Poverty and Inequality
Prof. Dr. Awudu Abdulai Department of Food Economics and Consumption studies Poverty and Inequality
Poverty is the inability to achieve a minimum standard of living Inequality refers to the unequal distribution of material or immaterial resources in a society and as a result, different opportunities to participate in the society
Poverty is not only a question of the absolute income, but also the relative income. For example: Although people in Germany earn higher incomes than those in Burkina Faso, there are still poor people in Germany and non-poor people in Burkina Faso
-> Different places apply different standards -> The poor are socially disadvantaged compared to other members of a society in which they belong Measuring Poverty
How to measure the standard of living? What is a "minimum standard of living"? How can poverty be expressed in an index?
Ahead of the measurement of poverty there is the identification of poor households: ◦ Households are classified as poor or non-poor, depending on whether the household income is below a given poverty line or not. ◦ Poverty lines are cut-off points separating the poor from the non- poor. ◦ They can be monetary (e.g. a certain level of consumption) or non- monetary (e.g. a certain level of literacy). ◦ The use of multiple lines can help in distinguishing different levels of poverty. Determining the poverty line
Determining the poverty line is usually done by finding the total cost of all the essential resources that an average human adult consumes in a year. The largest component of these expenses is typically the rent required to live in an apartment. Economists have therefore paid particular attention to the real estate market and housing prices as a strong poverty line determinant. Individual factors are often used to account for various circumstances, such as whether one is a parent, elderly, a child, married, etc. ◦ The poverty threshold may be adjusted annually. Living Standards Measurement
Income (or expenditure) per capita But: production for own consumption, health, life expectancy, community owned resources, public goods, education, etc are not considered.
For example, comparison of Germany (developed country) with Brunei (developing country):
Brunei has a higher income per capita . -> Supplement income with other indicators Poverty line
A controversial question is whether there should be one poverty line for all developing countries, or whether each country should have its own specific poverty line?
The higher the average income deficit of the poor, the poorer are the poor Country Poverty Lines The poverty threshold or poverty line is the minimum level of income deemed adequate in a particular country. In practice, like the definition of poverty, the official or common understanding of the poverty line is significantly higher in developed countries than in developing countries. The common international poverty line has in the past been roughly $1 a day. In 2008, the World Bank came out with a figure (revised largely due to inflation) of $1.25 at 2005 purchasing power parity (PPP). In Oct 2015, World Bank updated the poverty line to US $1.90 a day.
At present the number of people living under extreme poverty is likely below 10% according the World Bank projections released in 2015. Absolute poverty
◦ There are two main ways of setting poverty lines—in a relative or absolute way: Absolute poverty is the level of poverty as defined in terms of the minimal requirements necessary to afford minimal standards of food, clothing, health care and shelter.
For the measure to be absolute, the line must be the same in different countries and technological levels.
If everyone's real income in an economy increases, and the income distribution does not change, absolute poverty will decline. Relative Poverty Relative poverty is the most useful measure for ascertaining poverty rates in wealthy developed nations.
Relative poverty measure is used by the United Nations Development Program (UNDP), the United Nations Children’s Fund (UNICEF), the Organization for Economic Co-operation and Development (OECD) and Canadian poverty researchers.
In the European Union, the relative poverty measure is the most prominent and most–quoted of the EU social inclusion indicators (net equivalent income). Relative poverty reflects better the cost of social inclusion and equality of opportunity in a specific time and space. Measuring Poverty (1) Indicators used in Measuring poverty: Head Count Index, the Income Gap Index (Poverty gap) and the Squared Poverty Gap Index.
The headcount index is the percentage of the population living in households with income per capita below the poverty line.
The poverty gap index gives the mean distance below the poverty line as a proportion of the poverty line.
The squared poverty gap index which indicates the severity of poverty is computed by weighting the individual poverty gaps by the gaps themselves, so as to reflect inequality amongst the poor.
10 Poverty Indices
„Head-Count-Ratio“ (H): H = q/n q = Number of people below the poverty line n = Total population
Limitation: It does not provide any information on the poverty of the poor
Violates the both the transfer and monotonicity axioms: ◦ Transfer axiom: demands an increase in poverty whenever a pure transfer is made from a poor person to someone with more income Transfering income from a poor to a very poor doesn‘t change the index. ◦ Monotonicity axiom: requires an increase in the overall poverty level if the income of a poor person is reduced.
11 Vorlesung zum Modul Entwicklungsökonomie. Prof. Dr. Awudu Abdulai 12 Poverty rate, 2011 PPP basis (World Bank, 2014) The Income gap (Poverty gap)
Poverty gap index provides a clearer perspective on the depth of poverty. It enables poverty comparisons. It also helps provide an overall assessment of a region's progress in poverty alleviation and the evaluation of specific public policies or private initiatives. The poverty gap index can be interpreted as the average percentage shortfall in income for the population, from the poverty line. Two regions may have the similar headcount ratio, but distinctly different poverty gap indexes. Income-Gap Ratio
π = Poverty line; yi = Household income
y 1. Arranging according to income y 2. Income gap per
Person (i): gi = yi – p 3. Total Income gap (g): p q
gi g gi i1 4. Average income gap: g* = g/q
q n
Income-Gap-Ratio (I): I = g*/p
15 Income-Gap Ratio (Poverty gap index)
If you multiply a country's poverty gap index by both the poverty line and the total number of individuals in the country you get the total amount of money needed to bring the poor in the population out of extreme poverty and up to the poverty line, assuming perfect targeting of transfers. ◦ For example, suppose a country has 10 million individuals, a poverty line of $500 per year and a poverty gap index of 5%. Then an average increase of $25 per individual per year would eliminate extreme poverty.
◦ Note that $25 is 5% of the poverty line. ◦ The total increase needed to eliminate poverty is US$250 million—$25 multiplied by 10 million individuals.
16 Squared poverty gap index (Severity of poverty index) The severity of poverty index tends to exhibit useful analytical properties, because it is sensitive to changes in distribution among the poor.
Specifically, while a transfer of expenditures from a poor person to a poorer person will not change the headcount index or poverty index, it will decrease the squared gap index
Vorlesung zum Modul Entwicklungsökonomie. Prof. Dr. Awudu Abdulai 17 Example of Headcount ratio and Income-gap ratio (Jürgen Faik, 2005)
Similar headcount ratios can lead to different income-gap ratios (1 & 2), or identical income-gap ratios can be related to different headcount ratios (3 & 4).
Poverty Head Income- Income A Income B Income C Income D line count gap ratio
Exp. 1 500 MU 499 MU 499 MU 1000 MU 1000 MU 0,50 0,00
Exp. 2 500 MU 0 MU 0 MU 1000 MU 1000 MU 0,50 1,00
Exp. 3 500 MU 250 MU 1000 MU 1000 MU 1000 MU 0,25 0,50
Exp. 4 500 MU 250 MU 250 GE 1000 MU 1000 MU 0,50 0,50
18 Example of Headcount ratio and Income-gap ratio (Poverty gap) (World Bank, 2005)
Poverty Gap, Poverty Rates in A and B, assuming poverty line of 125
Poverty gap Headcount Expenditure for each individual in country rate (P1) index (P0)
Expendi- ture in 99 101 150 150 0.10 50% country A Expendi- ture in 79 121 150 150 0.10 50% country B
• Headcount index and poverty gap identical in both countries
• For both of these countries, the poverty gap rate is 0.10, but most people would argue that country B has more serious poverty because it has an extremely poor member.
• Distribution in A could be generated by transfering 20 from the poorest person to the next poorest – hardly an improvement , yet no effect on the poverty gap rate.
19 Measuring Poverty (FGT-Index) A commonly used index that was suggested by Foster, Greer and Thorbecke (1984) to capture these three poverty measures is specified as
1 H z y i N i1 z
where z is the poverty line, and y represents income, H is the number of poor (those with incomes at or below z).
For values of α = 0 and 1, the index reduces to the head count (H/N) and income-gap, respectively.
For α = 2, the index measures the severity of poverty.
The FGT indices for α = 0, 1, and 2, are commonly referred to as P0, P1, and P2.
If α is low, then the FGT metric weights all the individuals with incomes below z roughly the same. The higher the value of α, the greater the weight placed on the poor.
20 Poverty Index: Income Distribution
Income distribution is how a nation’s total income (GDP) is distributed amongst its population
Given that the head count ratio and the poverty gap are unable to consider income distribution, other measures have been developed for this purpose.
The Gini Coefficient has been used to measure income inequality by country.
21 Countries' income inequality (2014) according to their Gini coefficients: red = high, green = low inequality
The Gini coefficient is a number between 0 and 1, where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with perfect inequality (where one person has all the income—and everyone else has zero income). Measuring inequality: Gini Coefficient
The Gini Coefficient is the ratio of the area between the line of perfect equality and the observed Lorenz curve to the area between the line of perfect equality and the line of perfect inequality.
That is, it measures the deviation of the distribution of income among individuals or households within a country from a perfectly equal distribution.
The higher the coefficient, the more unequal the distribution is.
In the diagram on the right, this is given by the ratio A/(A+B), where A and B are the indicated areas. Measuring Inequality
Lorenz-Curve and Gini-Coeffizient % of Households
Income A B Gini (G): G = A/(A+B)
of % % 20%
50%
Vorlesung zum Modul Entwicklungsökonomie. Prof. Dr. Awudu Abdulai 24 Lorenz curve and Gini Koefficient It is often used to represent income distribution, where it shows for the bottom x% of households, what percentage (y%) of the total income they have.
The percentage of households is plotted on the x- axis, the percentage of income on the y-axis.
It can also be used to show distribution of assets. It is considered as a measure of social inequality. Kuznets curve
. Standard economic theory stipulates that inequality tends to increase over time as a country develops, and to decrease as a certain average income is attained. . This theory is commonly
Inequality known as the Kuznets curve. . However, many prominent economists disagree with the need for inequality to increase as a country develops
Income per Capita Reasons for changing inequality (OECD, 2011)
Changes in the structure of households can play an important role. Single- headed households in OECD countries have risen from an average of 15% in the late 1980s to 20% in the mid-2000s, resulting in higher inequality.
Assortative mating, where people marry people with similar background, for example, doctors marrying doctors rather than nurses. ◦ OECD found out that 40% of couples where both partners work belonged to the same or neighboring earnings deciles compared with 33% some 20 years before.
An important reason for increasing inequality seems to be the difference between the demand for and supply of skills.
Income inequality in OECD countries is at its highest level for the past half century. ◦ The ratio between the bottom 10% and the top 10% has increased from 1:7, to 1:9 in 25 years
Vorlesung zum Modul Entwicklungsökonomie. Prof. Dr. Awudu Abdulai 27 Sen‘s Poverty Index
Because of the limitation of the Headcount ratio (H), Sen developed a poverty index that accounts for the income distribution:
P = H · Gp + PGI(1 - Gp )
Gp is the Gini-Coeffizient of the poor; and PGI the Poverty gap. Both are used for those that fall below the poverty line.
Sen‘s Index allows the decomposition of poverty into three components, that makes it possible to answer questions such as whether the poor are getting poorer, and whether there is higher inequality among the poor.
The Sen index has been widely discussed, and has the virtue of taking the income distribution among the poor into account. However the index is almost never used outside of the academic literature, perhaps because it lacks the intuitive appeal of some of the simpler measures of poverty, but also because it “cannot be used to decompose poverty into contributions from different subgroups (Deaton, 1997).
28 Relationship between Economic Growth and Poverty
A significant question addressed in economics is whether economic growth contributes to poverty reduction.
Or whether there is any relationship between economic growth and changes in the poverty rate.
29 Relationship between GDP und Poverty for 35 Developing Countries, 1995
10000 South- Korea Argentina 8000
6000 Malaysia 4000 Bangladesh 2000 China Sudan 0 Malawi GDP GDP / Capita, 1994 (U.S. $) 0 20 40 60 80 100 % of Population below der Poverty level
30 Growth and Poverty
Several studies have shown that economic growth contributes to poverty reduction.
Example: ◦In a study for 80 countries, The World Bank showed that the income of the bottom 20 % of the population increased in a 1:1 proportion to GDP growth over four decades.
31 Economic Growth for the Poor? (World Bank, 2001)
Growth rate of income per capita of the poor
Growth rate of income per capita
32 Income growth improves life expectancy
Life Expectancy and GDP per Capita in 2010
Quelle: Deaton, A.,The Great Escape, 2013
33 Longerlives and richer lives (comparing 1960 with 2010)
Almost all the darker circles are above and to the right of the lighter circles
Quelle: Deaton, A.,The Great Escape, 2013
34 Sustainable Development Goals (SDGs)
The Sustainable Development Goals (SDGs), also known as the Global Goals, are an inter-governmentally agreed set of targets relating to international development. ◦ They will follow on from the Millenium Development Goals (MDGs), which ends in 2015.
The MDGs involved eight globally agreed goals in the areas of poverty alleviation, education, gender equality and empowerment of women, child and maternal health, environmental sustainability, reducing HIV/AIDS and communicable diseases, and building a global partnership for development. Sustainable Development Goals, September 2015 (SDGs)
This included the following goals: End poverty in all its forms everywhere End hunger, achieve food security and improved nutrition and promote sustainable agriculture Ensure healthy lives and promote well-being for all at all ages] Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all Achieve gender equality and empower all women and girls Ensure availability and sustainable management of water and sanitation for all Ensure access to affordable, reliable, sustainable and modern energy for all Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation Reduce inequality within and among countries Make cities and human settlements inclusive, safe, resilient and sustainable Ensure sustainable consumption and production patterns Take urgent action to combat climate change and its impacts Conserve and sustainably use the oceans, seas and marine resources for sustainable development Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels Strengthen the means of implementation and revitalize the global partnership for sustainable development
36 Trends in the number of hungry people Decline of about 17%
Increased economic growth has helped reduce poverty and hunger
Source: FAO (2013)
Source: FAO (2013) Development Economics: Prof. Dr. Awudu Abdulai 38