Chaka GROUP Assignment

YOM INSTITUTE OF ECONOMIC DEVELOPMENT
GRADUATE PROGRAM
PROJECT PLANNING AND MANAGEMENT
COURSE- Development Policies & Strategies
Project Planning and Management:
Development Policies and Strategies- PPM 511
Group Assignment: Group-3- Inequality

Name ID
Chaka Yohannes Chaka GSRH/013/13
Desalegn Baorro Senbeto GSRH/014/13
Eden Eyasu Erasho GSRH/015/13
Eleni Tewabe G/mariyam GSRH/016/13
Ephrem Ermias Otiso GSRH/017/13
Ermias Ketena Belew GSRH/018/13
Habtamu Erkalo Basore GSRH/019/13
Jombola Wonte Guja GSRH/022/13
Assignment Question:
Nature and measurement issues of inequality, show how

a high growth country but with inequality difficult to
achieve development. Discuss also Ethiopian status in
this case.
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Table of Contents
1. Nature of Economic Inequality...................................................................................................................1
1.1 Introduction......................................................................................................................................2
1.2 What is Inequality?..........................................................................................................................2
1.3 What Causes Inequality?.................................................................................................................2
2. Measurement of Inequality..........................................................................................................................3
2.1 Types of Inequality...........................................................................................................................3
2.2 Indicators of Inequality....................................................................................................................3
2.3 What is the impact of inequality?....................................................................................................4
2.4 Poverty and Inequality.....................................................................................................................4
2.5 Measurement of Inequality..............................................................................................................5
2.5.1 problems in measuring inequality?.............................................................................................5
2.5.2 Inequalities and their measurement?..........................................................................................5
2.5.2.1 The Lorenz Curve................................................................................................................... 5
2.5.2.2 Inequality Indices.................................................................................................................... 6
I. Gini Coefficient.......................................................................................................................... 6
II. Ratio Measures.......................................................................................................................... 7
III. Palma Ratio.......................................................................................................................... 7
3. High growth country but difficult to achieve development.......................................................................8

3.1 Economic growth and development................................................................................................8
3.2 Economic Growth.............................................................................................................................8
3.3 Relationship between growth and development...........................................................................10
3.4 GDP and purchasing power parity...............................................................................................11
4. Ethiopian status of inequality....................................................................................................................11
5. Conclusion...................................................................................................................................................12
6. References...................................................................................................................................................14
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1. Nature of Economic Inequality
1.1 Introduction
Economic growth is about changes in aggregate or average incomes. This is
a good measure of a country’s development, but it is far from being the
only one. the analysis of the distribution of income, or wealth, among
different groups in society is far more important in showing the overall
growth or development of a country. Economic growth that spreads its
benefits equitably among the population is always welcome; growth that is
distributed unequally needs to be evaluated not simply on the basis of
overall change, but on the grounds of equity. Thus,
Inequality is important, both for its own sake and for its political, social,
and economic implications. However, measuring inequality is not
straightforward, as it requires decisions to be made on the variable,
population, and distributional characteristics of interest. These decisions
will naturally influence the conclusions that are drawn so they must be
closely linked to an underlying purpose, which is ultimately defined by a
social welfare function.
1.2 What is Inequality?

Definition. Inequality is concerned with disparities in the distribution of a
certain metric, which can be income, health or any other material or non-
material asset. Inequality typically refers to within country inequality on
individual or group level, such as between gender, urban and rural
population, race etc.
So, in relation to development, Inequality of outcomes occurs when

individuals do not possess the same level of material wealth or overall
living economic conditions. Development theory has largely been
concerned with inequalities in standards of living, such as inequalities in
income/wealth, education, health, and nutrition.
1.3 What Causes Inequality?
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A range of global and domestic factors which may reinforce each other
have been proposed in the theory and empirical literature to account for the
income inequality trends. The key forces include the following:
Global factors, such as technological progress, globalization, and

commodity price cycles, play an important role. For instance, technological
advancement has contributed to the skill premium, because individuals with
higher education have a comparative advantage in using new technologies
(Card and DiNardo, 2002). In Western Europe and the United States,
technological progress has also translated into a hollowing out of middle-
class jobs, a phenomenon known as job polarization (Goos and Manning,
2007).
Country-specific factors, such as those related to economic developments

and economic stability as well as to domestic policies — including financial
integration, redistributive fiscal policies, and liberalization and deregulation
of labor and product markets — also play an important role in explaining
inequality trends within countries.
2. Measurement of Inequality
2.1 Types of Inequality

Inequality in the sense of uneven or unequal distribution of various factors
among the individuals or society group can be seen from different elements
and some of these elements are very important measures to show the level
of inequality. The major ones are;
 Income inequality
 Wealth inequality
 Nutrition inequality
 Education inequality
 Health inequality
 Employment inequality
 Inequality in social security
 Etc……
2.2 Indicators of Inequality
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Though it is not an easy task to measure and explain Inequality in its general
term, some quantitative measurement or indicators are used to show the disparity
between and among societies and some of these indicators are:
 Income inequality.
 Poverty rate.
 Poverty gap.
 Discriminatory family code.
 Violence against women.
 Women in politics.
 Social Institutions and Gender.
 Housing overcrowding.
2.3 What is the impact of inequality?

At a microeconomic level, inequality increases ill health and health spending and
reduces the educational performance of the poor. These two factors lead to a
reduction in the productive potential of the work force. At a macroeconomic level,
inequality can be a brake on growth and can lead to instability. In development
terms, the main mechanism through which inequality affects growth is by
undermining education opportunities for children from poor socio-economic
backgrounds, lowering social mobility and hampering skills development.
2.4 Poverty and Inequality
People in poverty are those who are considerably worse-off than the majority of
the population. Their level of deprivation means they are unable to access goods
and services that most people consider necessary to an acceptable standard of
living.
It can be an absolute term, referring to a level of deprivation that does not change
over time, or a relative term in which the definition fluctuates in line with changes
in the general living standard.
The most commonly used definition of poverty in the UK is a relative measure:

poverty is defined as having a household income (adjusted for family size) which
is less than 60% of median income. This is one of the agreed international
measures used throughout the European Union.
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Inequality, by contrast, is always a relative term: it refers to the difference

between levels of living standards, income etc. across the whole economic
distribution. In practice, poverty and inequality often rise and fall together but this
need not necessarily be the case. Inequality can be high in a society without high
levels of poverty due to a large difference between the top and the middle of the
income spectrum.
2.5 Measurement of Inequality
2.5.1 problems in measuring inequality?
Unlike height, inequality has no unambiguous dimension. Inequality is

something that we must define before we can measure it. We must decide
how we will reduce a complex distribution of income to a single number.
The problem is that a single inequality metric cannot tell us about the shape
of the income distribution.
2.5.2 Inequalities and their measurement?

How is economic inequality measured?
A simple but effective way to examine income inequality is to calculate decile
ratios. The calculation is done by taking, for example, the income earned by the
top 10% of households and dividing that by the income earned by the poorest
10% of households.
2.5.2.1 The Lorenz Curve
The Lorenz curve plots the cumulative share of total income against the
cumulative proportion of income receiving units. It is used for analysing the size
distribution of income and wealth, to estimate the Gini index and other measures
of inequality and poverty.
Suppose we sort people in a population in increasing order of incomes. The below

figure shows a typical Lorenz curve. On the horizontal axis, we depict cumulative
percentages of the population arranged in increasing order of income. Thus, points
on that axis refer to the poorest 20% of the population, the poorest half of the
population, and so on. On the vertical axis, we measure the percentage of national
income accruing to any particular fraction of the population thus arranged. The
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point A, for example, corresponds to a value of 20% on the population axis and
10% on the income axis. The interpretation of this is that the poorest 20% of the
population earns only 10% of overall income. Point B, on the other hand,
corresponds to 80% on the population axis and 70% on the income axis. This
point, therefore, contains the information that the “poorest” 80% enjoy 70% of the
national income. An equivalent way to describe this is from “above”: the richest
20% have 30% of gross income for themselves. The graph that connects all these
points is called the Lorenz curve.
100%
Cumulative Income
Line of equality
70% B
Lorenz Curve
0
45
10% A
20% 80% 100%

Cumulative Population
Fig. The Lorenz curve of an income distribution
2.5.2.2 Inequality Indices
I. Gini Coefficient
Several inequality indices can be derived from the Lorenz diagram. The
Lorenz Curve construction also gives us a rough measure of the amount of
inequality in the income distribution. The measure is called the Gini
Coefficient.
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The Gini coefficient measures inequality across the whole of society rather
than simply comparing different income groups. If all the income went to a
single person (maximum inequality) and everyone else got nothing, the
Gini coefficient would be equal to 1. If income was shared equally, and
everyone got exactly the same, the Gini would equal 0. The lower the Gini
value, the more equal a society.
The Gini coefficient is a standard measure of inequality defined as the area

between the Lorenz curve and the line of perfect equality divided by
the area below the perfect equality line
II. Ratio Measures
Ratio measures compare how much people at one level of the income
distribution have compared to people at another. For instance, the 20:20
ratio compares how much richer the top 20% of people are, compared to the
bottom 20%.
Common examples:
 50/10 ratio – describes inequality between the middle and the bottom
of the income distribution
 90/10 – describes inequality between the top and the bottom
 90/50 – describes inequality between the top and the middle
 99/90 – describes inequality between the very top and the top
III. Palma Ratio
The Palma ratio is the ratio of the income share of the top 10% to that of the
bottom 40%. In more equal societies this ratio will be one or below,
meaning that the top 10% does not receive a larger share of national income
than the bottom 40%. In very unequal societies, the ratio may be as large as
7.
The Palma ratio addresses the Gini index's over-sensitivity to changes in the
middle of the distribution and insensitivity to changes at the top and
bottom. The Palma ratio is commonly used in international development
discourse.
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3. High growth country but difficult to achieve development.
3.1 Economic growth and development
'Development' and 'economic development' have often been treated as

synonymous concepts. The economic development of a country or society
is usually associated with (amongst other things) rising incomes and related
increases in consumption, savings, and investment.
Of course, there is far more to economic development than income growth;

for if income distribution is highly skewed, growth may not be
accompanied by much progress towards the goals that are usually
associated with economic development.
Let us start by asking a question, what characteristics are typically

associated with economic development? Write down a list of features that
in your view might distinguish an economically developed country from
one that is not.
Clearly not all developed countries exhibit all these characteristics in equal
measure. And, some of you might even question the presence of certain
items in the above list, pointing perhaps to countries (or regions within
them) in which, for example, crime and employment levels appear to be
quite high, or highlighting the fact that not everyone has access to good
public services, housing and so on. Some of these points are clearly open to
debate. For instance, crime levels in the rural areas of many developing
countries where most people live are often much lower than in some of the
urban population centres of developed countries. Nonetheless, the above list
is probably fairly indicative of the characteristics that distinguish countries
that are economically developed from those that are not.
3.2 Economic Growth
From the answer to the previous question you will have noticed that the
listed characteristics once again say more about goals than the processes or
mechanisms for achieving them. So, what drives a country towards
achieving these goals? The orthodox view, espoused by most governments,
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most major international organisations, and the economists that advise

them, is that a big part of the answer lies in economic growth.
However, economic growth can follow many different paths, and not all of
them are sustainable. Indeed, there are many who argue that given the
finite nature of the planet and its resources, any form of economic growth is
ultimately unsustainable. We shall leave these debates for later. For now let
us look at what exactly economic growth is and how it is measured.
Economists usually measure economic growth in terms of gross domestic

product (GDP) or related indicators, such as gross national product (GNP)
or gross national income (GNI) which are derived from the GDP
calculation. GDP is calculated from a country's national accounts which
report annual data on incomes, expenditure and investment for each sector
of the economy. Using these data it is possible to estimate the total income
earned in the country in any given year (GDP) or the total income earned by
a country's citizens (GNP or GNI).
GNP is derived by adjusting GDP to include repatriated income that was

earned abroad, and exclude expatriated income that was earned
domestically by foreigners. In countries where inflows and outflows of this
sort are significant, GNP may be a more appropriate indicator of a nation's
income than GDP.
There are three different ways of measuring GDP
 the income approach

 the output approach
 the expenditure approach
The income approach, as the name suggests measures people's incomes, the
output approach measures the value of the goods and services used to
generate these incomes, and the expenditure approach measures the
expenditure on goods and services. In theory, each of these approaches
should lead to the same result, so if the output of the economy increases,
incomes and expenditures should increase by the same amount.
Figures for economic growth are usually presented as the annual percentage
increase in real GDP. Real GDP is calculated by adjusting nominal GDP to
take account of inflation which would otherwise make growth rates appear
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much higher than they really are, especially during periods of high
inflation.
3.3 Relationship between growth and development

Now take a moment to think about what GDP and GDP growth tell us about
a country's level of economic and social development.
Do high levels of GDP necessarily correspond with high levels of

development? Not necessarily. It is not aggregate GDP that is important,
but GDP per capita. Countries like China and India have much higher levels
of GDP than, say, Singapore, New Zealand or Belgium, but few would
suggest that the latter are economically less developed than the former.
Let us again ask; If GDP growth is to translate into higher GDP per
capita, it has to outpace population growth. Assuming that it does, is it
reasonable to say that development is taking place?
Certainly, statistics reveal that the most developed countries are those with

the highest GDP per capita. Clearly, though, GDP per capita doesn't tell the
whole story. GDP per capita is calculated by dividing GDP by the population. It
says nothing about how incomes are distributed or spent. Growth in GDP per
capita could result from growth in the incomes of richer groups in society, with
incomes of poorer groups remaining largely unchanged. It coincides with
spending patterns that are skewed towards the rich and which exclude the needs
of the poor. It doesn't necessarily follow that growth in per capita GDP will lead
to a reduction in poverty or to broader social and economic development. Indeed,
there are those who argue, rightly or wrongly, that in many countries economic
growth is associated with increasing levels of poverty, rather than the reverse.
The relationship between economic growth and poverty is a hotly debated topic,
about which people are very divided. Some people highlight the negative effect
of growth on low income groups, stressing the need for new approaches to
economic development that will allow the poor to benefit more from economic
growth than they do at present. Others are more sanguine, believing that the
benefits of current models for growth will eventually 'trickle down' to poorer
groups in society, if they are not already doing so.
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3.4 GDP and purchasing power parity
An additional problem with GDP as a measure of development occurs when one

compares per capita GDP across countries. This problem arises because one US
dollar in the United States or Europe, for example, does not buy the same amount
of goods and services as it would do in, say, Africa or Asia. For many goods and
services one dollar will purchase significantly more in a developing country than
it will in a developed one. To overcome this difficulty, economists often
use purchasing power parity (PPP) dollars when making cross-
country comparisons of GDP. These are dollars that are adjusted to account for
the differences in purchasing power between different countries.
N:B Thus in conclusion we can say that economic inequality is a

broad and complex term which may not be achieved with
only high growth that may or may not lead to development
and need to be considered many other drivers.
4. Ethiopian status of inequality

Ethiopia is one of the most equal countries in the world and low levels of
inequality have, by and large, been maintained throughout this period of
economic development. Life expectancy increased and progress was made
towards the attainment of the Millennium Development Goals (MDG),
particularly in hunger, gender parity in primary education, child mortality,
HIV/AIDS, and malaria.
Ethiopia is a country which is one of the fastest developing economies in the

world with GDP two growing at 10.5 per cent per year since 2005, (Seid et al.,
Tigist Girma and Maru Shete 2015) and targets to become a low middle-income
country by 2025 (MoFED, 2015). Ethiopia has also managed to keep income
inequality at a relatively lower level since the early 1990s. With a Gini coefficient
of 0.30 in 2011, it is one the least unequal nations in the world (MoFED, 2013;
World Bank Group, 2015). Despite this the country is one of the poorest nations
in the world with around 31 per cent of the population lives below the
international poverty line of 1.25 PPP a day (World Bank Group, 2015) and the
evidence on the state and path of inequality over the decade obtained from the
national household income and consumption surveys, as well as the panel data,
point out that it has been clearly rising in urban areas, and remained more or less
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at its initial level in rural areas though it exhibited considerable variation across
time according to the panel data Alemayehu et al. (2009).
In Ethiopia income inequality increased in urban areas and remains unchanged in
rural areas. For this reason there is growth in urban areas but the increase in
income inequality in urban areas eliminated the poverty-reducing effects and the
increase in the Gini coefficient of urban areas and remain unchanged in rural
areas indicates that the overall increase in income inequality (Tassew et al. 2009).
Alemayehu et al. (2009) on their study they showed exist of strong correlation
between growth and inequality. They further estimated that over ten years, as
growth per capita increases by four percent, poverty would decline from forty-
four to twenty-six percent, but with no change in the aggregate income
distribution. Alemayehu and Addis (2014) also examined the relationship
between growth, poverty and inequality in Ethiopia. They found growth and
distributions as important determinants for change in poverty. In rural areas
poverty reduction is totally accounted by growth (inequality was not significant).
While in urban areas the poverty reduction effect of growth is more than wiped
out by the inequality that has accompanied it, and this underscores the need to
address the challenges of inequality.
5. Conclusion
Inequality can have different dimensions. Economists are mostly concerned with
the income and consumption dimensions of inequality. Among other non-income
inequality dimensions, we can include inequality in skills, education,
opportunities, happiness, health, life-years, welfare and assets.
Several inequality indices can be derived from the Lorenz diagram. The
divergence of a Lorenz curve for perfect equality and the Lorenz curve for a given
distribution is measured by some index of inequality. Several inequality indices
follow along with some basic properties that one would expect the indices to
satisfy. These properties are to be used in their ranking, relevance and
performance evaluation. The most widely used index of inequality is the Gini
coefficient. Gini is generalized to accommodate differing aversions to inequality.
Income inequality can be decomposed at different levels of aggregation. At the

national level it can be decomposed into within-subgroup, between subgroup, and
overlapping components. In a similar way at the international level it can be
decomposed into within-country, between-country, and overlapping components.
In the measurement of world income inequality, it is desirable that the unit of
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analysis is the citizens of the world rather than countries. Representative

individual based micro data is preferable.
The effects of inequality in non-income factors on earnings can be summarized

variously. Inequality in education explains a minor fraction of differences in
cross- country earnings inequality. The impact decreases by the level of education
and depends on the economic development and skill-intensive nature of
production technologies. It also negatively affects the investment rate and growth
rate of income. There is no direct link from income inequality to ill health
measured as mortality, but a range of mechanism and social arrangements
indicate the presence of an indirect link. Unlike in the case of income inequality,
within country health inequality is a dominating source of inequality. Regions
differ with respect to the effects of inequality on happiness; the differences in
happiness are associated with preferences for equal societies and higher social
mobility.
Employment in addition of being a source of income is also is a provider of social

relationships and individual social identity. Joblessness has a direct cost to the
employee and employers, social costs and a cost in in-optimal operation of an
economy. The additional burden of unemployment on individual wellbeing, the
non-pecuniary cost, is an important non-monetary cost of joblessness and much
larger than the pecuniary effect that stems from the loss of income, though the
negative effect varies by personal characteristics. Inequality in the distribution of
assets is found to affect long-term growth. In sum the results suggest that one
should account for the interrelationship between the different dimensions in the
measurement and analyses of inequalities.
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6. References
Aghion P. (2002), Schumpeterian growth theory and the dynamics of income inequality,
Econometrica 70(3), 855-882.
Alemu, A., A. Kedir, K. Endale and T. W/Giorgis (2011) Growth, Poverty Reduction and
Inequality in Ethiopia: The role of Labour Markets, report submitted to African Economic Research
Consortium (AERC), Nairobi, Kenya.
Alemayehu Geda, Abebe Shimeles, John Weeks, (2009), Growth, Poverty and Inequality in
Ethiopia: Which way for Pro-Poor Growth? Journal of International Development, J. Int. Dev.
21, 947–970 (2009) Economic Commission for Africa (ECA), Addis Ababa, Ethiopia
Anand S. (1997), The measurement of income inequality, in: S. Subramanian (ed) Measurement of
inequality and poverty, Oxford University Press, pp. 81-105.
Castello A. and R. Domenech (2002), Human capital inequality and economic growth:
some new evidence, The Economic Journal 112, March C187-C200.
McKay, A. (2002). Defining and measuring inequality, Inequality Briefing: Briefing, (1).
Economists’ Resource Centre odi.org/sites/odi.org.uk/files/odi-assets/publications- opinion files/
3804.pdf
MoFED (2015), the Second Growth and Transformation Plan (GTP II) (2015/16-2019/20).
Technical report, Ministry of Finance and Economic Development, Ethiopia
Tassew W, Hoddinott J, Dercon S. (2009) Poverty and Inequality in Ethiopia: 1995/96-2004/05,

Addis Ababa University, International Food Policy Research Institute and University of Oxford,
Addis Ababa, Ethiopia.
Wooldridge M.J (2000). Introductory Economics: A modern Approach, Second Edition.
Development Economics, Debraj Ray,
Development Economics, Michael P. Todaro; Stephen C. Smith, Eleventh Edition
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YOM INSTITUTE OF ECONOMIC DEVELOPMENT

Project Planning and Management:

Development Policies and Strategies- PPM 511

Group Assignment: Group-3- Inequality

Nature and measurement issues of inequality, show how

3. High growth country but difficult to achieve development.......................................................................8

1. Nature of Economic Inequality

1.2 What is Inequality?

So, in relation to development, Inequality of outcomes occurs when

1.3 What Causes Inequality?

Global factors, such as technological progress, globalization, and

Country-specific factors, such as those related to economic developments

2.1 Types of Inequality

2.2 Indicators of Inequality

2.3 What is the impact of inequality?

The most commonly used definition of poverty in the UK is a relative measure:

Inequality, by contrast, is always a relative term: it refers to the difference

2.5 Measurement of Inequality

2.5.1 problems in measuring inequality?

Unlike height, inequality has no unambiguous dimension. Inequality is

2.5.2 Inequalities and their measurement?

2.5.2.1 The Lorenz Curve

Suppose we sort people in a population in increasing order of incomes. The below

20% 80% 100%

Fig. The Lorenz curve of an income distribution

2.5.2.2 Inequality Indices

The Gini coefficient is a standard measure of inequality defined as the area

II. Ratio Measures

III. Palma Ratio

3. High growth country but difficult to achieve development.

3.1 Economic growth and development

'Development' and 'economic development' have often been treated as

Of course, there is far more to economic development than income growth;

Let us start by asking a question, what characteristics are typically

3.2 Economic Growth

most major international organisations, and the economists that advise

Economists usually measure economic growth in terms of gross domestic

GNP is derived by adjusting GDP to include repatriated income that was

There are three different ways of measuring GDP

 the income approach

3.3 Relationship between growth and development

Do high levels of GDP necessarily correspond with high levels of

Certainly, statistics reveal that the most developed countries are those with

3.4 GDP and purchasing power parity

An additional problem with GDP as a measure of development occurs when one

N:B Thus in conclusion we can say that economic inequality is a

4. Ethiopian status of inequality

Ethiopia is a country which is one of the fastest developing economies in the

Income inequality can be decomposed at different levels of aggregation. At the

analysis is the citizens of the world rather than countries. Representative

The effects of inequality in non-income factors on earnings can be summarized

Employment in addition of being a source of income is also is a provider of social

Tassew W, Hoddinott J, Dercon S. (2009) Poverty and Inequality in Ethiopia: 1995/96-2004/05,

Wooldridge M.J (2000). Introductory Economics: A modern Approach, Second Edition.

Development Economics, Debraj Ray,

Development Economics, Michael P. Todaro; Stephen C. Smith, Eleventh Edition

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