Great Land College

MA in Development Management

Course Title: Development Economics

Course Code: ECON 631

Lecturer: Firdisa Birru (Assistant Professor)

Email: helphelpless2015@yahoo.com

4/14/2022 Firdisa Birru (Assistant Professor) 1

 LECTURE TWO

ANALYSIS OF POVERTY AND

INEQUALITY

Instructor’s: Firdisa Birru (Assistant Professor)

Development Economics Lecture Note by Firdisa Birru (Assistant Professor)

What is Poverty? Can we measure Poverty?
How do we define Poverty? Why do we need to measure
Who are the Poor? Poverty?
What are the causes of How do we measure
Poverty? Poverty? What is inequality?

Contents
Economic &
Demographic Technological & Socio-
Characteristics political Characteristics
of LDCs of LDCS
 Economic Characteristics of LDCs
Very low level of income and mass poverty
/Absolute and relative poverty/
Very low rate of saving and low capital formation
Low productivity in all sectors including economic
activity
High international indebtedness
Prof. Ragner Nurkse developed a vicious circle of
poverty.
 He wrote a book on the problem of capital
formation in underdeveloped countries
Vicious Circle: A causation of forces in which one
force act as a cause and effect of the other force
Development Economics Lecture Note by Firdisa Birru (Assistant Professor)
Instructor: Firdisa Birru (Assistant Professor)
Instructor: Firdisa Birru(Assistant Professor)
 What is Poverty?
 It is not easy to define Poverty
 Traditionally poverty has been defined as the
inability to obtain adequate food and other
necessities of life.
 But, this has been considered as a narrow
definition.
Thus, the concept of poverty has been
expanded to include other aspects of
deprivation:
1) One direction of expansion has been to go
beyond lack of private resources and
include availability of command type
resources such as electricity, infrastructure,
education, health, water and others.
Development Economics Lecture Note by Firdisa Birru (Assistant Professor)
2) Another direction of expansion has been to
include social deprivations or marginalization like
inability to participate in communities and politics.
Thus, we have a narrower definition of poverty
which focuses on income or spending and a wider
one which goes beyond issues of income.
The former has been known as income
poverty while the later is sometimes called
Human Poverty.
Although the concerns are wider, it is generally
considered useful to focus on poverty largely as
lack of money measured in terms of low income or
inadequate expenditure.

Development Economics Lecture Note by Firdisa Birru (Assistant Professor)

The need to focus on income (expenditure)
emanates from two main reasons:
One reason is practical: inadequate income is
clear, measurable, and of immediate concern for
individuals.
Another reason is that: low income tend to
correlate strongly with other concerns that are
important but harder to measure.
A single, all encompassing measure of poverty,
however, remains beyond reach.
Thus, our main focus is (in this course) is on the
narrower definition of poverty.
We measure poverty with the help of poverty
lines.
Development Economics Lecture Note by Firdisa Birru (Assistant Professor)
 Poverty Line
A poverty Line (poverty threshold) refers to the
minimum level of income or expenditure deemed
necessary to achieve the minimum requirements of
life.
It is a line below which one is considered as poor
and above which one is not.
 Having a poverty line allows us to count the poor,
target resources, and monitor progress against a
clear benchmark.

Development Economics Lecture Note by Firdisa Birru (Assistant Professor)

 Absolute Versus Relative Poverty Line

Absolute poverty line indicates deprivation in

an absolute sense, while relative poverty line
would show relative deprivation.
While absolute poverty line would apply to
countries without difference, relative poverty line
varies across countries.
Many wealthier countries set poverty lines on
relative standards.

Development Economics Lecture Note by Firdisa Birru (Assistant Professor)

 Poverty Measures
Three most widely used poverty measures:
Headcount Index
Poverty Gap Index and
Squared Poverty Gap Index
 Before we see these measures, let us first see some
desirable characteristics of poverty measures:
1) Scale Invariance: poverty measures should be
unchanged if, for example, a population doubles in
size while everything else is maintained in the same
proportion.
2) Focus axiom: poverty measures should focus on the
well-being of those below the poverty line, so that
changes among the better-off people do not affect
measured poverty.

Development Economics Lecture Note by Firdisa Birru (Assistant Professor)

3) Monotonicity Axiom: this axiom states that,
holding all else constant, when a poor person’s
income falls, poverty measures must rise or at
least should not fall.
4) Decomposability: this refers to the ability of the
poverty measure to be decomposed by sub-
populations (e.g. by region, by gender, by
rural/urban, etc).
5) Transfer-Sensitivity Axiom: This axiom relates to
the change within the poverty line/threshold.
 This states that if income is transferred from a
person of relatively higher income within the
poverty line to one of lower income, the poverty
measure should indicate a fall.
Development Economics Lecture Note by Firdisa Birru (Assistant Professor)
 A) Headcount Index
 The headcount is the simplest, best and the most
commonly calculated poverty measure.
 It identifies the share of a population whose income is
less than the poverty line.
 It simply adds the number of people whose income
is below an agreed upon poverty line.
 This measure counts heads (persons) found below
the poverty line.
 The overall headcount is the ratio of the two numbers:
 H = (No of poor) ÷ (popn in the sample) =G/N
 The headcount is an important descriptive tool.
Development Economics Lecture Note by Firdisa Birru (Assistant Professor)
 However, it has two major weaknesses:
1) The headcount registers no change when a
very poor person becomes less poor.
 Nor does the headcount change when a poor
person becomes even poorer (Monotonicity
failed).
2) A second weakness is also related with the
failure of the transfer axiom.
 It is generally argued that changes in the
income distribution below the poverty line
matter in a moral sense. This notion is captured
by the transfer axiom above; but the headcount
fails the test.
15
Development Economics Lecture Note by Firdisa Birru (Assistant Professor)
 B) Poverty Gap Index
The 2nd widely used measure is the Poverty Gap Index.
The Poverty Gap measures the amount of money by
which each individual falls below the poverty line.
The Poverty Gap Index is:
𝟏 𝐌 𝐙𝐢 −𝐲𝐢
𝐏𝐆𝐈 = 𝐢=𝟏( 𝐙 )
𝐍 𝐢

Where, z= poverty line (total poverty line); yi=income

of each household; N= is total hhs in the sample.
In general, the Poverty Gap Index measures the
degree of poverty (severity of poverty).
The Poverty Gap Index has a problem similar to the
headcount in that it fails the transfer sensitivity
axiom.
Development Economics Lecture Note by Firdisa Birru (Assistant Professor)
 C) Squared Poverty Gap Index (Poverty Severity
Index)

 This takes into account not only the distance

separating the poor from the poverty line (the poverty
gap), but also the inequality among the poor.
 That is, a higher weight is placed on those households
further away from the poverty line.
Foster, Greer & Thorbecke (1984; henceforth FGT)
propose a class of measures built on this idea which
have found their way into much of the poverty analysis
published by the World Bank.

Development Economics Lecture Note by Firdisa Birru (Assistant Professor) 17

 Squared Poverty Gap Index ….
With income expressed in per capita terms, the
measures take the form:

 The parameter α above determines the degree to

which the measure is sensitive to the degree of
deprivation for those below the poverty line.
 If α = 0, the FGT index becomes the headcount ratio
 If α = 1, the FGT index becomes the Poverty Gap
 If α = 2, FGT index becomes the Squared Poverty
Gap
Development Economics Lecture Note by Firdisa Birru (Assistant Professor) 18
 Determinants of Poverty
Understanding the factors that determine or cause
poverty can help us tackle the causes of poverty.
The causes of poverty can be divided into d/t
levels:
1) National or Regional Level Factors include:
 shortage of rainfall (drought), remoteness
(geographical isolation), inadequate public
service, weak communication and infrastructure,
lack of good governance, political and economic
instability, market failures, social or racial
discrimination, gender discrimination, etc.

Development Economics Lecture Note by Firdisa Birru (Assistant Professor) 19

2) Community level factors: Community
Level characteristics that may cause poverty
include:
Proximity to paved roads and main
markets,
whether or not the community has
electricity,
availability of schools or health centers,
human resource development,
access to employment,
social mobility, social networks (social
Capital such as equip, edir, etc)

Development Economics Lecture Note by Firdisa Birru (Assistant Professor)

 3) Household and Individual Level Factors
 Household and individual level factors that may
cause poverty include such factors as:
Demographic factors: household size, age
structure, gender of household head, etc
Economic factors: household and productive
assets such as household goods, livestock, land,
agricultural equipment, financial assets such as
savings; level and type of employment;
Social factors: health, education (level of education
or literacy, availability of educational services,
average spending on education, etc) and shelter
(relates to the type of building – size & materials
used-as well as house ownership).
Development Economics Lecture Note by Firdisa Birru (Assistant Professor)
 Analysis of Inequality
Inequality is a broader concept than poverty in
that it is defined over the entire population, but
not only below a certain poverty line.
Inequality is concerned with distribution.
Note that inequality measures can be calculated for
any distribution—not just for consumption, income,
or other monetary variables—but also for land and
other continuous and cardinal variables.

Instructor: Firdisa Birru (Assistant Professor).

 Lorenz Curve and Gini Coefficient
Gini coefficient is the most commonly used
measure of inequality.
The coefficient varies b/n 0, which reflects
complete equality, and 1, which indicates
complete inequality (one person has all the
income or consumption; all others have none).
Graphically, the Gini coefficient can be easily
represented by the area b/n the Lorenz curve
and the line of equality.
If income is distributed equally, then the
Lorenz curve & the line of equality are
merged & the Gini coefficient is 0.
Instructor: Firdisa Birru (Assistant Professor).
The closer the Lorenz curve The Lorenz curve is a widely used
to the line of equality, the better graph of the distribution of income, with
is the size distribution of cumulative percentage of families plotted
income along the horizontal axis and cumulative
percentage of income plotted along the
vertical axis.
If income is equally distributed,
there is no shaded area.
If income distribution is perfectly
unequal , the triangle is fully shaded

More unequal distributions of

income produce Lorenz Curves that
are•farther
. from the 45-degree line

Instructor: Firdisa Birru (Assistant Professor)

 GC is the ratio of the area b/n the perfect equality line &
the Lorenz curve and the total area lying to the right of
the equality line in a Lorenz curve diagram.
0 < The Gini Coefficient < 1

Development Economics Lecture Note by Firdisa Birru (Assistant Professor)

 The further the Lorenz Curve is from the
equidistribution line, the more unequal the
distribution.
For example, B represents more unequal
distribution than A.
Similarly, D represents the most unequal
distribution compared to all A, B and C.
 The shape of a Lorenz Curve is thus a good
visual indicator of the level of inequality in the
society.
If two Lorenz Curves intersect we cannot tell which
one represents more unequal income distribution
than the other.
The Greater the Curvature of the Lorenz Line, the
Greater the Relative Degree ofBirruInequality
Instructor: Firdisa (Assistant Professor).
Instructor: Firdisa Birru (Assistant Professor).
.
Recent estimates show that worldwide, the
Gini Coefficient ranges from a low of 0.232 in
Denmark to 0.707 in Namibia.
When the Gini Coefficient is expressed in
percent (23.2% in Denmark) it is known as Gini
Index.
Poor countries generally have higher Gini
Indices (typically between 40 to 65) while rich
countries generally have lower Gini Indices
(below 40).
The lowest Gini Coefficient is usually found in
europe.
Overall, there is a clear negative correlation
between Gini Coefficient and GDP per capita.
Instructor: Firdisa Birru (Assistant Professor).
10Q!

29