Inequality, poverty and

development
 What is the extent of relative inequality, and
how is this related to the extent of poverty?
 Who are the poor?
 Who benefits from economic growth?
 Does rapid growth necessarily cause greater
income inequality?

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 Do the poor benefit from growth?
 Are high levels of inequality always bad?
 What policies can reduce poverty and inequality?

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• It is the disproportionate
distribution of total national
income among households.
Others like:
•Growth effects
•Wage differentials
•Inadequate employment
generations
•Globalizations
•Social usefulness
•High populations
•Huge expenditure
•Imbalance in industrial
investment
•Poor infrastructure
•Unskilled labor
•Gender, age, technology,
resources.
• Income-Inequality refers to differences in income status
and it is the indicator of relative poverty.
 It is measured by using two principal measures:

• Personal or size distribution:- individual persons

or households and the total income they receive.

• Functional or factor share distribution: the

share of total national income that each of the
factors of production (L, Ld, K, E) receives.
 Arranging all individuals/factors by ascending their
income and divide the total population into distinct
groups or sizes (quintiles, deciles, percentiles, etc.)
 Methods to compute inequality are:
 Range, mean deviation, coefficient of variation,
 Lorenz curve, Gini- coefficient
 Principles of Inequality measures

• Anonymity principle:- measure should not depend on

who has higher income; e.g. whether we believe the
rich or poor to be good or bad people.

• Scale independence principle:- inequality measures

should not depend on size of the economy – want a
measure of income dispersion
 Population independence principle:- the population
size does not matter; all that matters are the proportion of
the population of that earn different levels of income.

 Transfer principle(Pigon-Dalton Principle): all other

incomes constant, if transfer income from a richer to a
poorer person (not so much that the poorer person is now
richer than the originally rich person), resulting new
income distribution is more equal.
 MEASURING INEQUALITY
• A common measure of income inequality is the Lorenz
curve.
• Lorenz curves
 The number of income recipients are plotted on the
horizontal axis in cumulative percentages.
 The vertical axis shows the share of total incomes
received by each percentage of population in
cumulative terms.
 The Lorenz curve shows the actual quantitative r/s b/n the
percentage of income recipients and the percentage of the total
income they did in fact receiving.
 The diagonal line represent
prefect equality in size
distribution of income

 If the Lorenz curve overlaps

with the bottom horizontal or
right vertical axis, the whole
income is received by one
person.

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 Because no country exhibits either perfect equality or
perfect inequality, the Lorenz curve will lie to the right
of the diagonal line.

 The more the Lorenz curve is away from the diagonal

line, the more unequal the income distribution is. The
criteria called the Lorenz criterion.
 It says that if the Lorenz curve of a distribution lies at
every point to the right of some other distribution, the
former should be judged as more unequal than the latter.
 When the Lorenz curve cross to each other, they can not
provide a useful inequality ranking.

 An inequality measure is consistent with Lorenz criteria

iff it is simultaneously consistent with Anonymity, social
and population independence and transfer principles.
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 1
 Range :- is given by : R ( ym  y1 )

where, ym=max income
μ: mean income and y 1=min income
 Range is a very crude measure that doesn’t take the whole
income distribution in consideration. It doesn’t satisfy Dalton
principle.
 Example:-if the country max income is 15 and minimum income
is equal 0.8 and if the population mean income is 5..

1
Range  (15  0.8)  2.8
5
 . Or =

• It satisfies the Pigou-Dalton principle of transfers. When income is

redistributed from richer to poorer, RMD decreases as the
numerator decreases. But if the individuals involved in
redistribution are all on the same side of the mean (either below or
above), RMD does not change.
 As inequality analysis requires comparisons, it would be
more useful to make the variance free from the measurement
unit. The CV does this job and satisfies Dalton principle; and
is calculated as follows:

 When income is the same for all individuals, CV=0 –equality.

 The most important flaw of CV is that it is not bounded from above,
i.e. it tends to become larger especially when mean income is low.
 The Kuznet Ratio: is the ratio of income of the richest
20% to the poorest 40%.

income20%
Kz 
income40%

 It doesn’t satisfy Dalton’s principle.

 Gini Coefficient:- is a number that summarizes
inequality among individuals. It is the ratio of the area
between the Lorenz curve and the 45 degree line of
perfect equality to the area of the triangle below the 45
degree.

 Gini-coefficients can vary from 0 (perfect equality) to 1

(perfect inequality).
 GC for countries with highly unequal income
distributions typically lies b/n 0.50 and 0.70 while for
countries with relatively equitable distributions, lies b/n
0.20 to 0.35.
5-23
Nk is individuals with in the class

Let’s have an Example:

• Drive the income inequality based on d/t
measurement?
 Poverty is not an
accident like slavery
and apartheid, it is
man made and can be
removed by actions of
human beings!
Nelson Mandela
 Poverty at the individual and/or household level
represents a serious constraint on economic
activity.
 These lack of opportunities can be reinforced by
income inequality.

 “…the fundamental disparity that permits one individual

certain material choices, while denying another
individual those very same choices.” Ray(1998).
 The poor can explain the poverty as he/she felt. Different
individuals from different countries expressed poverty as
follow:-

 Russian poor: define poverty as a daily worries about lack

of money
 Bangladesh: wellbeing is defined as to have life free of
anxiety
 Jamaican poor: define it as lack of self confidence
 Kenyan poor : graphic expression: The poor invited the
researcher in to his rooms and kitchen and shows his
roofs, walls, kitchen equipment's and said what you see is
poverty.

 Ethiopian poor : define poverty to be skin, to be pale, a

situation that makes an individual older than his age.
 In developing countries the poor tend to be Black,
female, young, rural, unskilled and perhaps semi-
skilled (this is determined by the nature of economic
growth, trade liberalization policy, subsidies etc…).
 Research indicates that the
 quality and quantity of education,
 urban-rural location,
 racial group, gender, health and employment status
 socio-economic factors, the historical legacy of a country,
property rights, economic dependence, political
system/affiliations

 All these impact on whether somebody is poor or not.

?
 Child labor
 Bad health
 Crime and violence
 Shorter lives
 Hunger
 Homelessness
 Health problem

 Being deprived in many things.

 The different stakeholders should have to provide the necessary
elements; targeting poverty eliminating programs. Like:

• Employment generation
• Cancelling impossible to repay world debts
 There are different conceptual approaches in measuring
the wellbeing at individual level.
A. Welfare approach.
B. Non-Welfare approach
 The Welfare approach: compares welfare and public
policy decision based on the preference of individuals. It
uses well articulated theory of consumer behavior.
It uses utility theory to drive poverty line.
 The non-welfare approach: assesses the well being of
individuals based on some elementary achievements such as
being able to be adequately nourished or clothed or something.
 According to the World Bank (2001), poverty has many
dimensions. These are:
 Lack of opportunity: which is measured by appropriate measure of
income or consumption.
 Low capability: (Low achievement in education and health).
 Physical weakness like a measurement children weight, height, age
etc.
  Vulnerability: (exposure to risk or low level of security).
 Voiceless-ness: (empowerment); in front of other people,
government, institutions etc.
 Poverty can be both absolute and relative.
 Relative poverty: as the name indicates, it is relative and it is everywhere
in the world. A person can be relative but not absolute poor.
 Absolute poverty: a poverty situation where people are not getting the
minimum requirement to live in terms of shelter, food and cloth. (i.e.
getting below $1 /2 or consuming below 2200 Kc, WBR)
 We use income or consumption as a measure of poverty. In
developing countries consumption expenditure measure is
preferred because:
A. People underreport income
B. Consumption is a smooth version of income and a better indication
of wealth.
 Poverty line:- is a level of consumption/income below which
a person is considered to be poor.
 Poverty line is the cost of bundles of goods deemed sufficient
for a basic need. (i.e. able to buy 2200 kcal/day/ adult and essential
non- food expenditure, $2/day).
 The most commonly used poverty indices are the Foster,
Greer and Thorbecke’s measure of poverty ( 1994). That is,
measure of poverty. P
 Let’s denote poverty line =Z
 Consumption expenditure/ income per adult =

consumption exp enditure / income

Yi 
adultequivalentHHsize
 A person is considered to be poor if his consumption
expenditure /income is less than the poverty line. i.e. if
yi  Z
 We have three ways of aggregating poverty.
1. Head count Ratio(HCR).
2. Poverty gap Ratio(PGR).
3. Squared poverty gap Ratio(SPGR).
 Let’s assume we have n people, and q = the number of poor
people.
 When = 0, P0=Head count Ratio.



= 1, P1= Poverty gap ratio
1  Z  yi  =2,
q

P     P2=Squared poverty gap
n i 1  Z 
 
 0
1  Z  yi
q
 q
HCR  P0     

n i 1  Z  n

•The number of poor divided by total number of people.

•This gives the proportion of people whose income is
below the poverty line.
•If Po=0.442 it indicates that 44.2% of the population are
poor.
•Head count ratio is very easy to measure and to
communicate.
 Disadvantage- it is insensitive to the depth of poverty.
 1
1 q
 Z  yi for y <=Z
PGR  P1    

n i 1  Z 
•This measures the average income gap of the poor from the poverty
line.
•If PGR (P1)=0.12, the poor are far from the poverty line by 12% on the
average. Thus, this measure tells the depth of poverty. It is also an
indicator of potentials for eliminating poverty by targeting the transfer
to the poor.

•The draw back: It does not capture the difference or severity of the
poverty among the poor. Meaning it doesn’t capture the transfer of
income among the poor. If income is transferred from the poor to the
least poor the PGR is unaffected.
 q 2
1  Z  yi 
SPGR  P2   
n i 1  Z 


• This shows the severity of the poverty among the

poor.

• The drawback: it is difficult to understand and

communicate to policy measures. It is not easy for
interpretation. But it is used for comparison.
 Village-A= four people with income ( 1,2,3,4,)
 Village-B= four people with income ( 2,2,2,4)
 Let Poverty line = 3. Then calculate P0, P1 and P2.
 Given : q = 3
 n= 4
q 3 3
 1: HCRA    0.75 and HCRB   0.75
n 4 4
 2. PGRA  1  313 2 and
33    0.25

4 3 

3.
1  3  2  3  2  3  2 

PGRB     0.25
4 3 
2
1   3  1 =0.138
2
 3 2   33
2
 =0.083 1    1  2  1  2  1  2  
SPGA        andSPG B             

4  3   3   3   4  3   3   3  
  

• There fore, poverty is more sever in village A

(0.14), than village B (0.083).
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 In both country A and country B, 50% the
population falls below the same poverty line
PV.
 However the poverty gap in country A is greater
than in country B which implies that it will take
more of an effort to eliminate absolute poverty in
country A.
 Components of
Multidimensional
poverty

•Better but more expensive method to

measure poverty!!!
Dimension Indicator Deprived if.. Relative Related to
weight
Education Years of No household member has completed five years of 16.7% MDG2
Schooling schooling

Child Enrollment Any school-aged child is not attending school in 16.7% MDG2
years 1 to 8

Health Child mortality Any child has died in the family 16.7% MDG4
Nutrition Any adult or child is malnourished 16.7% MDG1
Standard of Electricity The household has no electricity 5.6% MDG7
living
Drinking water The household does not have access to clean drinking 5.6% MDG7
water or clean water is more than 30 minutes walk
from home

Sanitation They do not have an improved toilet or if their toilet 5.6% MDG7
is shared
Flooring The household has dirt, sand or dung floor 5.6% MDG7

Cooking fuel They cook with wood, charcoal or dung 5.6% MDG7

Assets The household does not own more than one of: radio, 5.6% MDG7
TV, telephone, bike, or motorbike, and do not own a
car or tractor.
 OPHI (Oxford Poverty & Human Index) (2010)
stated that a household is identified as
multidimensional poor if and only if it is deprived in
some combination of indicators whose weighted sum
exceeds 30% of all deprivations.
 Anthropometry Measures: used to asses nutritional
status at individual and population level.


 A decline in an individual’s anthropometric index

from one point in time to another could indicate
illness and /or nutritional deficiency.
 To construct an anthropometric indices we need
weight , height and age of individuals.
 There are three measures:
 1. Stunting For children >15
 2. Wasting
 3. Body Mass Index (BMI)
 Stunting: is measured by dividing the height of the
child by its age.
 The Lower the ratio is an indication of stunting (shortness).
 It is associated with poor over all economic condition and
repeated exposure to adverse condition.
 Wasting:- is measured by dividing the weight of the
child by its height.
 The lower the rate is an indication of thinness. It is a short
run measure of malnutrition.
  Body Mass Index(BMI)
 This is a measure of adult malnutrition. This measure is
obtained by dividing the weight(kg) of an individual by
the square of his/her height(meter).

 This measure does not hold for pregnant and

individuals with some health problems.
 If BMI > 18.4 , the individual is normal.

 If 17 < BMI < 18.4 , the individual is in Grade -I chronic

energy deficient.

 If 16 < BMI < 17 , the individual is in Grade -II chronic

energy deficient.

 If BMI<16 , the individual is in Grade- III chronic

energy deficient.
 Vulnerability:- is the probability of an individual being
exposed to various shocks that makes him to be poor.
 At micro level the most important risk that affects the poor
are illness, death, injury, disability, harvest failure and
unemployment.
 At meso (community) level vulnerability includes
deforestation, harvest failure, soil degradation, natural
calamities such as earth quick, flood and civil war.
  At Macro level: drought, inflation, balance of
payment etc. could be some of the risk.


 While the micro level risks can be off set by actions

at house hold level, the macro level risks require a
public action.
 Voiceless-ness:- refers to lack of voice, power and
independence as well as humiliation, shame, exploitation

by institutions of the state and the society.

 Example:-Gender discrimination.
 The absence of rule of law, lack of protection against
violence, lack of civility and unpredictability of public
officials are some of the indicators of voiceless-ness.
 Voiceless-ness in general means being prevented
from involved in decision making that affects his
life
 The solution for voiceless-ness is empowering people.
 Empowerment is an active process which occurs at
different levels.
 Empowerment includes:
 Intra- house hold equality and access to and control
over resources as well as decision making.
 Equality in access to resources and social interactions
that affect gender inequality.
 Representativeness in decision making bodies at local,
regional and national level of governments.
 Does the pursuit of economic growth tend to
improve, worsen, or have no necessary effect on the
distribution of income and the extent of poverty in
developing countries?

 Unfortunately, economists do not possess any

definitive knowledge of the specific factors that
affect changes in the distribution of income over
time for individual countries.
 Simon Kuznet analyzed the relationship between the
distribution of income and growth based on the historical
growth pattern of contemporary developed countries.

 He has suggested that in the early stages of economic

growth, the distribution of income will tend to
worsen, where as at latter stages it will improve.
5-72
 Why inequality seemed first to worsen during the
early stages of economics growth?

 It is related with the nature of structural transformation.

The income gap between modern and traditional sectors
may widen quickly at first before beginning to converge.

 This hypothesis however, solely depends on the

historical growth records of countries.
The Need for a Package of Policies
 Policies to correct factor price distortions
 Policies to change the distribution of assets, power, and access to
education and associated employment opportunities
 Policies of progressive taxation and directed transfer payments
 Policies designed to build capabilities and human and social capital
of the poor
 Polices regarding to address the problems of poverty and inequality is
critical.
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“If You Are Born Poor It Is Not Your Mistake,
But If You Die Poor It’s Your Mistake!”
Bill Gate.
• “I FAILED in some subjects in exam, but my friend PASSED in
all. Now he is an engineer in Microsoft and I am the owner of
Microsoft”

The