Prices and Poverty in Urban Ethiopia

Poverty is an ongoing issue in Ethiopia. The identification of policy options to address the problem requires that poverty be measured accurately. One of the most important ingredients in the measurement of poverty is price. The magnitude of poverty is affected by how cost of living differences across time and regions are adjusted. This paper derives a set of price indexes for urban Ethiopia, using data from four household surveys conducted between 1994 and 2000. The results indicate that the cities of Dire Dawa and Mekelle are the two most expensive cities, while Jimma and Bahir Dar are the least expensive. The findings also confirm that poverty is high in urban Ethiopia, with poverty head count of over 40%. Poverty estimates and profile derived using poverty lines as cost of living deflators are similar to those obtained from preferred price indexes developed in the study. However, country-level consumer price indexes, which do not adjust for spatial cost of living differences, may result in misleading estimates and poverty profile. This may have implications for the allocation of resources for poverty alleviation purposes.