POVERTY AND DEVELOPMENT

TOPIC 4: POVERTY AND INEQUALITY

Inequality concept and measurement

 Poverty measures depend on the average level of income or consumption in a country and
the distribution of income or consumption.
 poverty measures therefore focus on the situation of those individuals or households at the
bottom of the distribution.
 Inequality is a broader concept than poverty in that it is defined over the entire population,
not only below a certain poverty line.

To measure inequality in a country and compare among countries more accurately, economists use
Lorenz curves and Gini indices. It has been observed that developing countries would have very
unequal income distribution and growth that benefits mostly the rich few. The process of
transformation of economies from primitive into industrialized society is always accompanied by
widening disparities in the early stages and if the government does not play its role in ensuring
redistribution of resources, the gap between the rich and poor keep increasing.

The following are some of the commonly used measures of inequality:

i. Gini coefficient of inequality
This is the most commonly used measure of inequality. The coefficient varies between 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 between the Lorenz curve and the line of equality.

Lorenz Curve of Income Distribution

Lorenz curve This is a graph that shows the variance of the size of distribution of income from
perfect equality.

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 The Lorenz curve maps the cumulative income share on the vertical axis against the
distribution of the population on the horizontal axis.
 In the above example, 40 percent of the population obtains around 20 percent of total
income. If each individual had the same income, or total equality, the income distribution
curve would be the straight line in the graph—the line of total equality. The Gini coefficient
is calculated as the area A divided by the sum of areas A and B. If income is distributed
equally, then the Lorenz curve and the line of total equality are merged, and the Gini
coefficient is 0. If one individual receives all the income, the Lorenz curve would pass
through the points (0, 0), (100, 0), and (100, 100), and the surfaces A and B would be
similar, leading to a value of 1 for the Gini coefficient.
Interpretation:
i) The closer the line depicting the distribution i.e. the Lorenz curve is to the line of perfect
equality the more equitable the income distribution is in that country.
ii) The more bent the curve is away from the line of perfect equality, the more unequal the
distribution of income is.

 one of the disadvantages of the Gini coefficient is that it is not additive across groups; that
is, the total Gini of a society is not equal to the sum of the Ginis’ for its subgroups.

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ii. Theil index

While less commonly used than the Gini coefficient, the Theil index of inequality has the
advantage of being additive across different subgroups or regions in the country. The Theil
index, however, does not have a straightforward representation and lacks the appealing
interpretation of the Gini coefficient.

iii. Decile dispersion ratio

It presents the ratio of the average consumption or income of the richest 10 percent of the
population divided by the average income of the bottom 10 percent.
This ratio can also be calculated for other percentiles (for instance, dividing the average
consumption of the richest 5 percent—the 95th percentile—by that of the poorest 5
percent—the 5th percentile)

iv. Share of income and consumption of the poorest x percent.

A disadvantage of both the Gini coefficients and the Theil indexes is that they vary when
the distribution varies, no matter if the change occurs at the top, the bottom, or the middle
(any transfer of income between two individuals has an effect on the indexes, irrespective
of whether it takes place among the rich, among the poor, or between the rich and the poor).
If a society is most concerned about the share of income of the people at the bottom, a
better indicator may be a direct measure, such as the share of income that goes to the
poorest 10 or 20 percent. Such a measure would not vary.

To summarize the discussion of alternative policy approaches to the problems of poverty and
inequality in development, the need is not for one or two isolated policies but for a “package”
of complementary and supportive policies, including the following four basic elements.
i. A policy or set of policies designed to correct factor price distortions (underpricing
capital or overpricing modern-sector skilled wages) so as to ensure that market or
institutionally established prices provide accurate signals and incentives to both
producers and resource suppliers. Correcting distorted prices should contribute to
greater productive efficiency, more employment, and less poverty. The promotion of

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indigenous technological research and development of efficient, labor-intensive

methods of production may also be valuable.
ii. A policy or set of policies designed to bring about far-reaching structural changes in
the distribution of assets, power, and access to education and associated income-
earning (employment) opportunities. Such policies go beyond the realm of markets and
touch on the whole social, institutional, cultural, and political fabric of the developing
world. But such fundamental structural changes and substantive asset redistributions,
whether immediately achieved (e.g., through public-sector interventions) or gradually
introduced over time (through redistribution from growth), will increase the chances of
improving significantly the living conditions of the masses of rural and urban poor.
iii. A policy or set of policies designed to modify the size distribution of income at the
upper levels through the enforcement of legislated progressive taxation on incomes and
wealth and at the lower levels through direct transfer payments and the expanded
provision of publicly provided consumption goods and services, including workfare
programs. The net effect is to create a social “safety net” for people who may be
bypassed by the development process.
iv. A set of targeted policies to directly improve the well-being of the poor and their
communities, that goes beyond safety net schemes, to offer programs that build
capabilities and human and social capital of the poor, such as microfinance, health,
education, agricultural development, environmental sustainability, and community
development and empowerment programs. These can be carried out either by
government or by nongovernmental organizations through local and international
support.

TACKLING POVERTY
The work to end extreme poverty is far from over, and a number of challenges remain. It is
becoming even more difficult to reach those remaining in extreme poverty, who often live in fragile
contexts and remote areas. Access to good schools, healthcare, electricity, safe water and other
critical services remains elusive for many people, often determined by socioeconomic status,
gender, ethnicity, and geography. Moreover, for those who have been able to move out of poverty
progress is often temporary: economic shocks, food insecurity and climate change threaten to rob

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them of their hard-won gains and force them back into poverty. It will be critical to find ways to
tackle these issues. While growth is important for poverty reduction, it has also been recognized
for a long time that, the type of growth, i.e. the particular processes and sectors that generate
growth, matters.
Thus, should a poverty strategy have a growth bias or instead mainly concentrate on empowering
the poor to benefit from growth? A series of recent studies have explored the relative contribution
of income growth and distributional changes to changes in poverty. All in all, the papers suggest
that the extent to which governments should focus on growth or distributional change to achieve
poverty reduction depends on country conditions, and in particular the levels of economic
development and initial inequality, as well as the society’s level of tolerance for inequality.

Reasons why policies focused toward reducing poverty levels need not lead to a slower rate
of growth:
i) First, widespread poverty creates conditions in which the poor have no access to credit,
are unable to finance their children’s education, and, in the absence of physical or
monetary investment opportunities, have many children as a source of old-age financial
security. Together these factors cause per capita growth to be less than what it would
be if there was greater equality.
ii) Second, a wealth of empirical data bears witness to the fact that unlike the historical
experience of the now developed countries, the rich in many contemporary poor
countries are generally not noted for their desire to save and invest substantial
proportions of their incomes in the local economy.
iii) Third, the low incomes and low levels of living for the poor, which are manifested in
poor health, nutrition, and education, can lower their economic productivity and
thereby lead directly and indirectly to a slower-growing economy. Strategies to raise
the incomes and levels of living of the poor would therefore contribute not only to their
material well-being but also to the productivity and income of the economy as a whole.
iv) Fourth, raising the income levels of the poor will stimulate an overall increase in the
demand for locally produced necessity products like food and clothing, whereas the
rich tend to spend more of their additional incomes on imported luxury goods. Rising
demand for local goods provides a greater stimulus to local production, local

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employment, and local investment. Such demand thus creates the conditions for rapid
economic growth and a broader popular participation in that growth.
v) Fifth, a reduction of mass poverty can stimulate healthy economic expansion by acting
as a powerful material and psychological incentive to widespread public participation
in the development process. By contrast, wide income disparities and substantial
absolute poverty can act as powerful material and psychological disincentives to
economic progress. They may even create the conditions for an ultimate rejection of
progress by the masses, impatient at the pace of progress or its failure to alter their
material circumstances.

World Bank proposed strategy for poverty reduction includes three prolonged
approaches to poverty reduction;
i) Promoting opportunity: This is about expanding economic opportunities for the poor
and this can be achieved through the process of economic growth - this growth is
referred to as pro-poor growth; this also implies increasing the return on the asset base
for the poor.
ii) Facilitating empowerment: This can be done by strengthening the participation of
the poor in decision making and eliminating the various forms of discrimination; by
making institutions more accountable and responsive to the poor.
iii) Enhancing security: This is by reducing the poor’s vulnerability to economic shocks,
natural disasters (such as effects of extreme weather) and violence and wars.

What is important is to ensure that the poor are assisted in dealing with these shocks. Some
of the insurance mechanisms that could be considered may include;
(i) Provide free health for the old through old age health insurance
(ii) Unemployment insurance
(iii) Design employment programs that target the most vulnerable - youth and women
(iv) Social funds - through the social safety net programs
(v) Micro finance programs - to improve the access to finance
(vi) Insurance against crop failure and price instability.

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Conclusion: promoting rapid economic growth and reducing poverty are not mutually conflicting
objectives.

Poverty distribution among different groups of society

The weight of poverty falls most heavily on certain groups. It also has a racial and ethnic face.
Some of the groups include;
i) Women in general are disadvantaged –in poor households they often shoulder more
of the workload than men; they are less educated (although this has been changing);
they have less access to resources such as land and finance,
ii) Children and young people are also disadvantaged, for instance, they lack nutrition,
health care and education,
iii) Poverty incidence is also often high among ethnic groups and minorities.

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