Bangladesh Economy II: Issues and

Policies

Lecture 3: Chapter2: Poverty and Income

Distribution

Dr Tabassum Zaman
Associate Professor, Department of Economics
Jagannath University
 Chapter 2: Poverty and Income Distribution
• CONTENTS

• Main indicators and their limitations;

• the evidence and interpretation; 
• factors behind poverty and inequality;
• discrimination against women;
• other sources of economic inequality

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 Poverty and Income Distribution
• In the World :
• 1.2 billion lived on less than $1.25 a day. 2010 (1990 – 34%)
• 2015: 734 million or 10% of the total world population below $1.90 per
day
• Bangladesh :
• 1991 – 56.7%; 2000 – 48.9%
• 2018 – 21.8%
• Poverty decreased by 1.8% in the 1990s and 4.3% in 2000s
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 Poverty and Income Distribution
• They suffer from – undernutrition and poor health, little or no literacy,
lived in environmentally degraded areas, have little political voice,
socially excluded, live on small or marginal farms or in urban slums
• National governments and their development partners are all working
to reduce poverty
• Poor are more likely to be malnourished, they have less access to
services like education, electricity, sanitation and healthcare, and they
are more vulnerable to conflict and climate change.
• Understanding poverty is thus fundamental to understanding how
societies can progress.
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 Added Perspective of Poverty Measurement
• Poverty measured at the international poverty line of $1.90 a day is used
to track progress toward meeting the World Bank target of reducing the
share of people living in extreme poverty to less than 3% by 2030.
• For added perspective, since 2017 the World Bank has also been tracking
poverty at $3.20 a day, for lower-middle-income countries, and $5.50 a
day for upper-middle-income countries.
• Poverty line for a country is typically a monetary threshold below which
a person's minimum basic needs cannot be met, taking into account the
country's economic and social circumstances.

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 Rationality of Poverty Measurement
• Poverty lines vary widely by country.
• Also often revised as countries develop: richer countries typically have
higher poverty lines than poorer ones.
• Governments track how many people are living on less than the national
poverty line so that they can monitor their development progress.
• The national poverty line is also a central indicator for SDG 1, “ending
poverty in all its forms."

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 Measuring Absolute Poverty
• Absolute Poverty – The situation of being unable or only barely able to
meet the subsistence essentials of food, clothing and shelter
 Income Poverty
o Extent of income poverty is the number of people who are unable
to command sufficient resources to satisfy basic needs
o Counted as the total number living below a specified minimum
level of real income – an international poverty line
o This is independent of the level of national per capita income
o Takes into account different price levels by measuring poverty as
anyone living on less than $1.9 a day in 2011 PPP dollars
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 Measuring Absolute Poverty
Absolute poverty is sometimes measured by the number or
“headcount,” H, of those whose incomes fall below the absolute
poverty line, Yp.

When headcount is taken as a fraction of the total population, N, we

define this as Headcount Index, H/N (also referred to as “headcount
ratio”).

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 Measuring Absolute Poverty
Total Poverty Gap: Economists try to calculate TPG to estimate the
extent to which the incomes of the poor lie below the poverty line
The total amount of income necessary to raise everyone who is below
the poverty line up to that line
It is found by adding up amounts by which each poor person’s income, Yi,
falls below the absolute poverty line, Yp.
TPG=∑(Yp – Yi) [i = 1…. H]

• Multidimensional Poverty Measurement

o Poverty cannot be adequately measured with income alone as
Amartya Sen’s framework, examined. 9
 Amartya Sen’s capabilities approach
Amartya Sen’s capabilities approach offers a comprehensive perspective of development
where everything revolves around enhancing people’s well-being.

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 Measures of income inequality
• Income inequality – The disproportionate distribution of total national
income among households
 Size distribution of income
o Most commonly used measure by economists.
o Distribution of income according to size class of persons.
o The share of total income accruing to the poorest specific percentage
or the richest specific percentage of a population – without regard to
the sources of that income
o Divide population into successive quintiles or deciles

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 Measures of income inequality
 Kuznets ratio
o Ratio of income received by top 20% and bottom 40% of the
population
o Used as a measure of the degree of inequality between high – and
low- income groups in a country

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Kuznets Ratio

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 Measures of income inequality: Lorenz Curve
 Lorenz curve
o A graph depicting the variance of the size distribution of income from
perfect equality
o Shows the actual quantitative relationship between the percentage of
income recipients and the percentage of the total income they did in
fact receive during a given year
o The more the Lorenz line curves away from the diagonal (line of
perfect equality), the greater the degree of inequality represented

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Measures of income inequality: Lorenz Curve

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 Measures of income inequality: Gini coefficients

 Gini coefficients and aggregative measures of inequality

o Known as Gini concentration ratio or Gini coefficient
o Summary measure of the relative degree of income inequality in a
country
o Ratio of the area between the diagonal and the Lorenz curve divided
by the total area of the half-square in which the curve lies
o Income inequality range from ‘0’ (perfect equality) to ‘1’ (perfect
inequality).
• Countries with highly unequal income distributions typically lies between
0.5 and 0.7. Countries with relatively equal distributions lies between 0.2
to 0.35
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Measures of income inequality: Gini coefficients

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Gini Coefficient: Bangladesh

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 Measuring inequality and poverty: Bangladesh
• Income v.s. consumption approach to measuring inequality and poverty
• Argument for using consumption over income
• Income during a given time period is often subject to many
transitional elements while consumption is a better indicator of
“permanent income”, the expected long-term income.
• Argument in favor of using income over consumption
• The consumption of the poor, especially in a developing country, is an
unsatisfactory indicator of sustainable standard of living because the
poor are often forced to finance current consumption by borrowing or
liquidating assets.
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 Measuring inequality and poverty: Bangladesh
• In this situation current income is a better indicator of sustainable living
standard than current consumption

• The volatility of income matters far more for the poor than for the rich
because, compared to the rich, the poor are far less able to resort to
borrowing and, when they can borrow, their cost of doing so is
substantially higher than the cost for the rich to borrow.

• A wealthy person can withstand a temporary loss of income far better

than can a poor person

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 Measuring inequality and poverty: Bangladesh

• Whichever of the two indicators is chosen, there will be errors in

identifying the poor. For example, assuming that measurements are
accurate, a number of rich people with temporary loss of income would
be classified
• If income is chosen while a number of poor people, who have managed
to finance consumption by liquidating assets that are crucial for their
long-term survival, would be classified as non-poor if consumption is
chosen.
• One should use both the indicators unless one can argue that the
measurement of one is better than that of the other.
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 Measuring inequality and poverty: Bangladesh

• BBS assesses current state of poverty and inequality using the HIES
• Household Expenditure Survey (HES) was first conducted in 1973-74.
• More surveys done up to 1991/92 based on Food Energy Intake (FEI) and
Direct Calorie Intake (DCI)
• Defined Absolute Poverty as calorie intake below 2122kcal /day and
Hard Core Poverty as calorie intake below 1805kcal /day

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 Measuring inequality and poverty: Bangladesh
• For the first time in 1995/96, CBN method was used by BBS for
measuring poverty. This method has been named HIES. This approach
was followed during 2000 and 2010 conducted every 5 years. In this
method, non-food consumption items were included
• Most recent one is done in 2016!
• BBS prepares various indicators for measuring poverty and inequality

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 Measuring inequality and poverty: Bangladesh

• Poverty needs to be measured to ensure proper follow up of poverty,

implement targeted programmes on poverty reduction by identifying
poor households, evaluate projects for poverty reduction, and assess
effectiveness of associated organizations.
• First step of measuring poverty is to set a yardstick of welfare.
Information on individual’s welfare is available through surveys.

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 Measuring Poverty in Bangladesh: CBN Method
• Two poverty lines – Upper poverty line and Lower poverty line are
measured in 3 stages
• In stage 1:
• Food poverty line is determined by calculating the cost of a fixed bundle
of food stuff (11 items of foodstuff- rice, wheat, pulse, edible oil, milk,
meat, vegetables, sweet water fish, potato, sugar, and fruits) that provide
the minimum nutritional requirements for a diet corresponding to 2122
kcal a day

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 Measuring Poverty in Bangladesh: CBN Method
• In stage 2:
• Two different income lines - lower non-food allowance and upper non-
food allowance – for meeting non-food demand are computed.
• The median amount spent on non-food items by households whose total
consumption is approximately to their food poverty line is known as
lower non-food allowance.
• On the other hand, the amount spent on non-food items by households
whose food consumption is approximately equal to their food poverty
line is known as upper non-food allowance.

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 Measuring Poverty in Bangladesh: CBN Method
• In the final stage 3:
• lower poverty line is estimated by adding food poverty line with lower
non-food allowance while upper poverty line is estimated by adding food
poverty line with upper non-food allowance

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 Measuring Poverty in Bangladesh: CBN Method
• The position of the families whose total consumption expenditure is
equal to or below food poverty line is considered equal to or below
lower poverty line.
• Similarly, the position of families whose food consumption equals food
poverty line and total expenditure equals or below upper non-food
allowance is considered equal to or below upper poverty line.
• Therefore, in terms of consumption, all the families falling below upper
poverty line are considered poor, while families falling within or below
lower poverty line are considered extreme poor.

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 Measuring Poverty in Bangladesh: CBN Method
• In addition to quantitative measurement of poverty, BBS also prepares
indices of poverty gap and squared poverty gap to explain the
qualitative aspect of poverty.
• Headcount index basically gives us the number of poor families in a
given population without revealing the depth or severity of poverty.
• The depth of poverty can be understood with the help of poverty gap
indicator while squared poverty gap indicator explains the severity of
poverty.

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Upper and Lower Poverty Lines: Bangladesh

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 Key Poverty Indices
1. Head-count Index
• Aggregate measures on poverty can be determined if per-capita
consumption of the whole population and the poverty line income are
known. Some of the important measures of poverty indices

• Where Np – number of poor; and N - total population.

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 Key Poverty Indices
• Headcount index (HCI) is a very simple measure. However, it has some
weaknesses

i. HCI Doesn’t take depth of poverty into account.

ii. HCI doesn’t indicate how poor the poor are. Doesn’t change even
when the poor become poorer
iii. HCI is mostly calculated for households not individual members in a
family. If 30% of the households are poor, then 35% of the population
might be poor
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 Key Poverty Indices

2. Poverty Gap
This index measures the extent to which average expenditure of poor
households falls short of the poverty line. It is expressed as a percentage
of the poverty line.
More specifically, poverty gap is defined by subtracting actual income of
poor households from the poverty line and the gap will be zero for
everyone else. Using the index function, it can be expresses as:

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 Key Poverty Indices

2. Poverty Gap

 Z is poverty line, G = difference between poverty line (Z) and income (Y) or
expenditure of the household, N – population
 i=1-N
 This index helps measure minimum cost of eradicating poverty. In other words, the
sum of poverty gaps of the poor population is equal to total required transfers for
eradicating poverty completely.
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 Key Poverty Indices

2. Poverty Gap
• Weakness of this measure is -
• It ignores the severity of poverty
• Generally, income transfer from a poor household to a less poor
household should effect the poverty measurement indices; though
poverty gap index ignores such transfer

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Poverty Gap Calculation

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Example
• A society consists of four individuals with the following incomes:
200 ,220, 300, 320. The poverty line is 250.Derive the poverty gap
index.

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 Key Poverty Indices

3. Squared Poverty Gap Index

• This is calculated in order to remove the drawbacks of poverty gap
index.
• This index shows inequality in income distribution among the poor. This
is simply a weighted sum of poverty gaps where the weights are the
poverty gaps themselves.
• In other words, a poverty gap of say 10% of the poverty line is given a
weight of 10% while one of 50% is given a weight of 50%. Therefore, by
squaring the poverty gaps, the measure gives more weight on
observations that fall well below the poverty line.
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 Key Poverty Indices

3. Squared Poverty Gap Index

• The following formula poverty severity or squared poverty gap index:

•Where N is the total Population

•i=1-N
•Z is the poverty Line
•Yi=Income of the ith individual
•Gi=Poverty gap for ith individual=( Z-Yi)
•In this calculation, individuals whose income is above the poverty line have a gap of zero.
•By definition, the poverty gap index is a percentage between 0 and 100%. Sometimes it is reported as a fraction,
between 0 and 1. A theoretical value of zero implies that no one in the population is below the poverty line. A
theoretical value of 100% implies that everyone in the population has zero income.
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Example of SPG

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 Poverty and Inequality: Bangladesh
• Per capita income grew to $2,064 in the 2019–20 fiscal year from $1,909
in 2018–19, in the backdrop of GDP growth rate at 5.24 per cent, experts
and economists are concerned that the per capita income doubled in
last eight years without the rising inequality addressed.

• The country’s per capita income was $1,054 in FY2013 and gradually
increased over the next few years to stand at $1,610 in FY2017, and
$1,751 in FY2018.
• The per capita income grew several times from $330 in 1994–95 while
the disparity between the rich and the poor widened as the rich became
richer and the poor poorer over time amid an unequal distribution of
growth.
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 Poverty and Inequality: Bangladesh
• Gini coefficient, used to measure a country’s income distribution, was
0.48 in 2016, just .02 points away from the danger mark of 0.50.

• According to a study of the Centre for Policy Dialogue, the income

inequality may increase the danger mark very shortly.

• CPD in a 2019 report showed that inequality in terms of income,

consumption and wealth was rising in the country.

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 Poverty and Inequality: Bangladesh
• Income share held by the richest 5% of the households increased to
27.89% in FY2016 from 18.85% in FY1992

• while the income share held by the poorest 5% declined to 0.23% from
1.03% per cent during the same period.

• In 2010, the richest 5% households were 32 times richer than the

poorest 5%. This difference multiplied astronomically in 2015 when the
richest households became 121 times richer, it said

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Poverty and Inequality: Bangladesh

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Poverty and Inequality: Bangladesh

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 Poverty and Inequality: Bangladesh
  2016 2010 Change per year (%) 2005 Change per year (%)
(2010-2016) (2005-2010)

Headcount Rate          
National 24.3 31.5 -4.23 40.0 -4.67
2016
Urban 18.9 21.3 -4.68 28.4 -5.59
Rural 26.4 35.2 -1.97 43.8 -4.28
Poverty Gap          
National 5.0 6.5 -4.28 12.8 -6.3
Urban 3.9 4.3 -1.61 9.1 -7.93
Rural 5.4 7.4 -5.12 13.7 -5.46
Squared Poverty Gap          
National 1.5 2.0 -4.68 4.6 -8.81
Urban 1.2 1.3 -1.33 3.3 -8.64
Rural 1.7 2.2 -4.21 4.9 -8.75
Gini Index of Inequality          
National 0.483 0.458      
Urban 0.498 0.452      
Rural 0.454 0.430      
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 Poverty and Inequality: Bangladesh
Gini Index of 2016 2010 2000 1991-92  
Inequality

National 0.483 0.458 0.306 0.259  

Urban 0.498 0.452 0.368 0.307  

Rural 0.454 0.430 0.271 0.243  

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Poverty and Inequality: Bangladesh

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 Poverty and Inequality: Bangladesh
• Table 13.5 indicates that,

 Except Rangpur division poverty rate reduced in all other division in 2016 compare to
2010
 Rangpur division has the highest incidence of poverty at 47.2%. On the other hand,
Dhaka division has the lowest incidence of poverty at 16.0%
 Incidence of poverty has appreciably declined in Dhaka division compared to other
divisions. The reduction rate is almost half (16% in 2016 from 30.5% in 2010)
 In Barishal, Khulna and Sylhet division, poverty rate is higher in urban areas than
rural areas and
 Urban poverty in Sylhet and Chattogram division increased in 2016 though the
average poverty rate decreased compare to 2010.
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Reference

• http://hdl.handle.net/11540/1911
• https://www.newagebd.net/article/113218/disparity-widens-in-bangl
adesh-as-per-capita-income-goes-up

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