Chapter 5

POVERTY, INEQUALITY
AND DEVELOPMENT

Abdulhamid, Sittie Samra | Banto, Shina | Madani, Princess Rasheda

Mocsana, Aynah | Raman, Fairoz
 5.1 Measuring Inequality

5.2 Measuring Absolute Poverty

5.3 Poverty, Inequality and Social Welfare

Lesson 5.4 Absolute Poverty: Extent and Magnitude

Outline 5.5 Economic Characteristics of High-poverty groups

5.6 Growth and Poverty

5.7
Labour the Functional Distribution of Income
and Inclusive Development

5.8 Policy Option on Income Inequality and

Poverty: Some basic Considerations

5.9 Summary and Conclusion

 MEASURING INEQUALITY
Income inequality - the disproportionate distribution of total
national income among households, often leading to significant
social and economic consequences.
1. Personal or Size distribution of income
The distribution of income according to size class of persons—for example,
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.

Quintile - a 20% proportion of any numerical quantity. A population divided

into quintiles would be divided into five groups of equal size.
Decile - a 10% portion of any numerical quantity; a population divided into
deciles would be divided into ten equal numerical groups.
2. Lorenz Curves
a graph depicting the variance of
the size distribution of income from
perfect equality. Shows the actual
quantitative relationship between
the percentage of income
recipients and the percentage of
the total income they did in fact
receive during, say, a given year.
3. 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, the higher the inequality of
income distribution; the lower it is, the more equal the distribution of
income.
Gini concentration ratio/ Gini coefficient - the ratio of the shaded area A to
the total area of the triangle BCD.
Gini coefficient is among a class of measures that satisfy these four highly
desirable properties:

1. Anonymity Principle - means that our measure of inequality should not depend
on who has the higher income.
2. Scale Independence Principle - means that our measure of inequality should
not depend on the size of the economy or the way we measure its income.
3. Population Independence Principle - is somewhat similar; it states that the
measure of inequality should not be based on the number of income recipients.
[Link] Principle - it states that, holding all other incomes constant, if we
transfer some income from a richer person to a poorer person, the resulting
new income distribution is more equal.
4. The Ahluwalia-Chenery Welfare Index (ACWI)
a final approach to accounting for the distribution of income in assessing
the quality of growth is to value increases in income for all individuals but
to assign a higher weight to income gains by lower-income individuals than
to gains by higher-income individuals.
 MEASURING
ABSOLUTE POVERTY
Absolute poverty - The Situation of being unable or only barely able to
meet the subsistence essentials of food, clothing, and shelter.
MEASURING ABSOLUTE POVERTY
[Link] Poverty
[Link] Poverty Measurement
1. Income Poverty
a. Headcount index (“headcount [Link] Poverty Gap (TPG)
ratio”) - The sum of the difference between the
- The proportion of a country’s poverty line and actual income levels of
population living below the poverty line. all people living below that line.

H/N
Where:
H is the number of persons whose
incomes fall below the absolute Where:
poverty line (Yp) Yp – is the absolute poverty line

N is the total population Yi – is the income of ith person

(person below poverty line)
 Average Poverty Gaps (APG) Average Income Shortfall (AIS)

- which found by dividing the TPG by the - which found by dividing the TPG by the
total population: total population:

Where: Where:
N – number of a person in an economy TPG – Total Poverty Gap
TPG – Total Poverty Gap H – headcount
c. The Foster-Greer-Thorbecke (FGT) Index
-A class of measures of the level of absolute poverty.

Where:
𝑌𝑖 is the income of the ith poor person,
𝑌𝑝 is the poverty line
N is the population
H is the Headcount
Depending on the value of a, the Pa index takes on different forms
- If a = 0, we are measuring Headcount Ratio
- If a = 1, we are measuring Poverty Gap Index
- If a = 2, we are measuring Squared Poverty Gap index
Criteria for a desirable poverty measure that are widely accepted by development
economists:

[Link] anonymity
[Link] independence
[Link]
[Link] sensitivity principles

Plus, the Focus Principle of Amartya Sen

- a good poverty measure will be based only on the incomes (well-being) of the poor;
specifically, an increase or decrease in incomes of those above the poverty line should
not affect how we measure the level of poverty.

d. Person-Equivalent Headcounts
-partial improvement is to convert changes in the poverty gap into its headcount-
equivalent (based on the initial average income shortfall).
2. Multidimensional Poverty Measurement
A poor person is identified through what is called the “dual cutoff method”

- First, the cutoff levels within each of the dimensions

- Second, the cutoff of the number of dimensions in which a person must be deprived
to be deemed multidimensionally poor.
 ,
POVERTY INEQUALITY &
SOCIAL WELFARE
Extreme income inequality leads to:

1. Economic Inefficiency
2. Undermine Social stability and solidarity
3. Unfairness

Dualistic Development and Shifting Lorenz

Curves: Some Stylised Typologies

As introduced by Gary Fields, Lorenz curves may

be used to analyse three limiting cases of dualistic
development:

1. The traditional-sector enrichment

growth typology
2. The modern-sector enrichment 3. The modern-sector enlargement
growth typology growth typology
Kuznets’s Inverted-U Hypothesis
Kuznets curve
- A graph reflecting the relationship
between a country’s income per capita
and its inequality of income distribution.

Simon Kuznets suggested that in the

early stages of economic growth, the
distribution of income will tend to
worsen; only at later stages will it
improve.
Growth and inequality
It is not just the rate but also the character of economic growth that
determines the degree to which that growth is or is not reflected in
improved living standards for the poor. Clearly, it is not necessary for
inequality to increase for higher growth to be sustained.
 ABSOLUTE POVERTY:

EXTENT AND MAGNITUDE

Human Poverty Index (HPI)

- A measure developed by the United Nations Development Programme

(UNDP) used from 1997 to 2009. It measured poverty using indicators
related to longevity, knowledge, and standard of living. It was replaced in
2010 by the Multidimensional Poverty Index (MPI).
Multidimensional Poverty Index (MPI)

A poverty measure that captures multiple deprivations in health, education, and

standard of living. Developed by UNDP and the Oxford Poverty and Human
Development Initiative (OPHI) in 2010. It was modified in 2018 to align with the
Sustainable Development Goals (SDGs).

Deprivation

- A state of lacking basic needs or living standards essential for a minimum quality of
life.

The MPI has three main dimensions:

Health
Education
Standard of Living
Classification Of Poverty

A household is considered:
Multidimensionally Poor → deprived in 33% or more of the weighted
indicators.

Vulnerable to Poverty → deprived in 20%–33% of indicators.

Severely Poor → deprived in 50% or more of indicators.

Dashboard Indicators
- Additional indicators used alongside MPI to capture deprivations not included
in MPI (e.g., clothing, safety, personal dignity).

Chronic Poverty
- The condition of being persistently or permanently poor over long periods.

Categories of Poor Families:

Chronically Poor
Usually Poor
Vulnerable Non-poor
Ultrapoverty
- Deeper and more complex form of poverty, characterized by: Depth, length,
breadth.

- Often results in poverty traps — self-reinforcing conditions that keep

individuals poor without external help.

Poverty Traps
Situations where multiple deprivations reinforce each other, preventing
people from escaping poverty without external assistance.
Seen most clearly among the ultrapoor.
ECONOMIC CHARACTERISTICS

OF HIGH POVERTY GROUPS

Child Poverty
- Refers to the condition in which children experience deprivation in
multiple aspects such as nutrition, education, health, and living
standards.
UNICEF 2016 Findings
- About 385 million children lived in extremely poor households in 2013.
- Children represent half of the world’s extreme poor, even though they make
up only one-third of the global population.

Gender and Poverty (Women and Poverty)

Women make up a substantial majority of the world’s poor.
Poverty among women is caused by economic, social, and cultural
inequalities.
Causes of Women’s Poverty

A. Economic Factors B. Social and Cultural Factors

Lower Earning Capacity Gender Bias
Limited Control Over Income Household Roles
Lack of Access to Education Marriage Patterns
Unpaid or Informal Work Legal and Customary Restrictions
Limited Access to Productive Resources

Female-Headed Households
- A high proportion of ultrapoor households are headed by women.
Female heads of households usually have:
Lower education levels
Smaller and unstable incomes
Limited access to government programs

Intrahousehold Inequality
Unequal distribution of income and resources within a household.

When women’s share of household income is higher:

There is less gender discrimination.
Girls’ education and health outcomes improve.
Family nutrition and welfare increase.
Ethnic Minorities
Groups within a country that differ in race, culture, language, or religion from
the dominant population.

Indigenous Populations (Indigenous Peoples)

The original inhabitants of a region who maintain distinct cultural, social, and
historical identities separate from dominant groups

Incidence of Poverty
- The proportion of the population that falls below the poverty line; in this
context, poverty is disproportionately high among ethnic minorities and
indigenous peoples.
Rural Poverty
- A form of poverty that predominantly affects people living in rural areas, often
dependent on agriculture and natural resource-based livelihoods.

- Over two-thirds of the world’s poor live in rural areas.

Absolute Poverty
- A condition where individuals lack the minimum resources necessary for basic
living standards such as food, shelter, and healthcare.
Relationship Between Poverty and National Income
Negative correlation between poverty and per capita income:
As incomes rise → poverty rates tend to fall.

Higher national incomes lead to:

1. More resources for social programs.
2. Growth in civil society and volunteer sectors.

However, high levels of poverty can slow economic growth by reducing

productivity and investment.
 GROWTH & POVERTY
In the past, many people believed that helping the poor would slow down a
country’s economic growth. They thought that giving money or support to the
poor would reduce savings and investment. Because of this, governments
focused only on growing the economy, expecting that the benefits would later
“trickle down” to the poor, but this did not always happen.
Today, economists understand that reducing poverty and growing the
economy can actually work together. When poor people get education,
health care, and job opportunities, they become more productive. This
helps increase national income, create stability, and make growth more
sustainable. In simple terms, helping the poor also helps the economy grow
faster.
Five Reasons Why Policies to Reduce Poverty Can Accelerate Growth

1. Widespread poverty limits access to credit, education, and investment

opportunities, which lowers growth.
2. The rich in many poor countries often do not save and invest productively in the
local economy.
3. Low incomes and poor living conditions reduce health, education, and
productivity, slowing growth.
4. Rising incomes of the poor increase demand for locally produced goods,
stimulating local production and employment.
5. Reducing mass poverty encourages public participation and creates stability,
while inequality discourages progress.
 LABOUR, THE FUNCTIONAL
DISTRIBUTION OF INCOME,

AND INCLUSIVE DEVELOPMENT

Functional Distribution of Income
- The functional distribution refers to how the total national income is divided
among wages, rent, interest, and profit.

- It is different from the size distribution of income, which looks at how income
is distributed among individuals or households.

- A country can have high growth but still have inequality if most income goes
to capital owners instead of workers.

-In developing countries, the share of national income going to labor is often
very low.

-This happens because many workers are in the informal sector, agriculture, or
low-productivity jobs.

-Capital owners, on the other hand, receive a larger share of income.

The Functional Distribution
Causes of Unequal Function Distribution
-Weak labor unions and limited worker rights keep wages low.
-Unequal access to education and skills prevents poor workers from getting high-
paying jobs.
-High unemployment and underemployment make labor cheap.
-Economic policies often favor profits and capital over wages.

Effects on Development
- When labor’s share is small, income inequality grows.
-This can reduce demand for goods, slow growth, and increase poverty.
-Improving workers’ income share helps promote both equality and long-term
development.
LABOUR AND INCLUSIVE DEVELOPMENT
-Inclusive development means that all groups, especially workers and the poor,
share in the benefits of growth.
-Labor plays a central role in ensuring inclusive development.
-If workers’ wages rise fairly with productivity, growth becomes more balanced
and sustainable.

Strategies for Inclusive Labour Growth

Strengthen labor rights and ensure fair wages.
Expand access to education and skills training.
Support small enterprises and self-employment.
Encourage industries that create decent, productive jobs.
Promote gender equality and protect vulnerable workers.
 POLICY OPTIONS ON INCOME
INEQUALITY AND POVERTY:

SOME BASIC CONSIDERATIONS

AREAS OF INTERVENTION
Governments in developing countries aim to reduce poverty and income
inequality while sustaining growth.

Four key policy areas:

1. Altering the functional distribution – Adjust returns to labor, land, and capital.
2. Mitigating the size distribution – Redistribute ownership of productive assets
and skills.
3. Reducing upper-level income concentration – Through progressive taxation of
the rich.
4. Raising lower-level incomes – Through tax-funded transfers, education, health,
and employment programs.
Altering the Functional Distribution: Minimum Wage and
Capital Subsidy
- The functional distribution of income can be influenced by factor prices (wages,
interest, profits).

- Artificially high urban wages and low capital costs distort equality and efficiency.

- Correcting factor-price distortions (raising labor’s price, reducing capital’s

subsidies) promotes growth, employment, and equality.

- Minimum wage effects differ across countries: may help informal workers but
could harm employment if poorly designed.

- Removing capital subsidies increases the efficient use of labor and ensures fair
income distribution.
Modifying Size Distribution Through Increasing Assets of
the Poor
- Poverty reduction depends on ownership of productive assets (land, capital,
education).

- In developing countries, 20% of people often control 90% of resources.

- Redistribution policies like land reform and microcredit can reduce inequality.

- Land reform helps small farmers; urban reforms include small-business credit
access.

- Gradual redistribution through savings and investments promotes equity.

- Expanding education and skills training is vital for breaking inequality cycles.
Progressive Income and Wealth Taxes

- Governments need financial resources to improve living standards of the

poorest 40%.

- Progressive income taxes: higher earners pay a larger share of income tax.

- Wealth taxes target accumulated assets; aim to reduce wealth gaps.

- In practice, taxes can become regressive, with poor and middle-class bearing
heavier burdens via indirect taxes.

- Enforcing true progressive taxation is key for equitable redistribution.

Direct Transfer Payments and Public Provision of Goods and
Services
- Public spending on health, food, and education reduces poverty directly.

- Examples: subsidies, nutrition programs, and public works.

- Transfers must target genuine poor and avoid dependency.

- Workfare programs (e.g., India’s MGNREGA) tie benefits to labor—“a hand up, not
a handout.”

- Workfare advantages:
Encourages productivity and skills.
Sreens true poor participants.
Reduces stigma compared to welfare.
Applying Insights from Behavioral Economics
- Poverty affects cognition—creates a “cognitive tax” that reduces decision-
making ability.

- Chronic stress, hunger, and financial worries lower productivity.

- Behavioral interventions like:

Reminders (e.g., SMS) to save or take medication.
Self-commitment devices to encourage savings.
Simplified forms and procedures for poor participants.
Understanding behavioral barriers improves the success of anti-poverty
programs.
 Summary and
Conclusions

- Poverty and inequality require a comprehensive set of policies, not

isolated actions.

Four essential elements:

1. Correct factor-price distortions (fair labor and capital pricing).

2. Restructure asset distribution (land, education, employment

access)..
 Summary and
Conclusions

3. Enforce progressive taxation and social safety nets.

4. Implement community-based empowerment programs focused

on human and social capital.

- Goal: Inclusive growth that lifts the poorest, combining economic

efficiency with equity.

- Poverty eradication is achievable within a generation through will,

policy, and human effort.
Thank You!