MODULE 6: Introduction to

Poverty and Income Distribution

 Background of Poverty in ASEAN
Region
• Poverty and inequality have been recurrent
challenges in the Philippines and have again
come to the fore in the wake of the current
global financial crisis and rising food, fuel, and
commodity prices experienced in 2008 and in
our present time the havoc of covid -19.
 Background of Poverty in ASEAN
Region
• The proportion of households living below the official
poverty line has declined very slowly and unevenly in
the past four decades, and poverty reduction has been
much slower than in neighbouring countries such as the
People’s Republic of China (PROC), Indonesia,
Thailand, and Viet Nam. The growth of the economy
has been characterized by boom and bust cycles and
current episodes of moderate economic expansion have
had limited impact on poverty reduction. Other reasons
for the relatively moderate poverty decline include the
high rate of inequality across income brackets, regions,
and sectors; and unmanaged population growth.
 Current Profile of Poverty
in the Country
• Poverty incidence among households increased
from 24.4% in 2003 to 26.9% in 2006 and the
number of poor families increased from 4.0 million
in 2003 to 4.7 million in 2006. The headcount
index increased from 30.0% in 2003 to 32.9% in
2006 and the number of poor people increased
from 23.8 million in 2003 to 27.6 million in 2006.
 Current Profile of Poverty
in the Country
• It should also be noted that poverty incidence and
magnitude do not necessarily coincide. According
to the 2006 poverty data, Mindanao has the
highest poverty incidence at 38.8% but Luzon has
the highest number of poor families, with almost
2 million families (42.4% of the total).
 Current Profile of Poverty
in the Country
• Self-rated poverty has ranged from 50% to 52%
for most of 2008, peaking at 59% (an estimated
10.6 million people) in the second quarter.
Inequality has also been persistent over the years.
Although the Gini coefficient (this concept will be
discussed in the coming slide) improved to 0.4580
in 2006 from 0.4605 in 2003 and 0.4872 in 2000,
the level of inequality remains high compared
with other countries in Asia and has hardly
changed for more than 20 years. High inequality
has limited the impact of economic growth on
poverty reduction.
 Current Profile of Poverty
in the Country
• The Philippines’ midterm progress report shows
that the following gains have been made: (i)
decrease in the proportion of people living in
extreme poverty; (ii) visible improvements in
household and population poverty indicators; (iii)
maintained net enrollment rates by sex at both
elementary and primary education levels; (iv)
reduction in infant deaths per 1,000 live births; (v)
prevalence of HIV/AIDS below the national
target of 1% of the population; (vi) improvement
in environmental protection; and (vii) active
participation in the World Trade Organization.
 Current Profile of Poverty
in the Country
• However, the Philippines is still lagging
behind in meeting the targets on access to
primary education, maternal mortality rates,
and access to reproductive health care.
Because of the current global economic crisis
and recent increases in poverty incidence, the
goal of reducing the proportion of people
living in extreme poverty may not be achieved.
 Current Profile of Poverty
in the Country
• In all goals and targets, existing indicators
exhibit significant disparity by region. In terms
of gender, the Philippines has made substantial
progress in enhancing the opportunities and
welfare of its women and men; however,
challenges remain in implementing key
policies and improving maternal health and
reproductive health care.
 Current Profile of Poverty
in the Country
The main characteristics of the poor include the
following:
1.) The majority live in rural areas and work in
the agriculture sector, mostly as farmers and fishers.
2.) In the urban areas, such as Metro Manila, they
are found in slums and the informal sector.
3.) They have large families (six members or more).
 Current Profile of Poverty
in the Country
4.) In two-thirds of poor families, the head of
household has only an elementary education
or below.
5.) They have no or few assets and minimal
access to credit.
6.) A major income source of the poor is from
enterprise income (informal sector activities).
7.) A significant segment of the poor households
are “chronically poor.”
 Causes of Poverty
The main causes of poverty in the country are:

1.) low to moderate economic growth for the past 40 years.

2.) low growth elasticity of poverty reduction.
3.) weakness in employment generation and the quality of jobs
generated.
4.) failure to fully develop the agriculture sector.
5.) high inflation during crisis periods.
6.) high levels of population growth.
7.) high and persistent levels of inequality (incomes and
assets), which dampen the positive impacts of economic
expansion.
8.) And recurrent shocks and exposure to risks such as
economic crisis, conflicts, natural disasters, and
“environmental poverty.
 How Poverty Impacts Economic
Growth
• The difficulties of the Philippines to transition to
a higher and sustained level of growth have been
explained to be due to a sustained decline in
domestic investments, weaknesses in institutions
and social infrastructure, institutional uncertainty
and a history and culture that have impeded
growth.
• However, it is also possible that poverty itself is
constraining economic expansion. The channels
through which poverty may impact on economic
growth include:
 How Poverty Impacts Economic
Growth
1.) investment capacity constraints (lack of access to
credit aggravated by the underdevelopment of the
financial markets).
2.) human capital constraints (lack of education,
health care, and nutrition).
3.) regular doses of risks and shocks, causing
poverty traps; and
4.) conflicts and disorder resulting from inequality,
which hamper investments and destroy social
capital.
 The Lorenz Curve
• Lorenz curve is defined as a graphical
representation on which the cumulative
percentage of total national income is plotted
against the cumulative percentage of the
corresponding population.
• The extent to which the curve drops below a
straight diagonal line showing the degree of
inequality of distribution.
 The Lorenz Curve
• To illustrate the Lorenz curve, we utilize table 1 that is
found on the proceeding slide.
• In table 1, we have a hypothetical data of a country
with only 8 citizens including their (national) income.
• Each income is arranged from the highest to lowest
(ascending order) and we try to total their incomes.
• We compute for the percentage of population by
dividing each number of individual by its total
population, and in this hypothetical example the sum is
8, therefore, 1/8, 2/8. 3/8… 8/8. the results are
summarized in column 3.
 The Lorenz Curve
• The percentage of income is also determined, we
try to have the sum of all income, afterwards we
divide all incomes with the total such that,
5000/415000, 12000/415000, … 150000/415000,
the given outcome is given in column 4.
• Next, we need to calculate the Cumulated
percentage of income. Here, we add the
percentage of income of individual 1 (0.012) and
individual 0 (0), that is 0.012. for individual 2,
add the previous value of cumulated percentage
of income (0.012) and the percentage of income
(0.029) and the result is 0.041. follow the
procedure, and the result is given by column 5.
 The Lorenz Curve
• The percentage of income is also determined, we try to
have the sum of all income, afterwards we divide all
incomes with the total such that, 5000/415000,
12000/415000, … 150000/425000, the given outcome
is given in column 4.
• Next, we need to calculate the Cumulated percentage
of income. Here, we add the percentage of income of
individual 1 (0.012) and individual 0 (0), that is 0.012.
for individual 2, add the previous value of cumulated
percentage of income (0.012) and the percentage of
income (0.029) and the result is 0.041. follow the
procedure, and the result is given by column 5.
• Plot columns 3 and 5, the graph will look like in
illustration 1.
 Interpretation of the values in
Lorenz Curve
• Percentage in population:
Percentage of The first individual
Individual Population represents 12.50% of total
population.
0 0
1 0.125 = 12.50% The first and second
2 0.25 = 25% individuals represent 25%
3 0.375 = 37.50% of total population.
4 0.5 = 50% The first, second, and third
5 0.625 = 62.50% individuals represent
6 0.75 = 75% 37.50% of total population
7 0.875 = 87.50% and so forth.
8 1
 Interpretation of the values in
Lorenz Curve
• Percentage in income:
Percentage of
Individual Income The first individual
0 0 represents 1.20% of total
1 0.012 = 1.20% income.
2 0.029 = 2.9%
The second individual
3 0.043 = 4.30% represents 2.90% of total
4 0.072 = 7.20% income.
5 0.096 = 9.60%
6 0.145 = 14.50% The third individual
7 0.241 = 24.10% represent 4.30% of total
8 0.361 = 36.20% income and so forth.
 Interpretation of the values in
Lorenz Curve
• Percentage of cumulated income:
Cumulated
Percentage of
Individual income
The first individual
0 0 represents 1.20% of total
1 0.012 = 1.20% income.

2 0.041 = 4.10% The first and second

individuals represent 4.10%
3 0.084 = 8.40% of total income.
4 0.157 = 15.70%
The first, second, and third
5 0.253 = 25.30% individuals represent 8.40%
of total income and so
6 0.398 = 39.80%
forth.
7 0.639 = 63.90%
8 1 =100%
 Lorenz Curve
Table 1
Cumulated
Percentage of Percentage of Percentage of
Individual Income Population Income income
0 0 0 0 0
1 5000 0.125 = 12.50% 0.012 = 1.20% 0.012 = 1.20%
2 12000 0.25 = 25% 0.029 = 2.90% 0.041 = 4.10%
3 18000 0.375 = 37.50% 0.043 = 4.30% 0.084 = 8.40%
4 30000 0.5 = 50% 0.072 = 7.20% 0.157 = 15.70%
5 40000 0.625 = 62.50% 0.096 = 9.60% 0.253 = 25.30%
6 60000 0.75 = 75% 0.145 = 14.50% 0.398 = 39.80%
7 100000 0.875=87.50% 0.241 = 24.10% 0.639 = 63.90%
8 150000 1 = 100% 0.361 = 36.10% 1 =100%
Sum 415000
 Lorenz Curve
Illustration 1
120

100

80

60 Equlity
Lorenz Curve

40

20

0
0 20 40 60 80 100 120
 Lorenz Curve
• If the equidistant line that represents equality
in our graph and the red line representing the
Lorenz curve have a smaller distance between
the two, it means that there is less inequality in
a country.
• If the distance between the two lines are
substantial, it means the inequality is higher.
Illustration 2 shows us the idea.
 Lorenz Curve
Illustration 2
 The Gini Coefficient
• The Gini index or Gini coefficient is a
statistical measure of distribution developed by
the Italian statistician Corrado Gini in 1912.
It is often used as a gauge of economic
inequality, measuring income distribution or,
less commonly, wealth distribution among a
population.
• To find the Gini Coefficient the following
formula is used:
 The Gini Coefficient
Gini Coefficient =
120

100

80

60 Equlity
Lorenz Curve
A
40

B
20

0
0 20 40 60 80 100 120
 The Gini Coefficient
• In your discussion of basic geometry, area A
has a value that is equivalent to 0.50, and what
is crucial is to determine the values that is
located under area B.
• To find these values, we use the same table
that is found on the next slide.
• We try to identify this as Area Under Lorenz
curve, and it is computed in the following
manner:
 The Gini Coefficient
• In our computation of Area B or the area under
Lorenz curve just leave the values into their
decimals, like in table 2.
• To get the value on individual 1, determine the
average of the successive cumulated percentage
of income and multiply the value to the
percentage of population which is 0.125. that
means in geometry you are multiplying with the
width of the rectangle.
• So the computation will be: (((0.012+0)/2)*0.125)
= 0.000753012. Do this for the rest of the data.
 The Gini Coefficient
• After the area under the Lorenz curve is
verified, get the sum of all of its the values, in
this case the sum is 0.260391566.
• The area below B has 0.260391566, and we
subtract 0.50 to find area A, therefore, the
value is 0.239608.
• To get the Gini coefficient we follow the
𝐴
general formula of 𝐴+𝐵 , we have 0.479217.
 The Gini Coefficient
Cummulatd
Percentage of Percentage of Percentage of Area Under
Individual Income Population Income Income Lorenz curve
0 0 0 0 0 0
1 5000 0.125 0.012 0.012 0.000753012
2 12000 0.25 0.029 0.041 0.003313253
3 18000 0.375 0.043 0.084 0.007831325
4 30000 0.5 0.072 0.157 0.015060241
5 40000 0.625 0.096 0.253 0.025602410
6 60000 0.75 0.145 0.398 0.040662651
7 100000 0.875 0.241 0.639 0.064759036
8 150000 1 0.361 1 0.102409639
Sum 415000 0.260391566
The Gini Coefficient

Area A = 0.239608

Gini
Coefficient = 0.479217
Interpretation of the Gini Coefficient

0.479217 is relatively unequal distribution of

income. Since Gini coefficient is an aggregate
inequality measures and can vary anywhere from
0 (perfect equality) to 1 (perfect inequality). Gini
coefficient for countries with highly unequal
income distributions typically lies between 0.50
and 0.70 while for countries with relatively
equitable distributions, it is on the order of 0.20
to 0.35.
 Poverty Profile
• From 1985 to 2000, poverty was reduced at a
slow rate of only 0.7% per year. The poverty
incidence of families fell consistently by 12.4
percentage points over the period 1985–1997,
but this progress was halted by the Asian
financial crisis which saw an increase in
poverty of 1.9 percentage points to 33.7% in
2000.
 Poverty Profile
• The periods of 1985–1988 and 1994–1997, when
poverty incidence was dropping relatively
quickly, were also years of high annual economic
growth (4.67% during 1985–1988 and 5.33%
during 1994–1997).
• However, the fastest decrease in poverty
incidence was achieved during a period of
relatively modest 2% growth, from 1992 to1994.
An explanation is that inequality was reduced
during this time as the Gini coefficient fell by
0.0173 points.
 Poverty Profile
• The poorest performance was 1988–1991,
when growth was low and inequality high. At
this time the country was also affected by
political instability, natural disasters (volcanic
eruption and earthquake), and an energy crisis.
• The biggest increase came in the aftermath of
the East Asian crisis as the economy suffered
from low growth and rising Prices as shown in
table 3
 Poverty Profile
Table 3
Current Poverty Profile: Thresholds,
Incidence, and Magnitude
• Poverty incidence among households increased
from 24.4% in 2003 to 26.9% in 2006 and the
number of poor families increased from 4.02
million in 2003 to 4.68 million in 2006 despite
an average GDP growth rate of 5.3% in the
same period. In addition, inequality improved
and the annual per capita poverty threshold
increased by 22.32% during the same period.
Current Poverty Profile: Thresholds,
Incidence, and Magnitude
• In 2006, the threshold was highest in the National
Capital Region (NCR) and lowest in Region IX.
The NCR had the lowest poverty incidence
among families at 7.1% in 2006 (up from 4.8% in
2003) while the Autonomous Region in Muslim
Mindanao (ARMM) had the highest at 55.3% (up
from 45.4% in 2003). The Cordillera
Administrative Region has the least number of
poor families—87,050—while Region VI has the
most at 425,571 given in Table 4.
Current Poverty Profile: Thresholds,
Incidence, and Magnitude
Table 4
Current Poverty Profile: Thresholds,
Incidence, and Magnitude
• The headcount index increased from 30.0% in
2003 to 32.9% in 2006 and the number of poor
people from 23.8 million in 2003 to 27.6
million in 2006. The NCR has the lowest
incidence at 10.4% in 2006 (up from 6.9% in
2003) while the ARMM has the highest at
61.8% (up from 52.8% in 2003). The
Cordillera Administrative Region has the
fewest poor persons (506,823) while Region V
has the most (2.64 million).
Current Poverty Profile: Thresholds,
Incidence, and Magnitude
• Other regions with big numbers of poor people
are Region VI with 2.49 million and Regions
IV-A and VII with 2.21 million each given in
table 5.
Current Poverty Profile: Thresholds,
Incidence, and Magnitude
Table 5
Thank you!