POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

POVERTY, INEQUALITY AND

DEVELOPMENT

ECON 40163 ECONOMIC DEVELOPMENT

By:

BILLONES, Raymart B.

BURLAUS, Romnick E.

LUBIANO, Madilaine C.

MIRAFUENTES, Caryl mae S.

RODEJO, Jerome R.

BSMA 2-7

Professor:

Mrs. Aileen L. Camba

August 2019

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INTRODUCTION

Development refers to developing countries working their up way up the

ladder of economic performance, living standards, sustainability and equality that

differentiates them from so called developed countries. Philippines experience

some growth and some significant improvements this past years but despite those

things poverty remains. Some data shows that poverty is actually not widespread

anymore, but it’s the opposite of what we are seeing or experiencing. According to

NEDA, the poverty line is at more than 9,000 pesos per month so they assume

that if a family is earning 10,000 pesos you are not considered poor anymore. In

another statement NEDA also said that to be able to live a comfortable life a family

must earn at least 42,000 pesos while the average annual income of a Filipino

family is approximately 267,000 pesos or 22,250 pesos per month. Technically

they are saying that Filipinos are not poor but we are far from having a comfortable

life, so we are not suffering but rather we can say that we are on “surviving state”.

According to PSA or Philippine Statistics Authority, on the second quarter

of 2018 the Philippines GNI per capita is 48,983 and on the second quarter of 2019

the GNI per capita is 51,381 pesos. The Philippines experience growth between

this periods for about 4.9% growth rate. So if our country is actually experiencing

growth we should feel this growth, but that was not happening. The issue of

development does not only focus on making GNI grow but it also consider who

would be the main generator of those growth: the majority or the minority. Rich

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family are indeed a rarity so they are the minority, with rich families numbering only

20,000 or 0.1% of the total 17.4 million families in the country. So if they are the

one who are generating those growth, it would most likely be appropriated by them,

and progress against poverty would be slow and inequality would worsen, but if

the majority who are the middle class and low income class which is the 99.9% of

the families in the country generate the growth they would be the main beneficiary

of those growth and inequality would decrease.

For the reason that poverty and inequality plays a big role in the issue of

development we focus this report on those problems. We begin by introducing

appropriate measures of inequality and poverty, then we define the nature of the

poverty and income distribution problem and consider its quantitative significance

in various developing nations. We then examine in what ways economic analyses

can shed light on the problem and explore possible alternative policy approaches

directed at the elimination of poverty and the reduction of excessively wide

disparities in the distributions of income in developing countries. A thorough

understanding of these two fundamental economic manifestations of

underdevelopment provides the basis for analysis in subsequent chapters of more

specific development issues, including population growth, education, health, rural

development, environmental degradation and climate change, and foreign

assistance.

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CHAPTER I. Measuring Inequality

Inequality refers to the measurement of imbalance or unequal distribution

in a system, which may be social, economic, political, diversity, etc. In economics,

it refers to how economic metrics are distributed among individuals in a group,

among groups in a set of population, or among countries. In this chapter we would

be focusing on the Inequality in distribution of income. For us to be able to

understand more the inequality or identify if a country is experiencing inequality in

distribution of income, Economist and statisticians created principal measures of

income distributions both analytical and quantitative purposes.

 Size Distributions

The personal or size distribution of income refers to the proportion of

total income received by various groups and focuses on inequality of

income between various income earners, irrespective of the source from

which the income is derive. What matters is how much each earns

irrespective of whether the income is derived solely from employment or

comes also from other sources such as interest, profits, rents, gifts, or

inheritance. Moreover, the locational (urban or rural) and occupational

sources of the income (e.g., agriculture, manufacturing, commerce,

services) are ignored.

The size distributions of income arranged all individuals in ascending

personal incomes (from lowest income earner to highest income earners),

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it was then divided into groups or sizes. The common method use by

statisticians and economist are dividing the population into sequential

quintiles (A 20% proportion of any numerical quantity. A population divided

into quintiles would be divided into five groups of equal size.) Or deciles (A

10% portion of any numerical quantity; a population divided into deciles

would be divided into ten equal numerical groups.) according to ascending

income levels and then determine what proportion of the total national

income is received by each income group.

Table 1.1 shows a hypothetical but fairly typical distribution of income

for a developing country. In this table, 20 individuals, representing the entire

population of the country, are arranged in order of ascending annual

personal income, ranging from the individual with the lowest income (0.8

units) to the one with the highest (15.0 units). The total or national income

of all individuals amounts to 100 units and is the sum of all entries in column

2. In column 3, the population is grouped into quintiles of four individuals

each. The first quintile represents the bottom 20% of the population on the

income scale. This group receives only 5% (i.e., a total of 5 money units) of

the total national income. The second quintile (individuals 5 through 8)

receives 9% of the total income. Alternatively, the bottom 40% of the

population (quintiles 1 plus 2) is receiving only 14% of the income, while the

top 20% (the fifth quintile) of the population receives 51% of the total

income.

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A common measure of income inequality that can be derived from

column 3 is the ratio of the incomes received by the top 20% and bottom

40% of the population. This ratio, sometimes called a Kuznets ratio after

Nobel laureate Simon Kuznets, has often been used as a measure of the

degree of inequality between high- and low-income groups in a country. In

our example, this inequality ratio is equal to 51 divided by 14, or

approximately 3.64. To provide a more detailed breakdown of the size

distribution of income, decile (10%) shares are listed in column 4. We see,

for example, that the bottom 10% of the population (the two poorest

individuals) receives only 1.8% of the total income, while the top 10% (the

two richest individuals) receives 28.5%. Finally, if we wanted to know what

the top 5% receives, we would divide the total population into 20 equal

groups of individuals (in our example, this would simply be each of the 20

individuals) and calculate the percentage of total income received by the

top group. In Table 5.1, we see that the top 5% of the population (the

twentieth individual) receives 15% of the income, a higher share than the

combined shares of the lowest 40%.

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Table 1.1 Typical Size distribution of Personal Income in a

Developing Countries by Income Shares- Quintiles and Deciles
Share of total Income
(%)
Individuals Personal Income (%) Quintiles Deciles
1 0.8
2 1.0 1.8
3 1.4
4 1.8 5 3.2
5 1.9
6 2.0 3.9
7 2.4
8 2.7 9 5.1
9 2.8
10 3.0 5.8
11 3.4
12 3.8 13 7.2
13 4.2
14 4.8 9.0
15 5.9
16 7.1 22 13.0
17 10.5
18 12.0 22.5
19 13.5
20 15.0 51 28.5
Total (National Income) 100 100 100

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The table 1.2 presented the Size distribution of income in the

Philippines based on family income by Income Class based on the PSA

Family Income and Expenditure Survey (FIES).

The population is grouped into quintiles which is 20% of the

population each. The first quintile represents the bottom 20% of the

population on the income scale. This group receives only 0.2% of the total

national income. The second quintile receives 0.8% of the total income.

Alternatively, the bottom 40% of the population (quintiles 1 plus 2) is

receiving only 1% of the income, while the top 20% (the fifth quintile) of the

population receives 67% of the total income. Using the Kuznets Ratio, the

inequality ratio of the lower 40% of the population to the higher 20% of the

population is equal to 67.0 divided by 1.0, or 67.0. This clearly show how

unequal the distribution of income in the Philippines.

NOTE: THE MOST RECENT DATA PRESENTED ON PSA WEBSITE IS ON

YEAR 2015.

Table 1.2 Size distribution of Income in the

Philippines (2015)
Quintiles (Income
Income Class %)
Under 40,000 0.2
40,000-59,999 0.8
60,000-99,999 4.4
100,000-249,999 27.6
250,000 and over 67
Total (National
Income) 100

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 Lorenz Curve

In economics, the Lorenz curve is a graphical representation of the

distribution of income or of wealth. It was developed by Max O. Lorenz in

1905 for representing inequality of the wealth distribution. It is a graph on

which the cumulative percentage of total national income (or some other

variable) is plotted against the cumulative percentage of the corresponding

population (ranked in increasing size of share). The extent to which the

curve sags below a straight diagonal line indicates the degree of inequality

of distribution.

The numbers of income recipients are plotted on the horizontal axis, not

in absolute terms but in cumulative percentages. For example, at point 20,

we have the lowest (poorest) 20% of the population; at point 60, we have

the bottom 60%; and at the end of the axis, all 100% of the population has

been accounted for. The vertical axis shows the share of total income

received by each percentage of population. It is also cumulative up to 100%,

meaning that both axes are the same length. The entire figure is enclosed

in a square, and a diagonal line is drawn from the lower left corner (the

origin) of the square to the upper right corner. At every point on that

diagonal, the percentage of income received is exactly equal to the

percentage of income recipients—for example, the point halfway along the

length of the diagonal represents 50% of the income

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being distributed to exactly 50% of the population. At the three-quarters

point on the diagonal, 75% of the income would be distributed to 75% of the

population. In other words, the diagonal line in Figure 5.1 is representative

of “perfect equality” in size distribution of income. Each percentage group

of income recipients is receiving that same percentage of the total income;

for example, the bottom 40% receives 40% of the income, while the top 5%

receives only 5% of the total income.

The Lorenz curve shows the actual quantitative relationship between the

percentage of income recipients and the percentage of the total income they

did in fact receive during, say, a given year. In Figure 1.1, we have plotted

this Lorenz curve using the decile data contained in Table 1.1. In other

words, we have divided both the horizontal and vertical axes into ten equal

segments corresponding to each of the ten decile groups. Point A shows

that the bottom 10% of the population receives only 1.8% of the total

income, point B shows that the bottom 20% is receiving 5% of the total

income, and so on for each of the other eight cumulative decile groups. Note

that at the halfway point, 50% of the population is in fact receiving only

19.8% of the total income.

The more the Lorenz line curves away from the diagonal (line of perfect

equality), the greater the degree of inequality represented. The extreme

case of perfect inequality (i.e., a situation in which one person receives all

of the national income while everybody else receives nothing) would be

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represented by the congruence of the Lorenz curve with the bottom

horizontal and right-hand vertical axes. Because no country exhibits either

perfect equality or perfect inequality in its distribution of income, the Lorenz

curves for different countries will lie somewhere to the right of the diagonal

in Figure 1.1. The greater the degree of inequality, the greater the bend and

the closer to the bottom horizontal axis the Lorenz curve will be.

FIGURE 1.1 Lorenz curve

100

80

60
Income (%)

40

20

0
0 20 40 60 80 100
Percentage of Income Recepients

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The Figure 1.2 shows the Lorenz curve of the Philippines base on Table

1.2. As you can see the Lorenz curve curves away from the diagonal line

than the first figure it would mean that the degree of inequality of the

Philippines is worse than the first example.

Figure 1.2 Lorenz curve of the Philippines (2015)

100

80

60
Income (%)

40

20

0
0 20 40 60 80 100
Percentage of Income Recepients

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 Gini Coefficients and Aggregate Measures of Inequality

In economics, the Gini coefficient, sometimes called Gini index, or Gini

ratio, is a measure of statistical dispersion intended to represent the

income or wealth distribution of a nation's residents, and is the most

commonly used measurement of inequality. It was developed by the

Italian statistician and sociologist Corrado Gini and published in his 1912

paper Variability and Mutability.

The Gini coefficient measures the inequality among values of a

frequency distribution (for example, levels of income). A Gini coefficient of

zero expresses perfect equality, where all values are the same (for

example, where everyone has the same income). A Gini coefficient of 1

(or 100%) expresses maximal inequality among values (e.g., for a large

number of people, where only one person has all the income or

consumption, and all others have none, the Gini coefficient will be very

nearly one). However, a value greater than one may occur if some

persons represent negative contribution to the total (for example, having

negative income or wealth). For larger groups, values close to one are

very unlikely in practice. Given the normalization of both the cumulative

population and the cumulative share of income used to calculate the Gini

coefficient, the measure is not overly sensitive to the specifics of the

income distribution, but rather only on how incomes vary relative to the

other members of a population.

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In fact, as you will soon discover, the Gini coefficient for countries

with highly unequal income distributions typically lies between 0.50 and

0.70, while for countries with relatively equal distributions, it is on the order

of 0.20 to 0.35. The coefficient for our hypothetical distribution of Table 1.1

and Figure 1.1 is approximately 0.44, a relatively unequal distribution,

while In the Philippines the country’s Gini coefficient shot up to as high as

0.6, or 60 percent, from the current estimate of just over 0.4, or 40

percent, when the researchers assigned it alternative Gini, It is within the

range of highly unequal income distributions.

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 Functional Distributions

The second common measure of income distribution used by

economists, the functional or factor share distribution of income, attempts

to explain the share of total national income that each of the factors of

production (land, labor, and capital) receives. Instead of looking at

individuals as separate entities, the theory of functional income distribution

inquiries into the percentage that labor receives as a whole and compares

this with the percentages of total income distributed in the form of rent,

interest, and profit (i.e., the returns to land and financial and physical

capital). Although specific individuals may receive income from all these

sources, that is not a matter of concern for the functional approach.

A sizable body of theoretical literature has been built up around the

concept of functional income distribution. It attempts to explain the income

of a factor of production by the contribution that this factor makes to

production. Supply and demand curves are assumed to determine the unit

prices of each productive factor. When these unit prices are multiplied by

quantities employed on the assumption of efficient (minimum-cost) factor

utilization, we get a measure of the total payment to each factor. For

example, the supply of and demand for labor are assumed to determine its

market wage. When this wage is then multiplied by the total level of

employment, we get a measure of total wage payments, also sometimes

called the total wage bill.

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Figure 1.3 provides a simple diagrammatic illustration of the

traditional theory of functional income distribution. We assume that there

are only two factors of production: capital, which is a fixed (given) factor,

and labor, which is the only variable factor. Under competitive market

assumptions, the demand for labor will be determined by labor’s marginal

product (i.e., additional workers will be hired up to the point where the value

of their marginal product equals their real wage). But in accordance with the

principle of diminishing marginal products, this demand for labor will be a

declining function of the numbers employed.

Total national output (which equals total national income) will be

represented by the area 0REL. This national income will be distributed in

two shares: 0WEL going to workers in the form of wages and WER

remaining as capitalist profits (the return to owners of capital). Hence, in a

competitive market economy with constant-returns-to-scale production

functions (a doubling of all inputs doubles output), factor prices are

determined by factor supply and demand curves, and factor shares always

combine to exhaust the total national product. Income is distributed by

function—laborers are paid wages, owners of land receive rents, and

capitalists obtain profits. It is a neat and logical theory in that each and every

factor gets paid only in accordance with what it contributes to national

output, no more and no less.

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Figure 1.3 Function Income Distribution

R
S

Profit
E
W
Wage Rate

Wages
D

0 L
Employment
Supply Curve Demand Curve Equilibrium Wage Equilibrium Labor

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Chapter II. Measuring Absolute Poverty

Absolute poverty – the situation of being unable or only barely able to meet

the subsistence (means of surviving) essentials of food, clothing, and shelter. The

number of people who are unable to command sufficient resources to satisfy basic

needs. Counted as the total number living below a specified minimum level of real

income-international poverty line. Sometimes measured by headcount.

Real income - income after adjustment for inflation.

Headcount – number of those whose incomes fall below the absolute

poverty line.

Headcount Index (headcount ratio) – headcount taken as a fraction of the

total population. The proportion of a country’s population living below the

poverty line.

Poverty line = Yp

Headcount index H/N; N = population

*set the level below that may hold over for a few decades and such that the

person’s health is in jeopardy or to live in “absolute human misery”.

- It is impossible to define a minimum health standard that is invariant across

historical epochs because technology changes over time.

- We come as close as we can to establishing a reasonable minimum standard

that might hold over a few decades so that we can estimate more carefully how

much progress we have made on a more absolute rather than a highly relative

scale.

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Determining a local absolute poverty line – one basket of food with specified

nutritional requirements from medical studies of required calories, proteins, and

micronutrients. Then using local household survey data, one can identify a typical

basket of food purchased by households that just barely meet these nutritional

requirements. ADD/IMCLUDE other expenditures like clothing, shelter, and

medical care, to determine the local absolute poverty line.

TOTAL POVERTY GAP (TPG) – total income necessary to raise everyone who is

below the poverty line up to that line. The amount of money per day it would take

to bring every poor person in an economy up to our defined minimum income

standards. (i.e., no administrative costs or general equilibrium effects are

accounted for)
𝐻
TPG = ∑𝑖−1(𝑌𝑝 − 𝑌𝑖 )

APG = TPG/N (per capita basis)

SIZE OF POVERTY GAP IN REALTION TO POVERTY LINE

Normalized poverty gap (NPG) – as income shortfall measure NPG = APG/Ypi;

this measure lies bet. 0 and 1 and so can be useful for unit less measure of gap

for easier comparisons.

Average income shortfall (AIS) – tells the average amount by which the income

of a poor person falls below the poverty line. TPG/H, total poverty gap divided by

the headcount of the poor.

Normalized Income Shortfall (NIS) – measure that is divided by the poverty line

to yield a fractional measure; NIS=AIS/Yp

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FOSTER-GREER-THORBECKE INDEX – class of measures of the level of

absolute poverty

- FTG satisfies all 4 criteria for measures

*impact on poverty of economic shocks can differ greatly, depending on the level

and distribution of resources among the poor. The most desirable measures of

poverty would also be sensitive to the distribution of income among the poor

CRITERIA FOR A DESIRABLE POVERTY MEASURE THAT ARE WIDELY

ACCEPTED BY DEVELOPMENT ECONOMISTS

1. Anonymity and Population independence - both measure of the extent of

poverty should not depend on who is poor or on whether the country has a

large or small population.

2. Monotonicity – means if you add income to someone below the poverty line,

all their incomes held constant, poverty can be no greater than it was.

3. Distributional sensitivity – states that, other things being equal, if you

transfer income from a poor person to a richer person, the resulting economy

should be deemed strictly poorer.

- Headcount ratio satisfies anonymity, population independence, and

monotonicity.
𝐻
𝟏 𝑌𝑝−𝑌𝑖
FTG/P = 𝑵 ∑ ( )∝
𝑖=1 𝑌𝑝

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Yi = income of the ith poor

Yp = poverty line

N = the population

If delta = 0, numerator = H

If delta = 1, H/N*(NIS)

Delta = 2, use the formula

ALTERNATE FOMULA P2 = (H/N) [NIS2 + (1 – NIS)2 (CVp)2]

P2 2 poverty measure, aka squad poverty gap index; has become a standard

of income poverty measure used by the World Bank and other agencies, and it is

used in empirical work on income poverty because of its sensitivity to the depth

and severity of poverty. Another reason is that standard headcount measures also

have the perverse property of creating incentives for officials to focus efforts on the

poor who are closest to the poverty line.

MULTIDIMENSIONAL POVERTY MEASUREMENT

- Poor person is identified through what is called the “dual cutoff method”

- First, cutoff levels within each of the dimensions. Second, cutoff of the

number of dimensions in which a person must be deprived to be deemed

multidimensional poor.

- The adjusted multidimensional headcount ratio satisfies the desirable

property (dimensional monotonicity) that if the average fraction of

deprivations increases, so does M0.

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Mdelta = Hm/N

M0 (adjusted headcount ratio) = HM*A

*the product of the multidimensional headcount ratio times the

average fraction of dimensions in which the poor are deprived (or

“average intensity of poverty” A).

In the first semester of 2018, a family of five needed no less than PhP 7,337,

on average, to meet the family’s basic food needs for a month. This amount is the

food threshold. On the other hand, no less than PhP 10,481, on average, was

needed to meet both basic food and non-food needs of a family of five in a month.

This amount is the poverty threshold. These are 10.9 percent higher than the food

and poverty thresholds from the first semester of 20151.

Poverty incidence among Filipinos families in the first semester of 2018 was

estimated at 16.1 percent. This is defined as the proportion of families whose

income is below the poverty line to the total number of families. This was estimated

at 22.2 percent1 in the same period in 2015.

Table 2.1 Poverty incidence among families (%) First

Semester 2015 and 2018
First Poverty Coefficient of
Semester Incidence Variation

2018 16.1a/ 1.1

20151/ 22.2 4.8

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The poverty incidence among Filipino individuals in the first semester of

2018 was estimated at 21.0 percent. This is referred to as the proportion of the

population living below the poverty line to the total population. During the same

period in 2015, poverty incidence among Filipinos was recorded at 27.6

percent.

Table 2.2 Poverty incidence among population (%) First

Semester 2015 and 2018
First Poverty Coefficient of
Semester Incidence Variation

2018 21.0a/ 1.1

20151/ 27.6 4.5

The subsistence incidence among Filipino families was estimated at 6.2

percent in the first semester of 2018.This is alternatively called as the

proportion of Filipino families whose incomes fall below the food threshold. In

the same period in 2015, the proportion of families who are food poor was

recorded at 9.9 percent.

Table 2.3 Subsistence incidence among families (%)

First Semester 2015 and 2018
First Poverty Coefficient of
Semester Incidence Variation

2018 6.2a/ 1.8

20151/ 9.9 5.8

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The subsistence incidence among Filipino individuals was

estimated at 8.5 percent in the first semester of 2018, and 13.0

percent1 in the first semester of 2015. It refers to the proportion of

Filipinos whose incomes fall below the food threshold.

Table 2.4 Subsistence incidence among population (%)

First Semester 2015 and 2018
First Poverty Coefficient of
Semester Incidence Variation

2018 8.5a/ 1.7

20151/ 13.0 5.8

Table 2.5 Income Gap, Poverty Gap and Severity of

Poverty. First Semester 2015 and 2018
First Semester
Statistics
20151/ 2018

Income Gap 29.5 26.9a/

Poverty Gap 6.6 4.3a/

Severity of
Poverty 2.8 1.8a/

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Chapter III. Poverty, Inequality and Social Welfare

 Social welfare depends positively on the level of income per capita but

negatively on poverty and negatively on the level of inequality.

 No civilized people can feel satisfied knowing that fellowmen exist in

conditions of absolute human misery, which is prolyl why every religion has

emphasized the importance of working to alleviate poverty.

 If the top concern is to alleviate poverty, why should inequality be a

concern? First, extreme income inequality leads to economic inefficiency.

The higher the inequality is, the smaller the fraction of the population that

qualifies for a loan or other credits. Relative poverty is the lack of collateral.

 With high inequality, the overall rate of savings in the economy tends to be

lower, because the highest rate of marginal savings is usually found among

the middle classes.

 The rich do not generally save and invest significantly larger proportions of

their incomes (in the real economic sense of productive domestic saving

and investment) than the middle class or even the poor. Furthermore,

inequality may lead to an inefficient allocation of assets.

 The second reason to be concerned with inequality above the poverty line

is that extreme income disparities undermine social stability and solidarity.

Also, high inequality strengthens the political power of the rich and hence

their economic bargaining power.

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 High inequality facilitates rent seeking, including actions such as excessive

lobbying, large political donations, bribery, and cronyism. These result to

diversion from productive purposes that could lead faster growth.

 High inequality makes poor institutions very difficult to improve, because the

few with money and power are likely to view themselves as worse off from

socially efficient reform, so they have the motive and means to resist it.

 High inequality may also lead the poor to support populist policies that can

be self-defeating. (e.g. El Salvador and Iran have undergone upheavals or

extended civil strife that have cost countless lives and set back development

progress by decades.)

 High inequality is also associated with pathologies such as higher violent

crime rates.

 With high inequality, the focus of politics often tends to be on supporting or

resisting redistribution of the existing economic pie rather than on policies

to increase its size.

 Finally, extreme inequality is generally viewed as unfair. John Rawls

proposed thought experiment. Suppose that before you were born into this

world, you had a chance to select the overall level of inequality among the

earth’s people but not your own identity. That is you might be born as Bill

Gates, but you might be born as the most wretchedly poor person in rural

Ethiopia with equal probability. This is called “the veil of ignorance”.

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Facing this kind of risk, would you vote for an income distribution that was

more equal or less equal than the one you see around you?

 Most people vote for some inequality of income outcomes, to the extent that

these correspond to incentives for hard work or innovation. But even so,

most vote for less inequality than is seen in the world today. This is because

much of the inequality we observe in the world is based on luck or

extraneous factors, such as the inborn abilities, and identity of one’s great-

grandparents.

 W = W (YIP)

Y = income per capita (positive)

I = inequality (negative)

P = absolute poverty (negative)

DUALISTIC DEVELOPMENT AND SHIFTING LORENZ CURVES

- Lorenz curves may be used to analyze 3 limiting cases of dualistic

development.

1. Modern-sector enlargement growth typology - in which the two-sector

economy develops by enlarging the size of its modern sector while maintaining

constant wages in both sectors. Absolute incomes rise and absolute poverty

is reduced, but the Lorenz curves will always cross, indicating that we cannot

make any unambiguous statement about changes in relative inequality: It may

improve or worsen.

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2. The modern-sector enrichment growth typology, in which the economy

grows but such growth is limited to a fixed number of people in the modern

sector, with both the numbers of workers and their wages held constant in the

traditional sector. This roughly describes the experience of many Latin

American and African economies. Growth results in higher incomes, a less

equal relative distribution of income, and no change in poverty.

3. The traditional-sector enrichment growth typology, in which all of the

benefits of growth are divided among traditional-sector workers, with little or

no growth occurring in the modern sector. This process roughly describes the

experiences of countries whose policies focused on achieving substantial

reductions in absolute poverty even at very low incomes and with relatively low

growth rates, such as Sri Lanka, and the state of Kerala in southwestern India.

Growth results in higher income, a more equal relative distribution of income,

and less poverty.

Kuznets inverted-U Hypothesis – a graph reflecting the relationship between a

country’s income per capita and its inequality of income distribution.

 Inequality might worsen during the early stages of economic growth before

eventually improving.

 The Kuznets curve can be generated by a steady process of modern-sector

enlargement growth as a country develops from a traditional to a modern

economy. Alternatively, returns to education may first rise as the emerging

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modern sector demands skills and then may fall as the supply of educated

workers increases and the supply of unskilled workers falls.

Relationship between inequality and levels of per capita income (economic

growth)

 It is not just the rate but also the character of economic growth (how it is

achieved, who participates, which sectors are given priority, what

institutional arrangements are designed and emphasized, etc.) that

determines the degree to which that growth is or is not reflected in

improved living standards for the poor. It is not necessary for inequality

to increase for higher growth to be sustained

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Chapter IV. Absolute Poverty: Extent and Magnitude

Absolute Poverty is a condition where a person does not have the minimum

amount of income needed to meet the minimum requirements for one or more

basic living needs over an extended period of time. This includes things like: Food,

Safe Drinking water, Sanitation Facilities, Health, Shelter, Education, Information

and Access to Services.

Like so much in economic development, the critical problem of eradicating

absolute poverty is one of bad news and good news—of a glass that may be seen

as either half empty or half full. It is extremely difficult to arrive at a tight estimate

of the extent of global poverty at any point in time. Major World Bank reports issued

within a couple of years of each other have provided estimates of the dollar-a-day

headcount that differ by tens of millions of people. This reflects the difficulty of the

task. Another difficulty is determining the most appropriate cutoff income for

extreme poverty. The $1-a-day line was first set in 1987 dollars, and for years the

standard was $1.08 in 1993 U.S. purchasing power parity. In 2008, the equivalent

line was reset at $1.25 at 2005 U.S. purchasing power.

The most recent systematic poverty estimates (available as of early 2014)

show that in 2010 some 1.22 billion people lived below $1.25 per day, and some

2.36 billion below $2 per day (see Figure 5.13). The number of people living in

$1.25 per day income poverty fell from about 1.94 billion in 1981 – a 37% reduction

in the headcount. The drop in the number living on less than $2 per day was much

smaller – under 8% - but this more modest decline was partly due to people whose

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incomes actually had crossed above the $1.25 per day, though still remained

below $2 per day.

The incidence of extreme poverty is very uneven around the developing

world. Household survey–based estimates are regarded as the most accurate

ways to estimate poverty incidence.

And as part of this, researchers have come up to a measurement which

uses different household dimensions as a basis to measure poverty. This is the

Multidimensional Poverty Index. The MPI is the most prominent application of

multidimensional poverty measurement; it incorporates three dimensions at the

household level: health, education, and wealth.

The Multidimensional Poverty Index (MPI)

In 2010, the UNDP replaced the HPI with its Multidimensional Poverty Index

(MPI); by building up the index from the household level, the MPI takes into

account that there are negative interaction effects when people have multiple

deprivations—worse poverty than can be seen by simply adding up separate

deprivations for the whole country, then taking averages, and only then combining

them.

The index’s creators report that they selected the three dimensions (health,

education, and standard of living) and each of their corresponding indicators

because they reflect problems often mentioned by the poor, they have been long

considered important by the development community particularly as reflected in

the Millennium Development Goals, and they are well established philosophically

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as human rights or basic needs; naturally, reliable data also had to be available for

enough countries when selecting specific indicators for the index With respect to

health, two indicators—whether any child has died in the family and whether any

adult or child in the family is malnourished—are weighted equally (so each counts

one-sixth toward the maximum possible deprivation in the MPI). Regarding

education also, two indicators—whether not even one household member has

completed five years of schooling and whether any school-age child is out of

school for grades one through eight—are given equal weight (so again, each

counts one-sixth toward the MPI).

Finally, in terms of standard of living, equal weight is placed on six

deprivations (each counting one-eighteenth toward the maximum possible): lack

of electricity, insufficiently safe drinking water, inadequate sanitation, inadequate

flooring, unimproved cooking fuel, and lack of more than one of five assets—

telephone, radio, television, bicycle, and motorbike or similar vehicle. Calculating

deprivation in this way, individuals are then identified as “multidimensionally poor”

when their family is deprived by a “weighted sum” of 0.3 or more (3 out of 10 points

as calculated in practice).

In the Philippines, The Philippine Statistics Authority (PSA) released the

multidimensional poverty statistics on November 14, 2018 based on an initial

methodology. It is called the multidimensional poverty index (MPI) and serves to

complement the income-based measure of poverty. The MPI is a measure that

intends to capture deprivations on various dimensions. Thus, the MPI provides

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information on which dimension the Filipinos are most deprived in. In the initial

methodology, there are 13 indicators identified across the following four

dimensions:

I. Education dimension

 School attendance

 Educational attainment

II. Health and Nutrition dimension

 Hunger

 Food consumption

 Health insurance

III. Housing, Water and Sanitation dimension

 Ownership of assets

 Toilet facility

 Source of water supply

 Tenure status of dwelling

 Housing materials

 Electricity

IV. Employment dimension

 Underemployment

 Working children not in school

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Based on the information provided by the PSA, The Education dimension

had the largest share or contribution to overall deprivation (MPI) at 36.5 percent

and 36.9 percent in 2016 and 2017, respectively. The Health and Nutrition

dimension comes next with a contribution of 26.2 percent in 2016 and 27.5 percent

in 2017.The share of Housing, Water and Sanitation to MPI was 26.4 percent in

2016 and 27.4 percent in 2017. Employment dimension, on the other hand, had

the least share to MPI. Additionally, Among the 13 indicators, educational

attainment consistently had the highest incidence of deprivation among families

for 2016 and 2017 at 59.3 percent and 49.4 percent, respectively. These mean

that 6 out of 10 families in 2016 and 5 out of 10 families in 2017 were deprived of

basic education; that is, 6 out of 10 families had at least one family member aged

18 years old and above who did not complete basic education in 2016 and 5 out

of 10 in 2017. Conversely, hunger had the least incidence at 0.3 percent and 0.6

percent in 2016 and 2017, respectively.

A Filipino is identified as multidimensionally deprived if he or she is deprived

in at least one third of the indicators or at least four of the 13 indicators. In 2017,

the multidimensionally deprived Filipinos or the proportion of Filipinos deprived in

at least four out of the 13 indicators (headcount ratio) was estimated at 17.3

percent. In 2016, it was recorded at 23.9 percent.

In terms of the intensity of their deprivation, on average, they were

multidimensionally deprived in 41.2 percent and 43.2 percent of the indicators in

2017 and 2016, respectively.

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The MPI is calculated by multiplying the headcount ratio (the proportion of

Filipinos identified as multidimensionally deprived) by the average intensity of

deprivation among those who are deprived. MPI reflects both the share of people

and the degree to which they are deprived. In 2016 and 2017, the MPI was

estimated at 10.4 and 7.1, respectively.

Chronic Poverty

Chronic poverty is a phenomenon whereby an individual or group is in a

state of poverty over extended period of time. Research suggests that

approximately one-third of all people who are income poor at any one time are

chronically (always) poor. Andrew McKay and Bob Baulch provide a well-regarded

“guesstimate” that about 300 to 420 million people were chronically poor at the $1-

per-day level in the late 1990s. The other two-thirds are made up of families that

are vulnerable to poverty and become extremely poor from time to time. These

may be divided between families usually poor but occasionally receiving enough

income to cross the poverty line and families usually nonpoor but occasionally

experiencing a shock that knocks them temporarily below the poverty line. Chronic

poverty is concentrated in India, where the largest numbers are found, and in

Africa, where the severity of poverty among the chronically poor is greatest.

Growth and Poverty

Is the Growth and Poverty, which are the reduction of poverty and the

acceleration of growth, in conflict? Or are they complementary? Traditionally, a

body of opinion held that rapid growth is bad for the poor because they would be

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bypassed and marginalized by the structural changes of modern growth. Beyond

this, there had been considerable concern in policy circles that the public

expenditures required for the reduction of poverty would entail a reduction in the

rate of growth. The concerns that concentrated efforts to lower poverty would slow

the rate of growth paralleled the arguments that countries with lower inequality

would experience slower growth. In particular, if there were redistribution of income

or assets from rich to poor, even though progressive taxation, the concern was

expressed that savings would fall. However, while the middle class generally has

the highest savings rates, the marginal savings rates of the poor, when viewed

from a holistic perspective, are not small.

There are at least five reasons why policies focused toward reducing

poverty levels need not lead to a slower rate of growth—and indeed could help to

accelerate growth.

 First, widespread poverty creates conditions in which the poor have no

access to credit, are unable to finance their children’s education, and, in

the absence of physical or monetary investment opportunities, have many

children as a source of old-age financial security.

 Second, a wealth of empirical data bears witness to the fact that unlike the

historical experience of the now developed countries, the rich in many

contemporary poor countries are generally not noted for their frugality or

for their desire to save and invest substantial proportions of their incomes

in the local economy.

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 Third, the low incomes and low levels of living for the poor, which are
manifested in poor health, nutrition, and education, can lower their

economic productivity and thereby lead directly and indirectly to a slower-

growing economy.

 Fourth, raising the income levels of the poor will stimulate an overall
increase in the demand for locally produced necessity products like food

and clothing, whereas the rich tend to spend more of their additional

incomes on imported luxury goods.

 Fifth, a reduction of mass poverty can stimulate healthy economic

expansion by acting as a powerful material and psychological incentive to

widespread public participation in the development process.

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Chapter V. Characteristics of High-Poverty Groups

Rural Poverty- Perhaps the most valid generalizations about the poor are that

they are disproportionately located in rural areas, that they are primarily engaged

in agricultural and associated activities, that they are more likely to be women and

children than adult males, and that they are often concentrated among minority

ethnic groups and indigenous peoples.

Women and Poverty - Women make up a substantial majority of the world’s poor.

If we compared the lives of the inhabitants of the poorest communities throughout

the developing world, we would discover that virtually everywhere women and

children experience the harshest deprivation. They are more likely to be poor and

malnourished and less likely to receive medical services, clean water, sanitation,

and other benefits.

Ethnic Minorities, Indigenous Populations, and Poverty- A final generalization

about the incidence of poverty in the developing world is that it falls especially

heavily on minority ethnic groups and indigenous populations.

In this part, we express our feeling on what is happening right now in our

country specially the Philippines regarding the big problem of poverty. As you can

see in our poster making slogan; this girl represents our mother earth as the

Philippine women embracing a baby. This baby will become a productive one that

he/ she can be a professional some day; he/she will be a policeman, a doctor, a

teacher, or maybe a farmer someday. We disagree that women is one cause of

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poverty because some said that women is for house only, doing household chores

and having childbirth. We believe that "what can a man do can also a woman can

do" means that women are amazing also. Nowadays, women can do pretty much

everything that men can do. For example: In today’s world there are female pilots,

truck drivers, engineers, mountaineers, firefighters, soldiers, professional fighters

and wrestlers, oil rig workers and even presidents.

We also highlight the importance of helping one another to lessen poverty

in our country. We believe that through unity we can develop and implement

rapid and sustained economic growth policies and programs, in areas such

as health, education, nutrition and sanitation, allowing the poor to participate and

contribute to the growth. Improve the management of water and other natural

resources. Most of the rural poor depend on agriculture or other natural resources

for their livelihood. Therefore, it is necessary that they have more equitable access

to those resources so they are better able to manage their resources. Providing all

people with access to basic social services including education, health care, food,

sanitation, shelter and clean water. Lastly empower people living in poverty by

involving them in the development and implementation of plans and programs to

reduce and eliminate poverty. Their involvement ensures that programs reflect

those things that are important to them. We can do this through the support of our

government and the support of all of us. Poverty can’t be eliminated totally but it

will be lessen as we do our part as a good citizen in our country.

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Figure 5.1

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Chapter VI. Policy options on Income Inequality and Poverty: Some basic

considerations.

Areas of intervention

 Developing countries that aim to reduce poverty and excessive

inequalities in their distribution of income need to know how best to
achieve their aim.
 It is important to understand the various determinants of the distribution of
income in an economy and see in what ways government intervention can
alter or modify their effect.
 This section focuses on the relationship between income inequality and
poverty.
 Four Broad Areas Of Possible Government Policy Intervention –
corresponds with four major elements in the determination of a developing
economy’s distribution of income.
o Altering the functional distribution
o Mitigating the size distribution
o Moderating (reducing) the size distribution at the upper levels
o Moderating (increasing) the size distribution at the lower levels

Altering the functional distribution of income through relative factor prices

 It is argued that measures designed to reduce the price of labor relative to
capital (e.g., through market-determined wages in the public sector or
public wage subsidies to employers) will cause employers to substitute
labor for capital in their production activities.
 Artificially increased modern-sector wages reduce the rate of modern-
sector enlargement growth, thus harming the poor.
 In India, the Self-Employed Women’s Association argues that minimum
wages have beneficial effects even on informal-sector workers.

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 Research by Darryl McLeod and Nora Lustig concludes that higher

minimum wages are correlated with reductions in poverty.42 Thus, actual
impacts may vary, depending on local circumstances.
o These qualifications are particularly relevant for relatively low-skill
and informal activities, such as garment stitching, beedi rolling, and
incense rolling, in which workers have commonly held very low
bargaining power, often due to monopsony, if not extra market
forces.
 In general, not only increase productivity and efficiency but also reduce
inequality by providing more wage-paying jobs for currently unemployed or
underemployed unskilled and semiskilled workers.
 We may conclude that there is much merit to the traditional factor-price
distortion argument and that correcting prices should contribute to a
reduction in poverty and an improved distribution of income.
 Relative price of labor falls and the relative price of capital rises.

Modifying the size distribution through increasing assets of the poor

 The ultimate cause of the unequal distribution of personal incomes in most
developing countries is the unequal and highly concentrated patterns of
asset ownership (wealth) in these countries.
o Correcting factor prices is certainly not sufficient to reduce income
inequalities substantially or to eliminate widespread poverty where
physical and financial asset ownership—and education—are
highly concentrated.
 Redistribution policies - policy to reduce poverty and inequality is to
focus directly on reducing the concentrated control of assets, the unequal
distribution of power, and the unequal access to educational and income-
earning opportunities that characterize many developing countries.

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o A classic case of such redistribution policies as they relate to the

rural poor, who comprise 70% to 80% of the target poverty group,
is land reform.
o But attention must be given to different segments of the local poor
communities, as different priorities are often found between men
and women, between ethnic groups, and between castes.

Progressive income and wealth taxes

 Progressive income taxes – focuses on personal and corporate
incomes, with the rich requires to pay a progressively larger percentage of
their total income in taxes than the poor.
 The burden of the tax is designed to fall most heavily on the upper-income
groups.
 Progressive tax structures on paper often turn out to be regressive taxes
in practice, in that the lower and middle-income groups often end up
paying a proportionally larger share of their incomes in taxes than the
upper-income groups.

DIRECT TRANSFER PAYMENTS AND THE PUBLIC PROVISION OF GOODS

AND SERVICES
 The direct provision of tax-financed public consumption goods and
services to the very poor is another potentially important instrument of a
comprehensive policy designed to eradicate poverty.
 Direct money transfers and subsidized food programs for the urban and
rural poor, as well as direct government policies to keep the prices of
essential foodstuffs low, represent additional forms of public consumption
subsidies.
 Four significant problems require attention:

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o First, when resources for attacking poverty are limited—as they

always are—they need to be directed to people who are genuinely
poor.
o Second, it is important that beneficiaries not become unduly
dependent on the poverty program.
o Third, we do not want to divert people who are productively
engaged in alternative economic activities to participate in the
poverty program instead.
o Last, poverty policies are often limited by resentment from the non-
poor, including those who are working hard but are not very far
above the poverty line themselves.
 Appropriate agricultural development policies represent a crucial strategy
for attacking poverty because such a high fraction of the poor are located
in rural areas and engaged in agricultural pursuits.
 Conditional Cash Transfer (CCT) - programs that transfer incomes to
poor families conditional on behaviors such as keeping their children in
school.

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Chapter VII. Summary and Conclusions: The need for a package of policies

While providing a focus on ending extreme poverty and mitigating harmful

inequality, such policies can be designed to encourage and accelerate inclusive
economic growth targeted at the poor, while keeping in mind the inherently
multidimensional nature of poverty.

 A policy or set of policies designed to correct factor price distortions

(underpricing capital or overpricing modern-sector skilled wages) so as to
ensure that market or institutionally established prices provide accurate
signals and incentives to both producers and resource suppliers.
o Greater productive efficiency, more employment, and less poverty.
 A policy or set of policy designed to bring about far-reaching structural
changes in the distribution of assets, power, and access to education and
associated income-earning (employment) opportunities.
 A policy or set of policy designed to modify the size distribution of income
at the upper levels through the enforcement of legislated progressive
taxation on incomes and wealth.
 A policy or set of policy designed to directly improve the well-being of the
poor and their communities, which goes beyond safety net schemes.

“Poverty is no longer inevitable. The world has the material and natural
resources, the know-how and the people to make a poverty-free world a reality in
less than a generation. This is not woolly idealism but a practical and achievable
goal.”
- James Speth, the executive director of the United Nations Development

Programme.

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REFERENCE:

Todaro, M. P. and Smith, S. C. (2015). Economic Development 12th Edition.

Boston: Pearson Addison Wesley.

Philippine Statistics Authority (2019). Per Capita: Gross National Income, Gross

Domestic Product and Household Final Consumption Expenditure. Retrieved from

https://psa.gov.ph/nap-press-release/sector3/Per%20Capita%20GNI

Malasig, J. (2018) Surviving versus living: The Filipino family’s monthly budget.

Retrieved from

http://www.interaksyon.com/breaking-news/2018/06/11/128411/filipino-family-

basic-monthly-income-p42000-or-p10000/

Philippine Statistics Authority (2016). Family Income and Expenditure Survey

(FIES). Retrieved from https://psa.gov.ph/income-expenditure/fies

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