Chapter Five - Growth, Poverty, and Income Distribution

5.1 Inequality and poverty

There is wide spread concern that economic growth has not been fairly shared, and that the
economic crisis has widened the gap between rich and poor. And this become the most
pressing reason for establishing an international frame work that facilitates economic sharing
to create a more equal world where basic human needs are meet universally. More than 65
years later achieving these basic entitlements for all the world’s people still remains a distant
hope and vague aspiration of the international community. Even in many of the richest
countries poverty rates have been rising for a decade. Economic growth and its fair
distribution is the most important factors contributing in poverty reduction.

Poverty is the general scarcity or the state of one who lacks a certain amount of material
possessions or money. It is multidimensional concept which includes social, economic and
political elements. Poverty may be defined as either a relative or absolute. Relative poverty
takes in to consideration individual, social and economic statues compared to the rest of
society. Absolute poverty (destitution) refers to the lack of means necessary to meet basic
needs such as food, clothing and shelter.

 The concept of income poverty

Poverty has traditionally been defined in terms of income or consumption. In this regard,
poverty is “the inability to attain a minimum standard of living“. The minimum standard of
living defines the income poverty line and all persons whose income is less than this poverty
line fall in the category of poor. As far as determining the minimum standard of living is
concerned, different approaches have been used by different people.

 The Concept of ‘Human Poverty’

Some development economists have argued in recent years that although income focuses on
an important dimension of poverty, it gives only a partial picture of the many ways human
lives can be blighted. As noted by the HDR, Someone can enjoy good health and live quite
long but be illiterate and thus cut off from learning, from communication and from
interactions with others. Another person may be literate and quite well educated but prone to
premature death because of epidemiological characteristics or physical disposition. Yet a
third may be excluded from participating in the important decision-making processes
affecting his/her life. As is clear, the deprivation of none of these people can be fully captured

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by the level of their income. To get a complete idea of poverty, one has thus to enlarge the
canvas of study and talk in terms of deprivations and not merely income as it is in the
deprivation of the lives that people can lead that poverty manifests itself.

Poverty is thus a denial of choices and opportunities for living a tolerable life. This is the
concept of human poverty. It means that opportunities and choices most basic to human
development are denied-to lead a long, healthy, creative life and to enjoy a decent standard of
living, freedom, dignity, self-respect and the respect of others.

5.2 Measuring Inequality

Economists usually distinguish between two principal measures of income distribution for
both analytical and quantitative purposes: the personal or size distribution of income and the
functional or distributive factor share distribution of income.

 Size Distributions

The personal or size distribution of income is the measure most commonly used by
economists. It simply deals with individual persons or households and the total incomes they
receive. The way in which they received that income is not considered. What matters is how
much each earns irrespective of whether the income is derived solely from employment or
comes also from other sources such as interest, profits, rents, gifts, or inheritance. Moreover,
the locational (urban or rural) and occupational sources of the income (e.g., agriculture,
manufacturing, commerce, services) are ignored. If Ms. X and Mr. Y both receive the same
personal income, they are classified together irrespective of the fact that Ms. X may work 15
hours a day as a doctor while Mr. Y doesn’t work at all but simply collects interest on his
inheritance.

Economists and statisticians therefore like to arrange all individuals by ascending personal
incomes and then divide the total population into distinct groups, or sizes. A common method
is to divide the population into successive quintiles (fifths) or deciles (tenths) according to
ascending income levels and then determine what proportion of the total national income is
received by each income group.

Lorenz Curves

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Another common way to analyse personal income statistics is to construct what is known as a
Lorenz curve. Lorenz curve is a graph depicting the variance of the size distribution of
income from perfect equality

The more the Lorenz line curves away from the diagonal (line of perfect equality), the greater
the degree of inequality represented. The extreme case of perfect inequality (i.e., a situation
in which one person receives all of the national income while everybody else receives
nothing) would be represented by the congruence of the Lorenz curve with the bottom
horizontal and right-hand vertical axes. Because no country exhibits either perfect equality or
perfect inequality in its distribution of income, the Lorenz curves for different countries will
lie somewhere to the right of the diagonal. The greater the degree of inequality, the greater
the bend and the closer to the bottom horizontal axis the Lorenz curve will be.

Gini coefficient

An aggregate numerical measure of income inequality ranging from 0 (perfect equality) to 1

(perfect inequality). It is measured graphically by dividing the area between the perfect
equality line and the Lorenz curve by the total area lying to the right of the equality line in a
Lorenz diagram. The higher the value of the coefficient is, the higher the inequality of
income distribution; the lower it is, the more equal the distribution of income.

Gini coefficients are aggregate inequality measures and can vary anywhere from 0 (perfect
equality) to 1 (perfect inequality). In fact, as you will soon discover, the Gini coefficient for
countries with highly unequal income distributions typically lies between 0.50 and 0.70,
while for countries with relatively equal distributions, it is on the order of 0.20 to 0.35.

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  Functional Distributions

The second common measure of income distribution used by economists, the functional or
factor share distribution of income, ate mpts to explain the share of total national income that
each of the factors of production (land, labor, and capital) receives. Instead of looking at
individuals as separate entities, the theory of functional income distribution inquiries into the
percentage that labor receives as a whole and compares this with the percentages of total
income distributed in the form of rent, interest, and profit (i.e., the returns to land and
financial and physical capital). Although specific individuals may receive income from all
these sources, that is not a matter of concern for the functional approach.

A sizable body of theoretical literature has been built up around the concept of functional
income distribution. It attempts to explain the income of a factor of production by the
contribution that this factor makes to production. Supply and demand curves are assumed to
determine the unit prices of each productive factor. When these unit prices are multiplied by
quantities employed on the assumption of efficient (minimum-cost) factor utilization, we get
a measure of the total payment to each factor. For example, the supply of and demand for
labor are assumed to determine its market wage. When this wage is then multiplied by the
total level of employment, we get a measure of total wage payments, also sometimes called
the total wage bill.

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Income is distributed by function—laborers are paid wages, owners of land receive rents, and
capitalists obtain profits. It is a neat and logical theory in that each and every factor gets paid
only in accordance with what it contributes to national output, no more and no less.

Unfortunately, the relevance of the functional theory is greatly diminished by its failure to
take into account the important role and influence of nonmarket forces such as power in
determining these factor prices—for example, the role of collective bargaining between
employers and trade unions in the setting of modern-sector wage rates, and the power of
monopolists and wealthy landowners to manipulate prices on capital, land, and output to their
own personal advantage.

5.3 Measuring Absolute Poverty

Now let’s switch our attention from relative income shares of various percentile groups
within a given population to the fundamentally important question of the extent and
magnitude of absolute poverty in developing countries.

Absolute poverty is the situation of being unable or only barely able to meet the subsistence
essentials of food, clothing, and shelter.

It entails the idea that there are a set of minimum necessities or essentials for living. Anyone
without these essentials can be said to be in absolute poverty.

A measure of absolute poverty quantifies the number of people whose income falls below a
certain fixed level called poverty line (the level of income below which one cannot afford to
purchase for living).

There are a number of ways of measuring absolute poverty:

i. Head count index

ii. Poverty gap index
iii. Sen index
A. Head count index (HCI): is the most widely used measure which simply measures the
proportion of the population that is counted as poor. i.e how many people are poor(below
poverty line) as a percentage of total population. It is easy to understand but does not
reflect the depth of poverty.

- Absolute poverty is sometimes measured by the number, or “headcount,” H, of those

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 whose incomes fall below the absolute poverty line, Yp. When the headcount is taken as a
fraction of the total population, N, we define the headcount index, H/N (also referred to as
the “headcount ratio”).

B. Poverty gap index (PGI) or Total poverty gap (TPG): the measure of poverty that shows
the extent to which individuals fall below the poverty line and express it as a percentage
of the poverty line. But it does not show income disparity.

- It’s the sum of the difference between the poverty line and actual income levels of all
people living below that line.

C. Sen Index: a measure of poverty that considers 1) head count of people living below the
poverty line.2) the income short falls of the poor. 3) The inequality of income among the
poor. Thus sen index is distribution sensitive because the redistribution of income from an
intensely poor person to a less poor person always increases relative inequality among the
poor and this is captured by the index.

In general, Sen’s concept of poverty focuses on capabilities rather than attainments,

meaning that a high-income person who squanders his resources so that he lives
miserably would not be considered poor. Sen argues that policy makers need the
following measures of poverty: headcount or poverty percentage, income-gap or the
additional income needed to bring the poor up to the level of the poverty line, and Gini
coefficient or concentration of income among the poor
5.4. Economic Characteristics of High Poverty Groups

So far we have painted a broad picture of the income distribution and poverty problem in
developing countries. We have argued that the magnitude of absolute poverty results from a
combination of low per capita incomes and highly unequal distributions of that income.
Clearly, for any given distribution of income, the higher the level of per capita income is, the
lower the numbers of the absolutely poor. But higher levels of per capita income are no
guarantee of lower levels of poverty. An understanding of the nature of the size distribution
of income is therefore central to any analysis of the poverty problem in low-income
countries. But painting a broad picture of absolute poverty is not enough. Before we can
formulate effective policies and programs to attack poverty at its source, we need some
specific knowledge of these high-poverty groups and their economic characteristics.

- Rural Poverty

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Perhaps the most valid generalizations about the poor are that they are disproportionately
located in rural areas, that they are primarily engaged in agricultural and associated activities,
that they are more likely to be women and children than adult males, and that they are often
concentrated among minority ethnic groups and indigenous peoples. Data from a broad cross
section of developing nations support these generalizations. We find, for example, that about
two-thirds of the very poor scratch out their livelihood from subsistence agriculture either as
small farmers or as low-paid farmworkers. Some of the remaining one-third are also located
in rural areas but engaged in petty services, and others are located on the fringes and in
marginal areas of urban centers, where they engage in various forms of self-employment such
as street hawking, trading, petty services, and small-scale commerce. On the average, we may
conclude that in Africa and Asia, about 80% of all target poverty groups are located in the
rural areas, as are about 50% in Latin America.

It is interesting to note, in light of the rural concentration of absolute poverty, that the
majority of government expenditures in most developing countries over the past several
decades has been directed toward the urban area and especially toward the relatively affluent
modern manufacturing and commercial sectors. Whether in the realm of directly productive
economic investments or in the fields of education, health, housing, and other social services,
this urban modern-sector bias in government expenditures is at the core of many of the
development problems. We need only point out here that in view of the disproportionate
number of the very poor who resides in rural areas, any policy designed to alleviate poverty
must necessarily be directed to a large extent toward rural development in general and the
agricultural sector in particular.

- Women and Poverty

Women make up a substantial majority of the world’s poor. If we compared the lives of the
inhabitants of the poorest communities throughout the developing world, we would discover
that virtually everywhere women and children experience the harshest deprivation. They are
more likely to be poor and malnourished and less likely to receive medical services, clean
water, sanitation, and other benefits. The prevalence of female-headed households, the lower
earning capacity of women, and their limited control over their spouses’ income all contribute
to this disturbing phenomenon.

In addition, women have less access to education, formal-sector employment, social security,
and government employment programs. These facts combine to ensure that poor women’s

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financial resources are meagre and unstable relative to men’s. A disproportionate number of
the ultra-poor live in households headed by women, in which there are generally no male
wage earners. Because the earning potential of women is considerably below that of their
male counter - parts, women are more likely to be among the very poor. In general, women in
female-headed households have less education and lower incomes.

Further - more, the larger the household is, the greater the strain on the single parent and the
lower the per capita food expenditure. A portion of the income disparity between male- and
female-headed households can be explained by the large earnings differentials between men
and women. In addition to the fact that women are often paid less for performing similar
tasks, in many cases they are essentially barred from higher-paying occupations. In urban
areas, women are much less likely to obtain formal employment in private companies or
public agencies and are frequently restricted to illegal, low-productivity jobs. The illegality of
piece - work, as in the garment industry, prevents it from being regulated and renders it
exempt from minimum-wage laws or social security benefits. Even when women receive
conventional wage payments in factory work, minimum wage and safety legislation may be
flagrantly ignored. Similarly, rural women have less access to the resources necessary to
generate stable incomes and are frequently subject to laws that further compromise earning
potential. Legislation and social custom often prohibit women from owning property or
signing financial contracts without a husband’s signature. With a few notable exceptions,
government employment or income-enhancing programs are accessible primarily if not
exclusively by men, exacerbating existing income disparities between men and women. But
household income alone fails to describe the severity of women’s relative deprivation.
Because a higher proportion of female-headed households are situated in the poorest areas,
which have little or no access to government-sponsored services such as piped water,
sanitation, and health care, household members are more likely to fall ill and are less likely to
receive medical attention. In addition, children in female-headed households are less likely to
be enrolled in school and more likely to be working in order to provide additional income.

The degree of economic hardship may also vary widely within a household. We have already
discussed the fact that GNI per capita is an inadequate measure of development because it
fails to reflect the extent of absolute poverty. Likewise, household income is a poor measure
of individual welfare because the distribution of income within the household may be quite
unequal. In fact, among the poor, the economic status of women provides a better indication
of their own welfare, as well as that of their children. Existing studies of intrahousehold

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resource allocation clearly indicate that in many regions of the world, there exists a strong
bias against females in areas such as nutrition, medical care, education, and inheritance.

In addition, in many cultures, it is considered socially unacceptable for women to contribute

significantly to household income, and hence women’s work may remain concealed or
unrecognized. These combined factors perpetuate the low economic status of women and can
lead to strict limitations on their control over household resources. Development policies that
increase the productivity differentials between men and women are likely to worsen earnings
disparities as well as further erode women’s economic status within the household. Since
government programs to alleviate poverty frequently work almost exclusively with men, they
tend to exacerbate these inequalities. In urban areas, training programs to increase earning
potential and formal-sector employment are generally geared to men, while agricultural
extension programs promote male-dominated crops, frequently at the expense of women’s
vegetable plots.

Studies have shown that development efforts can actually increase women’s workload while
at the same time reduce the share of household resources over which they exercise control.
Consequently, women and their dependents remain the most economically vulnerable group
in developing countries. The fact that the welfare of women and children is strongly
influenced by the design of development policy underscores the importance of integrating
women into development programs. To improve living conditions for the poorest individuals,
women must be drawn into the economic mainstream. This would entail increasing female
participation rates in educational and training programs, formal-sector employment, and
agricultural extension programs. It is also of primary importance that precautions be taken to
ensure that women have equal access to government resources provided through schooling,
services, employment, and social security programs. Legalizing informal-sector employment
where the majority of the female labor force is employed would also improve the economic
status of women. The consequences of declines in women’s relative or absolute economic
status have both ethical and long-term economic implications. Any process of growth that
fails to improve the welfare of the people experiencing the greatest hardship, broadly
recognized to be women and children, has failed to accomplish one of the principal goals of
development. In the long run, the low status of women is likely to translate into slower rates
of economic growth. This is true because the educational attainment and future financial
status of children are much more likely to reflect those of the mother than those of the father.
Thus, the benefits of current investments in human capital are more likely to be passed on to

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future generations if women are successfully integrated into the growth process. And
considering that human capital is perhaps the most important prerequisite for growth,
education and enhanced economic status for women are critical to meeting long-term
development objectives.

As feminist development economists have often expressed it, official poverty programs
cannot simply “add women and stir.” Women-centered poverty strategies often require us to
challenge basic assumptions. The harsher conditions for women and women’s crucial role in
a community’s escape from poverty mean that involvement of women cannot be left as an
afterthought but will be most effective if it is the first thought—and the consistent basis for
action—when addressing poverty.

- Ethnic Minorities, Indigenous Populations, and Poverty

A final generalization about the incidence of poverty in the developing world is that it falls
especially heavily on minority ethnic groups and indigenous populations. In recent years,
domestic conflicts and even civil wars have arisen out of ethnic groups’ perceptions that they
are losing out in the competition for limited resources and job opportunities. The poverty
problem is even more serious for indigenous peoples, whose numbers exceed 300 million in
over 5,000 different groups in more than 70 countries.

Although detailed data on the relative poverty of minority ethnic and indigenous peoples are
difficult to obtain (for political reasons, few countries wish to highlight these problems),
researchers have compiled data on the poverty of indigenous people in Latin America.

The results clearly demonstrate that a majority of indigenous groups live in extreme poverty
and that being indigenous greatly increases the chances that an individual will be
malnourished, illiterate, in poor health, and unemployed. For example, the research has
shown that in Mexico, over 80% of the indigenous population is poor, compared to 18% of
the nonindigenous population. Whether we speak of Tamils in Sri Lanka, Karens in
Myanmar, Untouchables in India, or Tibetans in China, the poverty plight of minorities is as
serious as that of indigenous peoples.

5.5 Policy options on Income Inequality and poverty: Some Basic Considerations

Areas of Intervention

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Developing countries that aim to reduce poverty and excessive inequalities in their
distribution of income need to know how best to achieve their aim. What kinds of economic
and other policies might governments in developing countries adopt to reduce poverty and
inequality while maintaining or even accelerating economic growth rates? As we are
concerned here with moderating the size distribution of incomes in general and raising the
income levels of people living in poverty, it is important to understand the various
determinants of the distribution of income in an economy and see in what ways government
intervention can alter or modify their effect.

We can identify four broad areas of possible government policy intervention, which
correspond to the following four major elements in the determination of a developing
economy’s distribution of income.

1. Altering the functional distribution—the returns to labor, land, and capital as determined
by factor prices, utilization levels, and the consequent shares of national income that accrue
to the owners of each factor.

2. Mitigating the size distribution—the functional income distribution of an economy

translated into a size distribution by knowledge of how ownership and control over
productive assets and labor skills are concentrated and distributed throughout the population.
The distribution of these asset holdings and skill endowments ultimately determines the
distribution of personal income.

3. Moderating (reducing) the size distribution at the upper levels through progressive taxation
of personal income and wealth. Such taxation increases government revenues that decrease
the share of disposable income of the very rich—revenues that can, with good policies, be
invested in human capital and rural and other lagging infrastructure needs, thereby promoting
inclusive growth. (An individual or family’s disposable income is the actual amount available
for expenditure on goods and services and for saving.)

4. Moderating (increasing) the size distribution at the lower levels through public
expenditures of tax revenues to raise the incomes of the poor either directly (e.g., by
conditional or unconditional cash transfers) or indirectly (e.g., through public employment
creation such as local infrastructure projects or the provision of primary education and health
care). Such public policies raise the real income levels of the poor above what their personal

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income levels would otherwise be, and, can do so sustainably when they build the capabilities
and assets of people living in poverty.

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