Inequality and Poverty

Discussion and Measurements

Economic (Under) Development

Poverty

Inequality

Ends (objective)

Means (functional)

Ends (objective)

Means
(functional)

Two Quotes: 18th & 20th Centuries

No Society can surely be Flourishing and Happy, of which by far the greater part of the Numbers are Poor and Miserable Adam Smith,1776 A Society that is not Socially Just and does not intend to be, puts its own Future in Danger Pope John Paul II, Brazil,1980
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Inequality and Poverty

Relative Distribution Absolute Level

Inequality
Distribution of Income Distribution of Wealth Distribution of any other Attributes

Poverty
Lack of Income How much? General condition of people who are badly off and encompasses many aspects of want and disadvantages (Chambers) What are these wants and disadvantages? A severe failure of basic capabilities (Sen)

Absolute or Relative?
Something Definitely Absolute
Adequate level of Food, Clothing and Shelter Minimum Level of Nutrition Whether Acceptable Level can be given Absolute Meaning independent of the Contours of the Society? Ownership of Television? Minimal Standards of Leisure? Access to Scientific Education? Private Means of Transportation? etc. etc.
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Two Reasons for Studying Distribution - Income, Wealth , Poverty

Philosophical & Ethical Functional

Philosophical & Ethical

Why Individuals should be treated differently in terms of their access to life time economic resource? Answer : Personal Decisions Good or bad They are poor because They had it coming to them In some cases it is true But in most cases it is not so.

Philosophical & Ethical

Unequal Treatment starts from Day1 Parental wealth, local environment, access to utilities, etc. To hold descendents responsible for the sins of their ancestors is unfair. At the same time it is unfair to deprive the parents of the right to bequeath their children No way to resolve the dilemma at philosophical level
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Functional aspects of Inequality

Functional and Personal Income Distribution Distribution and Production Pattern Relationship between past and future Distribution Distribution on Savings and Growth Motivations for savings Inequality over time Inverted U Inequality, Tolerance level and Impact on futureTunnel effect In an imperfect capital market if the distribution of productive ideas is loosely correlated with the distribution wealth or asset, ideas may not be implemented. Distribution and Incentive
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Functional aspects of Poverty

Low income leads to low nutrition ( Wage affects food consumption) Low nutrition creates low income ( Food consumption affects ability to work i.e. productivity) Another Vicious circle of poverty

Lack of access to credit because of lack of collateral Collateral - Insurance against the genuine failure of the project - Is a means to prevent intentional default on the part of the borrower - The possibility of lost collateral reduces the incentive to walk away without repaying

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Poverty : Definitional Issues

Concern about Basic needs Food, Housing and Clothing A family may be deprived in one aspect, not in others A family may be deprived in several dimensions: Multiple deprivation

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Income or Expenditure?
Income may understate the level of living A family may be able to dissave or borrow Current level of expenditure may not be constrained by current level of income On the contrary income may overstate the level of living, where money alone is not sufficient to buy the necessary goods Rationing Unavailability of goods This leads to the argument that Income is a better criterion as it is a measure of opportunities open to a family

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Income or Expenditure-II?
Standards of Living -Attaining a specified level of consumption goods or Minimum rights to resources - Level of entitlement Two are in fact confounded Income is the focus of the rights approach But its use on a standard of living approach must be seen as a proxy for consumption (not necessarily consumption per se)
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Temporary or Chronic?
Chronic Poverty is a Structural Problem Temporary Poverty is because of Bad Economic Shocks

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Household or Individual?
Household Data ignores intra-household distribution of Consumption Females, Elderly, Non-earner

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Nutrition Based Poverty Line

Nutrition Based Poverty Lines are not Uncommon Calorie Energy Input Resting ( Basic) Metabolism Energy required for Work Sedentary Work Moderate Activity Heavy Work Other Nutrients: Protein, Vitamin etc. Relationship Between Calorie and Other Nutrients Nutrition Requirement Nutrition Cost at Low Level Acceptable Expenditure
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Income and Nutrition

Overall Expenditure OR Item by Item Consumption Income rise may not increase Nutritional Level Income represents the Capacity to Consume NOT the Consumption itself

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Poverty Line or Poverty Vector?

Is there any Such Magic Line below which all Perish? It is important to realize that Poverty Lines are always Approximations to a threshold that is truly Fuzzy, More because the Effects of Sustained Deprivation are Often felt at a later point in Time A single line/ number or a vector?
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Poverty Indicators for Bangladesh Grameen Bank

The bank member and her family live in a tin-roofed house or in a house worth at least 25,000 taka (roughly equivalent to $ 370). The family members sleep on cots or a bedstead rather than the floor. The member and her family drink pure water from tube-wells, boiled water, or arsenic-free water purified by the use of alum, purifying tablets, or pitcher filters. All of the members children who are physically and mentally fit and above the age of six either attend or have finished primary school. The members minimum weekly loan repayment installment is 200 taka (around $3). All family members use a hygienic and sanitary latrine. All family members have sufficient clothing to meet daily needs, including winter clothes, blankets, and mosquito netting. The family has additional sources of income, such as a vegetable garden or fruit-bearing trees, to fall back on in times of need. The member maintains an average annual balance of 5,000 taka (around $ 75) in her savings account. The member has the ability to feed her family three square meals a day throughout the year. All family members are conscious about their health, can take immediate action for proper treatment, and can pay medical expenses in the event of illness.

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Dimensions of Poverty Debate

Individual or Household measures Income or Expenditure Private consumption only or private consumption plus publicly provided goods Monetary or monetary plus non monetary components of poverty ( self esteem, participation, autonomy) Snapshot or timeline (one time or seasonal etc.) Actual or Potential( shocks; vulnerability) Stock or flow measures ( Income or Asset) Input or Output measures ( Shortfall in income or direct measure of well being) Absolute or Relative Objective or subjective perception of poverty

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Rights Issue
Concerned only with Poverty attaching no weight to Inequality above the Poverty Line Attach weight to the reduction of Inequality as a goal of policy but give priority to the elimination of Poverty Concerned about both the goals and are willing to trade gains in one direction to losses in another direction Attach no significance to Poverty, simply regard it as a component of the wider cost of Inequality

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Measurements
Inequality , Poverty and Human Development

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Inequality Indicators
Range Coefficient of Variation Kuznet ratio Lorenz Curve/ Lorenz Ratio/ Gini Coefficient 1) G1=Lorenz Ratio Pi the Cumulative Population Share Qi the cumulative Income Share Area Below the Lorenz Curve = {(Pi+1)-Pi))*(Qi+1)+(Q(i)} [ i= 0 to L-1] L is total number of Income Classes ( Class Intervals) G1= 1/(1/2)[(1/2)-Area Below the Lorenz Curve ] = 1{(Pi+1)-Pi))*(Qi+1)+(Q(i)} [ i= 0 to L-1]
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Poverty Indicators
1)Poverty Ratio = ( Number of People Below Poverty Line=HC)/Total No. of People(=n) = Head Count Ratio =HCR = PR 2) Consumption Gap = Difference Between the per capita consumption of the Poor and the Poverty Line = ( Z-yi) [i= 1,2,3----- to q ] [ yi< Z] = CG Where, Z is the poverty line and yi is the income of ith poor people = 1/q fi( Z-yi) [i=1,2,3----l] where l is number of classes below poverty line ( For Group data)

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3) Income Gap Ratio = IGR= 1- ( Average Income of the Poor/ Poverty Line) = (p-yi )/p*HC 4) Poverty Gap Ratio = PGR=PR*IGR = n/N [1-(y pBar/y*) Y pBar = average income of poor Y*= Poverty line If n increases PGR increases If IGR increases PGR increases

Sens Index ( For raw data) = SI Sens Index = PR*[ IGR+ (1-IGR)*LRP] Where, LRP is Lorenz Ratio of Poor Persons

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Alternative Development Indicator: PQLI

Physical Quality of Life Index 1-100 Scale Three Components Life Expectancy (X1) at age ONE 100 Best Performance : Sweden ( 77 years in1973) 1 Worst Performance: Guinea Beasue ( 28 years in 1950) Infant Mortality (X2) 100 Best Performance: Sweden ( 9 per 1000 in 1973) 1 Worst Performance: Gabion ( 229 per 1000 in 1950) Literacy Rate (X3) Percentage of Literacy 100---- 1 PQLI= (X1+X2+X3)/3 Major Criticism Fail to incorporate many other Social and Psychological Characteristics like Security, Justice, Human Rights and so on. Income is completely ignored
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Human Development Index

Longevity as measured by Life Expectancy at Birth Knowledge as measured by a weighted average of Adult Literacy ( w=2/3) Mean years of schooling (w=1/3) Standard of Living measured by real per capita income adjusted for the differing purchasing power parity (PPP) of each countrys currency to reflect cost of living

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Life Expectancy Index

UNDPs Lowest goal post with regard to Life Expectancy at Birth is 25 Years Maximum reasonable life expectancy for a country to try to achieve over the coming generation is 85 Years PLE=Present Life Expectancy ALE= Aspired Life Expectancy=85 MLE= Minimum Life Expectancy=25 Life Expectancy Index ={PLE-MLE}/{ALE-MLE}
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Life Expectancy Index for Armenia

PLI=72.7 Years in 1999 LIE={72.7-25}/{85-25}=0.795 72.7= 85% of 85

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Income Index
Adjusted Income= Natural Log of Current Income(CI) Lowest Per Capita Income in last generation That Could Have been $100 Log(CI) log(100) = Amount by which the Country has exceeded this lowest goalpost Consider this in relation to the maximum that a country could reasonably aspire to over the coming generation. UNDP takes this at $40000PPP Income Index={log(CI)-log(100)}/{log(40000)-log(100)}

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Income Index of Armenia

1999 PPP Income per capita is $2215
Income Index= {log(2215)-log(100)}/log(40000)-log(100)} = 0.517 i.e. 0.5 Maximum Value of Income Index= 1 Effect of Diminishing Marginal Utility of Income 2215= 6% of 40000 But Income Index of 0.5 Indicates Income of $2215 is enough to reach more than half way to Maximum Value the Index Can take, which is 1

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Education Index
Adult literacy Index (ALI) weight 2/3 Gross Enrollment Index (GEI) weight 1/3

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Adult Literacy Index

Maximum Literacy Rate=100 Minimum Literacy Rate=0 For Armania Adult Literacy Rate is 98.3% ALI={98.3-0}/{100-0}=0.983

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Gross Enrollment Index

Maximum Value is 100 Minimum Value is 0
For Armania Gross Enrollment Ratio is 79.9
( Primary, Secondary and Tertiary age Population)

GEI= {79.9-0}/{100-0}=0.799

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Education Index (EI)

EI= 2/3{ALI}+1/3{GEI} = 2/3{0.983}+1/3{0.799} =0.922 ( For Armenia)

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Human Development Index (HDI)

HDI= 1/3{Income Index}+1/3{LEI}+1/3{EI} = 1/3{0.571}+1/3{0.795}+1/3{0.922} = 0.745 ( For Armenia)

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HDI
It reveals that a Country can do much better than might be expected at a low level of income Substantial Income gains accomplish relatively little in Human Development

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HDI-GDP Comparison : High HDI

Country HDI HDI Rank GDP (PPP $) per capita GDP Rank GDP RankHDI Rank

Norway Australia Sweden Japan USA France UK S korea UAE

0.965 0.957 0.951 0.949 0.948 0.942 0.940 0.912 0.839

1 3 5 7 8 16 18 26 49

38454 30331 29541 29251 39676 29300 30821 20499 24056 12027

4 14 16 18 2 17 13 31 24

3 11 11 11 -6 -1 -5 -5 -25

Cuba
Mauritius

0.826
0.800

50
63

43
73

-7
10
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HDI-GDP Comparison,: Medium HDI

Country HDI HDI Rank GDP (PPP $) per capita 9902 8195 8090 13825 4101 5896 4390 2745 1935 3139 1027 GDP Rank GDP RankHDI Rank -6 5 -9 -21 32 9 13 12 32 -9 33
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Russia Brazil Thailand Saudi Arabia Armenia China Sri Lanka Vietnam Kyrgyzstan India Mynamar

0.797 0.792 0.784 0.777 0.768 0.768 0.755 0.709 0.705 0.611 0.581

65 69 74 76 80 81 93 109 110 126 130

59 74 65 45 112 90 106 121 142 117 163

Pakistan

0.539

134

2225

128

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HDI-GDP Comparison : Low HDI

Country HDI HDI Rank GDP (PPP $) per capita GDP Rank GDP RankHDI Rank

Togo
Zimbabwe

0.495 0.491 0.491 0.448 0.430 0.311

147 151 152 159 162 177

1536 2065 1140 1154 674 779

150 133 159 158 175 170

-3 -18 7 -1 13 -7

Kenya Nigeria Tanzania Niger

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