CHAPTER 2 POVERTY AND INEQUALITY Figure 2.2. Poverty and Inequality 2 LEARNING OBJECTIVES In this chapter, you will be introduced to the concepts of poverty and inequality and their relationship to economic growth and development. Specifically, this chapter will help you: differentiate absolute and relative poverty or inequality; discuss global poverty and inequality; understand poverty measures, issues, and variables; appreciate poverty incidence and the Lorenz Curve; yPene examine poverty trap and the various effects of work combinations and government support; reflect on ways how to alleviate poverty; explain world targets toward poverty alleviation and eradication; create a short documentary on economic poverty; recommend steps on how to eradicate poverty; and 10. understand some poverty eradication measures at work. SP a “with our globalized economy and sophisticated technology, we can decide to end the ‘age-old ill of extreme paverty and hunger.” Ban Ki-moon, b, 1944 th Secretary General of the U.N. *Bohme, online image. 2sLOOKING BACK of economic growth In Chapter 1, you have learned the Mane Four al ee * a development. You were able to appreciate the various sr catch-aip effect, Investmene foe such as savings and investment, diminishing returns an aaa Sabine], Ga “ abroad, education, health and nutrition, property rights an ah You have also ies research and development, and population growth. “ee baie reduction wares the idea of production and productivity relative to the fac G Silbes ner corte a physical capital per worker, human capital per worker, natural a em hashed ang technological knowledge. After that, the O-Ring theory of produ ee one c also discussed, and you have attempted to understand the comp! en atta ction Processes and determine the effects of quality on total production. as Ae xDlain why the rich economy distinctively has a more sophisticated production a restr than the poor ones. The Solow Model of long-term growth, the dynamics the capita (depreciation) line, and the investment and revenue curves, in considering the movemeng toward the steady state, were evaluated. Finally, there was a brief discussion on economic development in the country in terms of inflation, budget, some economic activities, issuey on economic development, like leftist and separatist groups, the COVID-19 pandemic and its impact on the economy, as well as the targets of the UN under the Sustainable Development Goal 17, promoting inclusive and sustainable economic growth that is full Productive and decent employment. INTRODUCTION According to Amartya Sen, 2 Nobel Prize Winner in Economics, poverty is a comple, multifaceted world that requires a clear analysis in all of its many dimensions.? Among the dimensions referred to in his: theory are the Beographical, biological, and. Social factors that! ‘must be taken into consideration to fully understand poverty, not just by determining the Poverty line that separates those who are above and below it.ABSOLUTE AND RELATIVE POVERTY Economic growth, for a long period of time, has been impressive in Southeast Asia despite some hindrances like the Asian Financial Crisis of 1997-1998, Thereisa presumption that growth reduces absolute poverty in the long run. To understand this notion, we define absolute poverty incidence as those levels of incomes and expenditures that fall below a level, popularly known as the “poverty line,” nominal value of which is adjusted to hold a fixed value of its purchasing power; whereas, relative poverty or sornetimes called inequality, is the comparison of the incomes and expenditures of the poor with reference to the rich or of some other groups.* POVERTY AND THE WORLD 't is observed that impoverished countries share common characteristics. Those who are considered the poorest normally work in the agriculture: sector; they are highly uneducated, somehow labeled as literate, and mostly considered malnourished. industrial revolution created a great deal of inequality between countries and was believed to even intensify the gap between the rich and the poor nations. There are economists who suggest that the skill-biased technological change helped the rich countries that are considered more educated and trained, They thrived as the technology basically replaces the unskilled workers that normally comprise the poor. There are some people who mainly attribute poverty to sluggish economic growth and low production and consumption of goods and services. According to-a study made by the Asian Development Bank published in 2009 in the Philippines, it is evident that there is a Population explosion in the urbanized areas, where labor-intensive work isin high demand, but the government is not able to sufficiently supply their basic needs such’as education, health services, and food security. Another possible reason for poverty is the-naturat disasters that are considered catastrophic to economic resources, leaving the people to go. back to zero in terms of capitalization. In addition, there is the apparent reduced influence of unions in businesses, tax policies are becoming more and more favorable to the rich Population, the upper-level management of economic organizations are receiving a hefty deal of salary and income as compared to the middle and lower-level management, not to mention to the ordinary employees and the worsening gap in races and gender inequality. Poverty s relativeto the standard of livingof one country, Athresholdissetto determine who are below this line and may be considered impové[Link] extremely impoverished. Extreme poverty is characterized by those disadvantaged in basic living conditions, such as. food, clean water, sanitation, housing, good health, and even to information, In the light of poverty, we may see globalization as an avenue of exploitation and oppression. For example, a labor-intensive product like a Spanish brand T-shirt is manufactured in Dhaka because it offers the cheapest labor and materials and has a weak + Fitz, Johan, Kangas, Jenne, Blomgren, and Hillam, “Cros-Temporal and Cross-National Poverty and Mortality Rates among Developed Countries Chapter? | Povertyand inequality 27 |rope. We may consider the companie, | in this situation, even though they an hand, the losers are the high-wage regulation to work conditions as compared to Eut ‘ consumers, and the low-income earners winners I i in sweatshops. On the other ; e eee Europe who may have had the job, had it been ee to the Asian manufacturers, although we may see these low-income earners as losers at the same times We often describe companies in this type of setting as putting | profits first before the peopie There is hope in the eradication of global poverty, even if itis considered a small step, Tike fair trade. A lot of developed countries lead the way in spreading awareness of the condition of a lot of countries that are suffering from poverty and even child abuse. Some labels on the packaging products that are considered from ethical sources are fair trade certified, fair trade foundation, equal exchange fairly traded, fair for life, and fairmindag among others. Another example is Fairtrade Labelling Organization International (FLO.) initiatives such as TransFair in the USA, Canada, Germany, Italy, Austria, and Japan. They also monitor Fair Trade Foundation in the UKand the Max Havelaar in Holland, Switzerland, France, Belgium, Denmark, and Norway.’ Inthe 2019 data by the UN Department of Social and Economic Affairs, young workers are twice as possible to live in extreme poverty as compared to adult workers. There are around four billion of the population who did not receive any form of social protection ‘support. Due to the pandemic, the poverty eradication aim was off-track, manifesting the first increase in global poverty in decades; more than 71 million are pushed into extreme poverty during this year. Not to mention, economic downturns in 63 countries in 2019 from natural calamities effecting to around $23.6 billion in direct losses. The first Sustainable Development Goal adopted by all member states of the United Nations aims to “end poverty in all its forms everywhere.” Its seven associated targets aim, among others, to eradicate extreme poverty for all people everywhere; reduce at least by half the proportion of men, women, and children of all ages living in poverty; implement nationally appropriate social protection systems and measures forall, including floors; and by 2030, achieve substantial coverage of the poor and the vulnerable.’ : MEASURING POVERTY The most common measure of poverty is the poverty rate, relative to the poverty line. In most countries, the poverty line is set by the government as the threshold to which the absolute valuie of income aiid expenses is compared to consider a family to be in poverty. The proportion of the population that is below the poverty line is the poverty rate. ‘The Anti-Capitalist Dictionary, “Sweatshop” + The Hutchinson Unabridged Encyclopedia, “The Rise of the Fair Trade Movement.” Dap inten ae nae. eradication, 2021. [Link]/topics/poverty” 28 | Economic DevelopmentThe poverty line is constantly adjusted to hold the real purchasing power given changing price levels. In the Philippines, further classification of the part below the poverty line suffering from extreme hunger is called subsistence incidence. Filipinos whose incomes and expenses fall below the food threshold are also set by the government.* Inequality is oftentimes associated with poverty. There are two major types of inequality: wealth and income. Wealth inequality is the uneven distribution of accumulated assets after deducting the liabilities, while income inequality is income distributed in an uneven manner. Today, the USA and the European Union, including the United Kingdom, have an accumulated population of less than 20% of the world but enjoy two-thirds of the global wealth; China estimates 20% of the population but enjoys only 8% of the wealth; India and Africa roughly estimate 30% of the population and share 2% of the global wealth. For example, 100 is distributed in a population with a percentile of the richest, rich, poor, poorer, and the poorest. The richest receives P80, the rich at #12, the poor at an estimate of 5, the poorer at P2, and the poorest will have a relatively low share of P1 out of the 100. 80 80 70 60 50 40 30 7 20 ' 5 7 = =D Population Population Population Population Population Poorest” Poorer Poor =—Rich_— ‘Richest Share in Income Figure 2.2. Distribution of Income tothe World Population {SD6S-UN, 2015) POVERTY INCIDENCE Most countries such as Indonesia, Vietnam, Cambodia, and Laos use expenditure- based measures of poverty that are considered to be more in line with the economic theory that is more relative to household well-being. Some countries such as Thailand, Malaysia, and the Philippines use the income-based measures of poverty, per individual and per household, and consider gender and age distribution. This is important to note when the government's way of interacting short-term implications of poverty is the adjustment of income. Philippine Statistics Authority, “Official Poverty Statistics, + Atlas of Global Inequalities, “Poverty” ng, RaLeAUD LOTTA | povetyandinelty 29 Hula 942 OUor individuals with per cap, : ilies Poverty incidence (Pi) is the percentage of familes or UT nun incomé enditure less than the per capita poverty tI sitsea er of families or individuals; hence, P = (9) x 100. According er cist Authority (PSA), poverty incidence (among. families) in the count df eae Te A mM Ig8 to 12.1% from 2015 to 2018 data, and poverty incidence from a ao on Toma same data year, Among the three major islands of the country, Min ae a we poverty incidence (among families) in 2018, with 23.8%, followed by, IE 4 H 15.2%, and Luzon with 6,6%. Poverty incidence (among the population) in Min janao is 31.6%, Visayas is 20.2%, and Luzon is 16.7%. The National Capital Region (NCR) continues to bg experiencing the least poverty incidence. As the poverty rate and poverty line change over time, so are the moving up and down the ladder of the people due to technological progression, a general rise in the standard of living, introduced New consumption items.” Those who are considered lower, middle, and upper classes are not deemed to stay at their level forever. For example, a low-class income family may go up to middle class once they receive a higher paying job when one or some of the members become professionals or successful in business. In the same manner, a family in the upper class may suffer a loss of a breadwinner businessman member that may impact the downfall of their class. The Lorenz Curve Figure 2.3. Lorenz Curve of inequality The Lorenz Curve was developed by American economist Max O. Lorenz in 1905, in his undergraduate essay and doctoral paper in “Economic Theory of Railroad Rates.” It is a curve showing the relationship between the population in percentile ranking and the national income. Since the data used are estimates and may be considered incomplete, the depiction in the graph may be an inaccurate picture of income inequality but would st show the wide discrepancy of perfect equality to the actual distribution of income. Perfect equality of income distribution is graphed with the li ‘ the line of quality—a5-degret line—and the graph underneath it is the estimation of the income dictbution Ina cunt line, the inequality gap is called the Gini Coefficient, a scalar metric of ine ali that wat introduced by Corrado Gini, an Italian statistician and sone demographer yancet the Lorenz Curve™. A more thorough discussion isin Chapter i eronrersnt * Poverty: an International Glossary, income Esiy ofthe Poverty Lines “Routledge Dictionary of Economics, “Lorenz Curve." % "Routledge Dictionary of Economics, “Gini Coefficient" 30. |) Economie: pe Development dnote adam itPOVERTY TRAP Poverty is a fluid idea with different meanings in different places. It generally represents earning or living off of less money than adequate, as deemed by a particular country or region.? There are findings on how to combat and alleviate poverty, but people and the government need to really be on top of the issue to finally resolve the problem. It would definitely not be easy and would not be in the near future, but the steps that we undertake today will definitely shape what we will become in the long run. We have just recently experienced a drastic turn of events when the pandemic hit us. This was obviously not expected, and it hit all the nations, causing poverty incidence to go up the notch so quickly that a lot of government and social interventions were set in place. Let us take a look at the Philippine statistics before the pandemic hit the country. 1m 2018 (%) 2015 (%) (Migrant and formal workers Youth Senior citizens Women Individuals in rural areas Individuals in urban areas Self-employed and unpaid family workers Fisherfolks Persons with disabilities children Farmers Figure 2.4, Poverty among Basie Sectorsin the Philippines** On the issue of poverty trap, why is poverty likely to persist worldwide? While governments and NGOs are working hand-in-hand in solving this issue, programs in place are deemed ineffective at reducing poverty at its very core. A Jot of poverty reduction programs, that will be discussed in the next section, are likely discouraging people to work, as employment may not be available, In the 2019 report of the PSA, in addition to the thresholds and incidence, other measures such as income gap, poverty gap, and severity of Poverty are used as metrics to measure poverty in the country.> Gale Encyclopedia of Public Health, Niendstedt, “Poverty.” + Philippine Statistics Authority. “Official Poverty Statistics” Bersales, ‘Proportion of Poor Filipinos, PSA, Ghaprer2 | Povertyand inequality 31The existence of the povel means-tested social security benefits, tl to an individual or family being worse o! other benefits.’* Table 2.1. Earnings at Diffel rty trap is seen to be he situation wl ff overall as a conseq| rent Combinations of ‘Work and G oT) ) | inevitable where there is a system oy here a slight increase inearningsleag, uence of losing entitlement t, j | jovernment Support ) 500 25,000 1,000 50,000 BNO ig 75,000, 2,000 100,000 2,500 125,000 For a regular Filipino who is earning 50 an hour, balancing leisure and work hours is depicted on the budget constraint line without government assistance. Working for 2,500 work hours for P50 would mean no leisure hours and earning P125,000 a year, given that there are 50 weeks in a year. If we limit it to 40 hours a week, 2,000 labor hours a year at PSO will be earning 100,000 (see point X in the graph). As we increase leisure time, hours for work would decrease and would diminish our opportunity to earn. Now, suppose there is a government program that would guarantee a poor Filipino an income of 120,000 a year. Table 2.1 shows the effect of the combination of work and government assistance: only when the employee works more than 2,000 hrs a year or more than 40 hours a week does the total earning start to increase beyond the guarantee of the, government, although it is evident that the marginal increase is quite ‘small and may have negligible impact on the worker, But then again, this employee will have extra expenditures such as education, child support, healthcare, transportation, etc. Even if there is no work done, the employee would still receive 120,000 which would Collins Dictionary of Sociology. “Poverty Trap” 32 | Economic Development veges Toe 7 a 3 Budget constraint line 3 oot oem 8 ene | ni | 0000 1000 1,800 2.000 2,600 | toes oi sae 1m m0 1 me von ve Figure 2.5. Poverty Trap: Budget Constraint without Government Assistance income & a eer une von | etme em oe me? | Figure 2.6. Poverty Trop: Budget Constraint with Government assistoncemean discouraging work, not building substantial work background, no network, and no ‘opportunity to work in the future. To combat this poverty trap, we can reduce 0.50 from every P1 earning; hence a new budget line is formed. Look at the graph on the previous page. There Is a reduction of government assistance when the individual decides to work; for example, for every 50, an hour of work will really net at 25 per hour. Table 2.2 shows the summary of the combination of the work and the new scheme of government assistance. An anti- poverty program like this guarantees 120,000 income and more incentive to work despite receiving financial aid from the government. For ‘example, when working for 500 hours, the 25,000 total income Is equal to 132,500, that is, 25,000 + (P120,000- = ). For every 2,000 work hours, 100,000 + (P120,000 ~ £20090) = 170,000, and so on. Somehow, this is more encouraging to do work because the total earning is not fixed to P120,000 even if one is working less than 2,000 hours, which is the threshold. Table 2.2. Earnings at Different Combinations of Work and Government Support Reduced to'50% for Every Peso Earned 0 PO 120,000 ‘120,000 500 25,000 107,500 132,500 1,000 ‘50,000 95,000 145,000 1,500 175,000 82,500 157,500 2,000 100,000 70,000 170,000 2,500 125,000 + __P57,500 182,500 POVERTY REDUCTION ‘The government plays an important role in reducing poverty in the country through its policies to improve the welfare of the people. This eventually benefits the country in the long runias itis believed that the poor:are more vulnerable to experiencing health issues, unemployment, drug dependence, illiteracy, and hamelessness as compared to those who have sufficient financial resources. In addition, those in poverty are more likely to be the victims of crimes, or worse, they are those who commit crimes. Cash Transfers. Some Latin American and African countries have conditional cash transfer (CCT) programs to aid families who are considered poor. In the Philippines, we have the Pantawid Pamilyang Pilipino Program (4Ps) that resembles the same policy. It is aimed to help the poorest’ of the poor .improve the health, nutrition, and education of children aged 0-18 by giving monetary support and social development programs to break the poverty cycle.”” Official Gazette, “Pantawid Pamilyang Pilipino Program.” hapter2 | Povertyand inequality 33¥ In-Kind Transfers. Another way is to directly provide goods and serioes 25 soci safety nets through specialized welfare programs such as social areas for ini senior citizens, supplementary feeding programs, temporary shelter for : ‘i jomel less and those who are displaced by natural calamities or casualties of battles, an fe medicines vaccines for the vulnerable and indigent members of the population (€.6. free flu vaccine, and other medicines that indigents can have from the Department of Health centers in the communities). Work Incentives, These commonly happen when a natural disaster OCCUFS, and those tive to work and help rebuild the who are displaced in their workplaces are given an incen' ah place of adversity in exchange for a reasonable wage to bring home and spend on those afflicted. Minimum Wage Law. itis an act of Congress or the Senate that imposes @ minimum payment of wage to workers in a specific location, duration of work, and nature Of the industry to ensure that a reasonable amount of income is provided to @ specific group of employees. Advocates of this measure. believe that this alleviates the condition of the poor -with little to no cost to the government. Some argue that this hurts the people it intends to hurt as it gives the power to minimize the payment to a deserving individual. ‘Adjust Tax Code. It is intended not to collect any form of tax from individuals who earn a specific amount or less in one year, reflected on a graduated income tax. The notion is to collect more taxes from those who are earning more, as the basis of the computation of the taxis the net income in a certain period of time, Hence, a 0% tax rate is to be imposed on those whose income is at a certain level or less. In addition, a call to adjust the tax code to mainly fix the ambiguities in the tax law thet the rich use to avoid paying taxes may effect toa more just imposition of taxes. Sustainable Development Goals. The UN Social Development Goals include these priority actions to be taken as addressed in the Johannesburg Plan of Implementation in 2002, prioritizing poverty as a top global challenge that we are currently facing, specficaly for developing countries: # Improving access to:sustainable livelihoods, entrepreneurial opportunities, and productive resources *° Providing universal access to basic social services * _ Progressively developing social protection systems to support those who cannot support themselves a * Empowering people living in poverty and their organizations » Addressing the disproportionate impact of poverty on women Working with interested donors and recipients to allocate increased shares Official Development Assistance (ODA) to poverty reduction * _Intensifying international cooperation for poverty eradication* #” United Nations, “Sustainable Development Goals” 34 | Economic Development