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Poverty and Inequality Prof. Dr. Awudu Abdulai Department of Food Economics and Consumption Studies

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Poverty and Inequality Prof. Dr. Awudu Abdulai Department of Food Economics and Consumption Studies 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.
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