lived in East
Asia and pacific. Fewer than 44 million of the extremely poor lived in Latin America and the
Caribbean and Eastern Europe and central Asia combined (WB, 2015).

Most urban centers in develop countries including Ethiopia have undergone a rapid population
growth. This is due to the fact that migrants migrate from rural area by drought, famine, civil
conflicts, and the natural growth of population (EEA, 2003/2004). For instance according to
World Bank (2015) in sub-Saharan Africa extremely poverty fell down from 42.6% in 2012 to
35.2% in 2015. It shows some reduction but not satisfactory. The combined effect of these
creates strain on the labor market and urban social services provision and ultimately led to
pervasive poverty and deprivation (WB, 2015).

1
In Ethiopia poverty also indicates that absolute poverty in 2010/11 compared to 2004/5 declined
over the past five years in all regions except Dire Dawa urban (where absolute poverty incidence
increased by 6%). The poverty gap in 2010 /11 also declined in all regions except in rural Afar,
rural SNNP, Addis Ababa and Dire Dawa. Poverty severity also declined in 2010/11 in many
region including Tigray, Amhara, Benishangul-Gumuz, urban Afar, urban Somali, and rural Dire
Dawa. But poverty severity increased in rural Afar, rural Oromia, rural Somali, SNNP, Addis
Ababa and urban Dire Dawa (MOFED, 1995/6-2010/11).

In 2015, Ethiopia was facing drought due to the effects of El Nino, and about 10.2 million
persons were in need of emergency aid into 2016. According to the United Nations Development
Program of 2015, about 23 million Ethiopians live in conditions substantially below the basic
poverty line and food insecurity remains a major challenge. In the same report 44.2 percent of
children under five are malnourished and stunted. According to the report by Oxford University
Poverty and Human Development Index (OPJDI) in 2011, 87 percent of the Ethiopian population
was poor as measured by Multidimensional Poverty Indicators (MPI), which means they were
deprived in at least one-third of the weighted MPI indicators. This put Ethiopia as the second
poorest country in the world when using the MPI approach (OPHDI, 2013).

The World Bank sets the international poverty line at periodic intervals as the cost of living for
basic food, clothing, and shelter around the world changes. In the 2005 update, the poverty line
was set at $1.25 per day. In 2011,the threshold was updated to $1.90 per pay. In 2022, global
research from the World Bank brought the figure up to $2.15, where it stands in 2023.

In Ethiopia, urban poverty is slightly more prominent in small and medium town than major
towns. Poverty rate in small and medium towns is 50 percent against 40 percent in major town.
In addition the share of urban poor in small and medium town is above the share of urban
population; 69 percent of the urban poor lived in small and medium towns, which accounts for
65 percent of urban population Elisa, 2008).

Therefore this study will attempt to know what factors determine urban poverty in small and
medium town (evidence from Wolkite town) that makes the household being poor and non-poor.

2
1.2 Statement of the Problem

The World Bank sets the international poverty line at periodic intervals as the living for basic
food, clothing, and shelter around the world changes. In the 2008 update, the poverty line was set
at $1.25 per day. In 2015, the threshold was updated to $1.90 per day. That figure was set based
on the prices established in 2011 and that threshold should reflect that same buying power that
was set with the earlier poverty line (World Bank 2015).

In Ethiopia, poverty is the general feature for the nation and causing many suffering and anguish
to the largest proportion of the population. It is high agenda of the government, donor agencies,
NGOs and other sectors. The available finding literature review evidence indicate that urban
poverty is one of the most challenging development issue which is putting pressure in the
economic growth as well-as devolvement path of Ethiopian economy and mainly for the
economic well-being of a large portion of population who reside in urban area(Esubalew,2006).

In Ethiopia also different studies has been conducted in investigating the determinants of urban
poverty. For instance Esubalew (2006), analysis the determinants of urban poverty. As he
determined include education, income, water were negatively affect the poverty and also the
determinant variable include that variable, family size and health status are positively affect the
poverty.

But Mekonnen (2002), analyze determinants of urban poverty by using variables like education
and health has positive and negative impact on poverty respectively. Even if the issue of poverty
was overdone, very little was done on urban poverty in case of medium towns of Ethiopia. It was
with the belief that this town was representative of other towns of Ethiopia. The study was
therefore, serve as a support or exemplary for studying urban poverties to another towns of
Ethiopia. We will do this research to fill above gap that created between the different findings of
research. And also those findings were conducted earlier and we will have done this research to
fill the gap of time by adding some variables that the earlier findings exclude from their research.
This study tries to fill gap from other studies identified above was in the past.

Smegnew (2016) was studied in Debre Markos, but our research is studied in Wolkite town,
2023 because we think there is study area and time gap between these researches. Smegnew was

3
studied by using only six explanatory variables, but our study was conduct by nine explanatory
variables, these shows there was variable gap between the earlier finding and our study area.
This study was not studied with these emphasized explanatory variables in Wolkite town.

Hence, this study will attempt to fill this gap by conducting an empirical research on identifying,
analyzing and understanding those covariates that are responsible for households to be poor and
non-poor in the study area that needs to guide policy decision. We will be analyzing socio
economic and demographic factors that affect urban poverty in Wolkite town. Therefore, this
study is expected to address the following research question.

1.3 Research Question

1) How many percent of the households that live below the poverty line in the study
area?
2) What are the factors that affect poverty status in study area?

1.4 Objectives of the Study

1.4.1 General Objective of the Study

The general objective of the study is to identify the major determinants of urban poverty in
Wolkite town.

1.4.2 Specific Objective of the Study

1) To identify the percent of households that live below the poverty line in the study area.

2) To identify the impact of those variables on urban poverty in the study area.

4
1.5 Significance of the Study

This study will be initiate to explore the factors that determine urban poverty in case of Wolkite
town. In doing so, we hope that survey will add knowledge in the area of poverty determinant in
urban level and it will have its own contribution for future research work.

In light of the statement of the problem and profile of the study area, assessing the determinants
of urban poverty in Wolkite town will have some paramount importance. There are several
poverty related studies conducted in Ethiopia in recent time, mainly because of the accessibility
of data from various household survey recently made available. Though there is research who
attempts to study the dynamic nature of poverty in Ethiopia including determinants, they largely
focus on rural part of the country. Little is known on the determinants of urban poverty in
Ethiopia. This study will make a humble attempt to fill this gap by investigating the determinants
of the urban poverty. Moreover, the study will serve as a spring board for the future study. In
addition study would give an input for policy makers, CBO’s, NGO’s or any other interested
stake holders or actors who in or another way are engaged in the development of the town.

1.6 Scope of the Study

The scope of this study was limited to the determinants of urban poverty in case of Wolkite
town. During this study we will collect necessary data from Wolkite town that determines urban
poverty. In addition; the study will also focus on determinants that dominantly affect the urban
poverty. In other words, due to lack of financial and time the study was limited to the
determinants of urban poverty in case of Wolkite town.

1.7 Limitations of the study

This study will examine determinants of urban poverty. But due to shortage of time, lack of
internet access, lack of experience of the researcher and budget constraint may have an impact on
research methodology. The concept of poverty is abroad and complex phenomena. However,
this study is mostly focus on the economic factor and household characteristics, due to its

5
broadest scope. Therefore the result will be obtain from the study may not suit to all causes
regarding broad concept of poverty.

1.8 Organization of the Study

The study comprises five chapters. Chapter one includes the introduction, which contains
background of the study statement of the problem, research question ,objective of the study,
significance of the study, scope of the study and limitation of the study. Chapter two contains
literature review part. This includes theoretical and empirical literatures with regards to poverty
and/or urban poverty. Chapter three was part of developing general methodological issues
concerning the factors can determine urban poverty. Chapter four concerns about work plan.

6
 Chapter Two

2. Review of Related Literature

2.1 Theoretical Literature Review

2.1.1 Definition of Poverty

Different definitions are forwarded with regard to poverty by different scholars and institutions.
Since poverty is the outcome of complex interaction of social, economic, cultural and political
factors, the theoretical consideration in studying poverty is adopt appropriate definition. Poverty
is a state or condition in which person or community lack, the financial resources and essentials
to enjoy a minimum standard of life and well-being that’s considered acceptable in the society
(www.http//invetopodia.com).

There are three main school of thought concerning the definition and measurement to poverty.
These are the welfare school, basic need school and the capability school (Yared, 2005).these
schools also perceive poverty differently there are areas in which they share same in common
meaning: which is all of them judge a person to be poor whenever he or she is lacking with
respect to reasonable minimum standard.

The welfare school relates definitions of poverty to the economic well-being of the society. It
assume when; societies are not able to attain a level of economic well-being deemed to constitute
a minimum by the standard of that, society, and then persons or society faces poverty. It sees
income as a determining factor for the presence of poverty (Yared, 2005).

The basic need school defines poverty as when one lacks basic needs (goods and services). It
concentrates on the degree of fulfillment of basic human need in terms of nutrition/food, health,
shelter, education, transportation and soon. Yared (2005) tries to explain the limitation of basic
needs approach as a definition and measure of poverty. He argues that the set of basic goods and
services is different for different individuals depending on sex, age, type of activity, etc. of

7
individuals that is under consideration. One of the basic problems he cited is how to determine
the set of basic needs.

The capability school is neither the economic well-being nor the basic need deemed to satisfy the
minimum standard by the society. It is human ability or capability to achieve a set of functioning.
It tells as the extent to which people have a capability to be and to do things of extrinsic worth.
The measure is said to include publicity provided but non marketed services: like sanitation,
health care, education and life expectancy (Sallila and Hilamo, 2004).

2.1.2 School of thought on poverty

In literature there are three main schools of thought concerning the definition and measurement
of poverty. These are the welfares school; basic needs school, and capability school (Garza,
2001; and Yared, 2005). These schools although perceive poverty differently, there are areas in
which they share some common meaning, which is all of them judge a person to be poor
whenever he/she is lacking with respect to reasonable minimum standard

2.1.2.1 The welfare school

This approach refers to the numerous microeconomic precepts and postulate that economic
actors are rational and that they behave in ways to maximize their benefit, in other words, the
welfare or satisfaction that they derive from their consumption of goods and services. In this
scene, the role of the government should be limited, even though it is still possible for the
government to implement mechanisms that increase individual’s benefit and to measure
aggregate social benefit. In this sense, the welfares’ approach will be favorable to the
implementation of economic policies oriented primarily towards increasing productivity,
employment and income growth (Esubalew, 2006).

2.1.2.2 The Basic Needs School

This school defines poverty when one lacks basic needs (goods and services). It concentrates on
the degree of fulfillment of basic human needs in terms of nutrition, food, health, shelter,

8
education, transport and so on. Yared (2005) tried to explain the limitation of basic needs
approach as a definition and measure of poverty. He argues that the set of basic goods and
services is different for different individuals depending on age, sex, type of activity, etc. of
individual that is under consideration. One of the basic problems he cited is how to determine the
set of basic needs. There is even a high disagreement among professionals on the determination
of basic.

2.1.2.3 The capability school

What is emphasized in this school is neither the economic well-being nor the basic needs deemed
to satisfy the minimum standard by the society; it is nevertheless, human abilities or capabilities
first, it is subjective in nature. If economic welfare was observable, the poor could be identified
on the basis of interpersonal comparisons of economic welfare, which makes no sense to many.
Second it raises a problem of ethics. With this approach, an individual who is materially
prosperous but not fulfilled (according to his or her own criteria) should be classified as poor,
whereas an individual, who is not financially prosperous but nonetheless Fulfilled, will be
considered not poor. The measure is said to include publicly provided but non-marketed services;
like, sanitation, health care, education & life expectancy. Sen (1987) also introduced the notion
of capabilities in poverty definition and assessments. He defined poverty not only as a matter of
low level of well-being, but also as lack of ability to chase well-being specifically because of
lack of economic means. He favored the capability to function as criteria for assessing standard
of living, and by implication poverty rather than the utility that might be derived from using that
capability.

2.1.3. Poverty Lines and Types

A poverty line is defined, based upon a minimum level of consumption, normally as the cost of a
bundle of goods (both food and non-food) deemed to assure that basic consumption needs are
met and below which survival is threatened (Caroline Moser et al., 1996; and Anthony et
al.,2009).More formally, the poverty line for a household may be defined as the minimum
spending or consumption (or income, or other measure) needed to achieve at least the minimum
utility level given the level of prices and the demographic characteristics of the household.
9
Therefore Poverty measurement generally assumes that there exist predetermined and well-
defined standards of consumption which must be reached if a person is not to be deemed
poor"(Ravalli on, 1992; and WBI, 2005). Thus, three types of poverty lines are dominant in most
poverty literatures (David H. et al., 2001; Metalign, 2005; WBI, 2005; and Esubalew, 2006); and
details are stated below:

2.1.3.1 Absolutes poverty line

It is known as objective poverty line and it is fixed in terms of the standard of living it
commands over the domain of poverty comparison. Absolute poverty line should not be defined
as regrious poverty line rather it should be the one which is fixed in terms of living standard in
dictators being used and over the entire domain of poverty comparison with a person at the same
real consumption (Revallion, 1992 Constance fet.al, 1995, WBI, 2005).one common weakness of
absolute poverty line is it does not change with the living standard of the society in question.
Thus people are labeled “poor” when some absolute needs are not sufficiently satisfied ,that is
needs related to the consumption pattern of other people in a given society (Esusalew ,2006).

2.1.3.2 Subjective poverty line

This approach explicitly recognize that poverty line is inherently subjective judgment people
make about what constitute a socially acceptable minimum standard of living in their own
societies (Revallion, 1992 and yohannes,1996).The concept of subjective poverty based on the
premise that people are the best judge of their own situation and that their opinion should
ultimately be decisive factor in defining welfare and poverty ( mekonen T.1999).

2.1.3.3 Relative poverty line

Refers to a lack of socially acceptable for level of resource of income compared to the other with
in a society or a country. In practice the most popular choice to set poverty line in this method is
done by taking a certain parentage of mean or median income of population. Therefore measures
of relative poverty define “poverty” being below some relative poverty threshold (sallilaetal,
2004; morduch T, 2006).

10
2.1.4 Setting poverty line

In the analysis of poverty, the starting point is the identification of the poor form non poor. To
deal with this poverty line plays a vital role in quantifying the various indicators of well-being in
to single index (Ravailion, 1992).Various method have been employed in constructing poverty
line The most popular method however are the cost of basic needs (CBN) and food energy intake
approach as cited in mekonnen (2002) World Bank. In the construction of poverty line two
methods can be employed. Those are cost of basic need (CBN) and food energy intake (FEI).

2.1.4.1 Costs of basic need approach

The cost of basic need method stipulates consumption bundle deemed to be adequate for basic
consumption needs and then estimate its cost for each of the sub-groups being compared in the
poverty profile. This is the approach of Rowtree (1901) in his seminal study of poverty in New
York, England, in 1989.

Ravallion and Lockshin (2006) propose an approach to test the utility consistency of cost of
basic need poverty lines across households with common preferences using Samuelsows (1938)
theory of revealed preferences. However, this can be applied only within sub-groups deemed to
have a common preference. In practice utility functions can vary, due to difference in climate.

2.1.4.2 Food energy intake approach

Food energy intake approach finds the consumption expenditure or income level at which food
energy intake is just sufficient to meet predetermined food energy requirement for good health
and normal activity level (such calorie requirement are given in WHO, 1985 for example). This
approach locates the poverty line as the income or consumption expenditure level just adequate
to meet a predetermined food energy intake to an individual. The level of FEI, very much,
depends upon, preference, activity, age and sex of an individual. After taking these differences
into account and the costs of attaining predetermined FEI, the poverty line can be constructed.
This could be obtained by finding the consumption expenditure or income level at which the

11
person attains the food energy level (Ravallion and Bidani, 1994). The steps are based on the
following:

Step one: establish the minimum nutrition requirement

Step two: examine the observed spending pattern to see at what average expenditure
households just achieved a minimum nutrition requirement.

According to these explanations the researcher will choose or favor food energy intake approach
than cost of basic need approach because of the following reasons: First, fluctuation of the price
of the commodities and hence, could not clearly show the reality in the consumption expenditure
behavior of residents (World Bank report, 2008/09).Second, the cost of basic need approach
needs listing and quantification of basics and non-basics goods of different items in monetary
terms, while food energy intake approach never use such monetary terms that is why food energy
intake is preferred. In the case of cost of basic need approach require estimation of household’s
consumption expenditure in monetary value. The researcher argue however, that in Arbaminch
town household consume both marketable and non-marketable goods, it is difficult to use
equivalent scales revealed only from marketable goods, therefore, instead of estimating the cost
of consumption expenditure or using cost of basic need approach the study will use food energy
intake approach.

2.1.5 Types of poverty

2.1.5.1 Income poverty

Income poverty happen when household takes Less than one USA dollar per day. This means
people will not have enough food or medicine and they will have poor clothes and houses. It also
due to people is not having access to money and other assets. The best way to reduce income
poverty is to encourage and support development of effective business that will make good use
of our natural resource and talented to create a wealth and job.

12
2.1.5.2 Non income poverty

Non income poverty happen when may have a little bite of money otherwise the quality of their
life are not good. They do not have affordable social and physical service (schooling, heath care,
medicine, safe water, good sanitation, good transport), and they may not feel safe in their home
either because they cannot trust.

Some of the poorest countries in Africa really need substantial prolonged aid to find direct
universe welfare benefit system to help them climb out of poverty. Extreme poverty being wide
spread helps cause other bad thing like child being sold as slave or used in armies and getting no
education. African poverty often means wide spread hunger and saturation. And it is general
facts of poverty that you are too poor than you may have no resource to improve that. Being
progress on poverty in Africa can be achieved with it more real effort and it being achieve now
to at least some extents in parts of Africa (Retrieve 2010).

Poverty is also widespread and multi-faceted in Ethiopia. Measured mainly in terms of food
consumption set a minimum nutrition requirement of 2200calorie per adult per day and also
including non-food consumption requirements, an estimates of 1995/6 shows that 45% of
population where below poverty line. Poverty was prevalent in both in rural and urban areas with
coverage of 47% and 33% respective population (IMF, 2000). Urban area accounts for only 15%
of the total population, but also have high rate of incidence of poverty. Unlike finding elsewhere
in developing world, urban and rural poverty level in Ethiopia are not dramatically different form
each other. Depending on the methodology adapted and data analyzed the estimated urban over
all poverty and food poverty range from 33%to 50% (kedir, 2003; bigsten et.al, 2003).

2.1.6 Measures of Poverty

There is no single measure of poverty and all choices have their own merit and demerit. The
debate of measuring poverty was like finger and finger nails for economists. The presence of a
lot of instruments, though, each with some drawbacks, nevertheless, helps us to see the type and
extent of poverty in a given society. Generally, the measurement of poverty was said to consist
of three phases; in the first phase, choice of appropriate well-being indicator was made, in the

13
second phase, the poor are identified from the population and the third phase was concerned with
the derivation of poverty indices using the available information.

The concepts of poverty thresholds and lines have a long history extending back into & beyond
the poor Laws in England. Despite their long history of operationalization, the methodology was
still deeply flawed for analysis and the design of antipoverty policy interventions (Saith, 2005).
After poverty line was determined three indices can be utilize in the measurement of poverty.

2.1.7 Poverty Indices

There are, of course, various types of poverty indices but the most commonly known ones are
head count index (Po), poverty gap/depth index (P1) and the severity index (P2) (Esubalew,
2006).

2.1.7.1 Head Count Index (P0)

This index tells us the proportion of population, whose consumption expenditure falls below the
predetermined poverty line. Put simply,

Q
po=
N

Where, “Q” is the number of people earning income below the poverty line and

“N” the total number of people in the population.

While ”P” has an advantage of simple calculation it suffers from two problems: a reduction in
the incomes of the poor doesn't reveal how worse the poor will be poorer and it doesn't in any
case depict distribution of income among the poor.

2.1.7.2 Poverty Gap/Depth Index (P1)

This measures how far an individual’s income falls short from the poverty line. Since this index
is based on the aggregate poverty deficit of the poor relative to the poverty line, it is by far better
than P0. Mathematically, P1 can be depicted as follows,
14
 q
1
P 1= ∑ { Zi−Yi } / Z
N i=1

Where; Yi = Consumption expenditure or income of the poor

Z = Poverty line although this model measures the depth of poverty better than P0, it is
insensitive to the number of individuals below the poverty line and to the transfer of income
among the poor.

2.1.7.3 Severity Index (P2)

The severity index also called, the Foster-Greer-Thorbecke Index, measures severity of poverty
by squaring and averaging the gap between the income of the poor and poverty line. It is given
by the formulae,

q
1 Z−Xi
P 2= ∑
n i=1 z

Where; Xi is income or consumption expenditure of household,

Z is the poverty line, n size of the population, and q is the number of the poor.

P0, P1, and P2 tell respectively the incidence, depth and P2 measures the mean of squared
proportional poverty gaps. It gives more weight to the poverty of the poorest by squaring and
averaging the gap.

2.2. Empirical literature review

2.2.1. Determinants of poverty

Different studies have been conducted with the determinant of poverty. Some of these are house
(1991) for Sudan; glewwe (1991) for Cotedivoire; Appleton (1995a, 1995b) for Uganda . The
determinant of poverty can be classified as economic factor and household characteristics.
Household size, age, level of education, health status…etc is related to household characteristics.

15
On the other hand economic factors include; income and unemployment level in the economy
(Glewwe, 1991).

The study grouped based on the method they use such as study by coulomb and McKay in
Muritania(1997), Mackinon and Appleton in Uganda (1996) and in case of Ethiopia Tadesse
(1997) all those studies use the method of multi nominal logistic regression analysis. While the
study by Glewwe for cote D, evior (1991), Esubalw (2006) for Ethiopia and house for sudan
(1991) were used the method of probit and logit model in their analysis of urban poverty.

Most of the studies econometric analysis examine the factors related to individual households for
instance Glewwe, (1991) identified determinants of households welfare by regressing total
household expenditure ( i.e. the measure of standard of living ) on different explanatory variables
in his analysis household characteristics are identified as determinant of poverty and he restricted
himself to that portion welfare due to consumption of goods and services.The study by Appleton
and Mackinon in Uganda (1997), they modeled poverty as a discrete choice variable by using
poverty measures developed by Foster, Greer and Thorbecke (1984).

Their focus was only on what happens to the poor because they didn‟t consider and modeled
variations in consumption above the poverty line. Their modeling exercise revealed that the
results from the simple consumption function. Their finding shows that consumption level of the
households are main factor that determine poverty significantly.Nowadays urban areas in
Ethiopia are in a state of expansion without the necessary preconditions and this is paving the
way for visible urban poverty. Urban areas are unable to cope with the increasing population,
and delivery of services has deteriorated markedly over the years. Access to housing, health, and
education services continues to be seriously limited. Basic sanitary conditions are horrific by any
standard. Transportation facility, energy availability and access to job, labor market, skill
upgrade, work, entitlements and finance are also at their lowest level (Dessalegn and Aklilu,
2002).

The mass departure of rural-urban migration either by pull or push, economic or social factors
play key or pivotal roles in the escalation of urban poverty in Ethiopia. This migration coupled
with the natural increase in population within the urban area has started to impose a pervasive

16
challenge to the admirable development of the urban centers. The urban population in Ethiopia is
growing at a rate of around 8 percent per year (CSA 2005/6).

The income level of households could also determine the level and status of urban poverty. In
Ethiopia, it is common to see that in most cases the family depends on a single breadwinner
wage earner. This single employed person, usually, doesn‟t have the capacity to fulfill the need
and interest of the whole family, particularly those families composed of children, youngsters,
and the old ones. This would have an impact for the family to expose vulnerable life. Lack of
access to skill development and upgrading of workers have had an adverse effect on income of
an individual. Since urban life is a function of monetized economy, absence/presence of income
play a direct and great effect on urban poverty (Mekonnen, 2002).

Health is also a crucial in determining to what extent which urban poverty prevails, because in
the absence of proper health, the working force whether professional, skilled or trained cannot
have the capability and opportunity to do jobs effectively and efficiently. Efficiency of workers
basically depends on their health status. Workers whose health was not good and who fall sick
quite often cannot do their job efficiently and thus their efficiency is bound to remain low
(Somashakar, 2003).

World Development Report 2002, cited in Somashaker (2003) explained that health plays
immense contributions. According to him improved health contributes to economic growth in
four ways: firstly it reduces production losses caused by worker illness, second it permits the use
of natural resources that had been totally or nearly inaccessible because of disease, third it
increases the enrollment of children in schools and makes them better able to learn, and finally it
frees for alternative uses resources that would otherwise have to be spent on treating illness.

Most of the urban areas of Ethiopia are still constrained by sufficient quantity, reliability and
quality of water. It becomes common that water related diseases like Giardia and Amoeba are
affecting most people due in part to lack of pure water. The numbers of households who have tap
water inside their home or compound are believed to be too small (AAWSA, 2000). In most
cases, households either share pipes far from their homes or buy drinking water from their
neighbors at a much higher cost than the recommended rate.

17
Garza(2001) examined the determinants of poverty in Mexico. A Logistic regression was used
to estimate based on the data with the probability of a household being extremely poor as the
dependent variable and a set of economic and demographic variables as the explanatory
variables. The results of the Logistic regression the study shows that there is no evidence that
female-headed households are more likely to be poor than male-headed households. Using a
Logistic regression on Income and Expenditure, Cortes (1997) finds that the probability of being
poor decreases by six percent if the household is headed by a woman. The works of (Shewaye,
2002, Mekonnen, 2002) in which female-headed households are those who are the most affected
and vulnerable groups in experiencing hard core urban poverty.

Empirical literatures suggest that there is a positive correlation between household‟s size and
poverty. For instance, DjavadSalehi-Isfahani cited in Yared (2005) for Iran concludes that
households with larger number of members tend to be poor.

Likewise, Grootart for Cote d' Ivor, IFPRI for Malawi, Herrer for Peru, Garza for Mexico, Eyob
and Harris for Eritrea, Nigatu, Mekonnen Related to poverty and education most empirical
studies undertaken on poverty concluded that education has a negative impact though the
magnitude is different depending on the socioeconomic condition in which the study is
undertaken. A remarkable correlation between poverty and level of education is for example,
observed in urban Ethiopia (Mekonnen, Bereket&Abebe, 2002). The study found out that the
percentage of poor people significantly declines as the level of Education of the household head
increase. Their study illustrated the incidence of poverty among people who have never attended
school which is 42 percent compared to people with college level and above education who have
had one member to the poor population.

DAG, (2003)) noted that whereas significant improvement has been achieved in terms of
participation rates in some developing countries; the potential for human resource development
in Ethiopia still remains questionable owing to the minimal progress associated with educational
quality and retention. Although the coverage of education seems promising in urban Ethiopia
today, the quality is still far from reality to make learners competitive for employment.

18
2.3. Conceptual Frame Work of the Study

The conceptual frame work contains dependent and independent variable. Independent variables
are assumed to have caused the change in the dependent variables. The dependent variables
referred to as the reason that researcher wants to explain (Kothari, 2004).

According to the conceptual framework for this study the dependent variable is poverty status and
independent variables are income of house hold, age of house hold head, dependency, sex, house hold
size, education, water, health, and market place.Conceptual framework provides direction for this study.
Diagrammatical description of variables below indicates relationship existing between poverty status and
its factor.

Family
size of
responde
nt Income of
dependenc house hold
y

Age of
market house
place hold
poverty head
status

health of Educatio
house n level of
hold responde
nt
Sex of
water
responde
access
nt

19
 Chapter Three

3. Methodology of the Study

3.1 Description of the Study Area

Wolkite city is one of the fast growing cities of Ethiopia. And it is located in the southern part of
Ethiopia some 158 km far from Addis Ababa. It serves as an administrative center of the Gurage
Zone in Centeral Ethiopia region accommodating around 77,514 inhabitants. Geographically, it
is located between altitudes of 1300 - 3000 m above sea level and has an agro ecology zone
(woynadega climatic condition). The city is found in 6`24‟30‟ longitude N & 38`18‟30”
Latitude east and its average rainfall is 1200-1800mm per year. And has an average mean
temperature of 30'c. The surrounding area of the town are 10.34
2 2
km ∧the population density are 7,526 /km this study will be conduct in Wolkite town.Wolkite
town is one of the largest town in the Gurage Zone. This sub city incorporates tewelve (12)
kebeles and from the overall population of the town among which 38,842 (50.12%) males and
38672(49.88%) females (Population Projection 2022-07-01).

20
3.2 Research Design

The main purpose of the study was to identify the factors that determine the level of urban
poverty. Gathering information about socio-economic and expenditure pattern of households was
the main ingredient for the study. It is collect through field survey using structured
questionnaires as the main instrument. The questioner poses to the head of household by
assuming that the head of the household are the main source of income as well as makes
expenditure for the house he/she leads.

This study will analyze the relationship between two set of variables: the dependant and
explanatory variable. The dependent variables were dichotomous or dummy variables: where it
represents (1) when the house hold is poor and (0) when the house hold was non poor. The
explanatory variable are having both qualitative and quantitative nature, These are ; age, sex,
house hold size, education level of house hold head, access to market place access to basic
service(i.e., water and health), and health status of house hold heads.

3.3 Sampling Technique

The study will be employed multi-stage sampling technique. At the initial stage sub-cities was
categorized in to three groups based on their heterogeneous charachetrstics. There are three (3)
sub-cities and twelve (12) kebeles in wolkite town. At the next stage three sample kebeles was
selected by applying simple random sampling technique from twelve kebeles. At the final stage
sample households was selected using equal probability systematic sampling technique by
selecting every Kth households to make more precise. In each kebeles selection of the first
household was made by simple random sampling technique. The sample size was determined
proportion to sampled kebeles population. The sample size was determined according to the table
below.

Number Sub city Kebele Household Proportion Sample

proportion

1 Gubre sub city Zebider 2,900 30% 30∗100

=30
100

21
2 Addis sub city Addisss 3,260 34% 34∗100
=34
100
Hiwot

B Bekur sub city Edget ber 3,400 36% 36∗100

=36
100

Total 9,560 100% 100

3.4 Sample Size

In order to minimize the problem scholars support the use of multiple strategies so as to
complement one method by another (Mehari, 2003). In line with above argument this study
would take a cross-sectional survey to assess the determinant of urban poverty in wolkite town.

According to the information obtained from (Population Projection 2022-07-01) the town
recently has 12 kebeles. Based the information obtained the town has similar economic, political
and social activities. So, in order to minimize time budget cost the study would cover three
Kebeles of the town these are Addis hiwot, Ediget ber and zebider because of simpilicity of these
kebele represent kebele 01 ,kebele 02and kebele 03 respectively. Total of 100 respondents are
randomly selected. Sample was determined by using Taro Yamane (Yamane, 1973) formula with
90% confidence level.

N
n= 2
1+ N (e )

77,514
= =100
1+ 77,514(0.01)

Where: N = Total households of three kebeles

n=Total sample size.

e = Margin error with 10%

22
Therefore, the sample size is 100

3.5 Source of Data

The study will use both primary and secondary data source. For primary data afield survey was
apply. Primary data’s with regards to poverty, demographic characteristics like (age, family size,
sex) expenditure, income and educational status would collocate through structured
questionnaires; the structured questionnaires are prepare to the head of the household. The
survey is conduct at house held level and the information about house held is obtained from the
head of households. The secondary source is collected from books published and unpublished
articles, official report, journals and internet service. The types of data are cross-sectional one.
Information about the consumption expenditure of house hold and Scio-economic characteristics
of households was collect from the field survey. Secondary source, on the theoretical
understanding of (urban) poverty and empirical studies conduct so far will use. The data is
annualizing by using (STATA) version 12 statistical analysis software programs.

3.6 Data Collection Tools or Instruments

The data to be use in the study will be collected from primary and secondary sources. Primary
data will be collected from administrative office workers with questioners and interviews. To get
the required data for the study researcher will employ a structured questionnaire to households of
the town. The questionnaire is first prepared in English and then it translates in to Amharic. This
uses for the purpose of clarity, acceptability, flow and reduction of repetition. The respondent
must understand the questionnaires in order to prepare normal questionnaires. And secondary
data will be collected from written materials, books and journals. .

23
3.7 Method of Data Analysis

Basically the analysis and presentation of the study is quantitative. In the first part, the study
used descriptive statistics (percentage, ratio and t tests), to analyze and describe the determinant
of urban poverty in wolkite town.

In the second part Econometric model, more specifically, Logit model is appropriate to estimate
the quantitative data. Logistic regression is a statistical technique for predicting the probability of
an event, given a set of predictor variables. The procedure is more sophisticated than the leaner
regression procedure. The binary logistic regression procedure empowers one to select the
predictive model for dichotomous dependent variables. It describes the relationship between a
dichotomous response variable and a set of explanatory variables. This estimation was worked
out with the help of STATA software application program method.

3.8 Model Specification

3.8.1 Theoretical model specification

In order to explore the correlates of urban poverty with the variables to be important in
explaining urban poverty logistic regression model was employed. In most application the model
are quite similar with probit regression. The main difference being that the logistic distribution
has slightly fatter tails. That is to say the conditional probability pi approaches 0 or 1 at a slower
rate in logit than in probit. Therefore there is no compelling reason to choose one over the other.
(Gujarat, 2009) There was rationality behind the selection Logistic regression model was
easiness for interpretation the models good predictive power. However, the model having this
strong side, it was not meaning that free from limitation. Limitation of the model arises if the
Logit, was positive, it means that when the value of regress or (S) increases, the number of that
regresses and equals 0(meaning some event of interest happiness) increase. If L was negative the
number that regress and equals 1 decrease as the values of X increase. This problem can be
solved by though adjusting the number and size of explanatory variable, with the dependent
variable being the dichotomous variables of whether the household is poor (1) or not poor (0).the

24
explanatory variables considered in the analysis are demographic (sex, age, household head,
family size) educational level, household health, water, access market place, .

3.8.2 Empirical model specification

In order to achieve the specified objectives and answer the questions set, this study was used
econometric model especially the logit model. The dependent variable is categorical variable
which would assume a value of “1” if the household is poor and assume a value of zero
otherwise. The logit model specified as follow (Gujarat, 2009 page559).

1 1
Pi= =
Xi 1+e−¿ ¿

Where βi=coefficient of each explanatory variable

Xi=explanatory variable for simplicity it can be written as

zi+ui
1 e
Pi= zi+ui
= zi
1+ e 1+ e

Where Zi=𝛽𝑜 + 𝛽1𝑥1 + 𝛽2𝑥2 + 𝛽3𝑥3 + ⋯ 𝛽𝑛𝑥𝑛

Ui=error term

The above equation shows the cumulative logistic distribution function.

Pi=the probability of household being poor, then (1-pi) was the probability of non poor which
was

zi+ui
1 pi e
1-Pi= zi+ui Therefore, it can be rewritten as; =1+ − zi+ui
1+ e 1− pi 1+e

Pi/(1-pi) was the odd ratio in favor of the household being poor or the ratio of the probability that
households are being poor to the probability that households are being non poor.

If I take the natural logarithm of the above, I obtain what the interesting logit model.

25
 zi+ui
pi 1+ e
ln( ¿= − zi+ui
1− pi 1+e

Zi=β0+β1x1+β2x2+β3x3+β3x3+……..βnxn

Therefore the general logit model that used for estimation purpose was that
Zi=β0+β1x1+β2x2+β3x3+……βnxn

3.8.3 Description of Variables

Dependent variable:

Poverty status; - In this study poverty status was a dependent variable which is dummy, it
takes1 if households are poor when income level less than $2.15 per day, and takes 0 if the
households are non-poor, when the income level greater than or equal $2.15 per day (World
Bank In 2022).

Independent variables:- in this case the independent variables are; income of house hold,
age of house hold head, dependency, sex, house hold size, education, water, health, and market
place are included.

Income of the household (Inc):-Average monthly income of the households which was
continues variable and in fact theoretically income and poverty have negatively related. If the
income of the household was increase by 1% the poverty can decrease by the coefficient of
income.

Age of household head: This refers to the age of household head. Which was continues one and
theories of urban poverty (as cited in Jonson 2007) puts that when the age of households
increases then the probability of poor was increases. The expected sign of age with poverty was
that negative.

Dependency (dep):-which is dummy variable and it, take 1 if the house hold head was
independent, 0 if the household head is dependent and here the expected sing in this research was
positive. If the household head of the respondent dependency increase by 1% the poverty
increase by the coefficient of dependency.
26
Sex: -is the biological deference of households which is dummy variable it takes 1=male

0=female and it’s expected to have negative sign with poverty. Literarily female headed
household higher probability of being poor household but empirical studies finds that the
probability of being poor decreases by six percent if the household is headed by a woman.

Household size (hhsize):- of household which was continues variable and expected sign of
household size with poverty was that positive sign when the family size was increase then the
probability of household being poor increase.

Education (edu):-which was dummy variable and it, takes 1 if household head was literate 0 if
illiterate and here the expected sign in this research is negative. According to traditional
neoclassical theory of poverty the higher education more likely to predict better living standards
across the life course and over time.

Water (wat);- water source of household used and it was dummy variable which takes the value
of 1 if households used privet tap water 0 otherwise .It was expected to have negative sign with
poverty.

Health (heal);- water source of household used and it was dummy variable which takes the
value of 1 if households used privet tap water 0 otherwise .It was expected to have negative sign
with poverty.

Market place (mktp): which was dummy variable and it takes 1 if the household head can get
market place and 0, otherwise. Here the expected sign of market place status with poverty was
that negative. If the respondent can get market place increase by 1% the poverty can decrease by
the coefficient of the market place.

3.9 Diagnosis test

Diagnostic test is made to make sure that the multiple linear regression model assumption
violated or not. So use of diagnostic test is essentially in this study. I will be check it.

27
3.9.1 Hetroscedasticity

The study will test heat test by using prush pagan test which test chi-square test if it is greater
than 5% we conclude there is no hetroscedasticity problem. And if there is hetroscedasticity
problem it can be removed by robust during regression.

3.9.2. Multicollinarity

The study will test multicollinarity by using variance inflation factor, if variance inflation factor
is greater than 10 it indicates the presence of multicollinarity and this problem can be solved by
drop the collinear variables. So this study will check the problem multicollinarity is existing or
not.

3.9.3. Goodness of Fit of the Model

The will check goodness of fit of the model by computing coefficient determination. Majority of
scientific study recommend greater than 70.If the study will face coefficient determination less
than this number, the researcher will increase sample size.

28
 Chapter Four

4. Working Plan

4.1 Budget Plan

Budget and cost plan is preparing schedule for budget and cost that will be use the planner doing
his or her work properly. Throughout the investigation each activates and step will be under take
according to their relevance for the successful of the study. Each activates under taken associated
with current price and market condition of our country; it is described by table as follows

No Material Number of unit Requirement Unit Total Cost

Requirement of
Cost

1 Pen 1 15 15

2 Paper 1 packet 300 300

3 Flash 4GB 1 250 250

4 Telephone 2 50 100

5 Transport 800

6 Typing and 50 5 250

Printing

7 Miscellaneous 20 100 200

Total 75 720 1915

Source of budget; Own source

29
4.2. Time Schedule

Time will be allocated to different faces of the research projection of its requirement. In General, the table
specifies time period covered until the computation of the study.
NO Activities Months

Oct Nov Des Jan Feb Mar Apr May

1 Data set X

2 Title X
Selection

3 Literature X
review

4 Preparing X X
Proposal

5 Data X
Collection

6 Data X X
Editing

7 Data X X
Analysis

8 Research X
project
report
submission

(Time Schedule, 2023)

30
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