Poverty & Inequality

Absolute Poverty is when people are living on incomes below the minimum income to meet needs such as food, clean water, clothes and shelter - often referred to as the poverty line. The world bank has set a line of below $2 and $1.25 a day (as of 2005) in terms of the purchasing power parity.

Relative Poverty is when people are living on an income which is below 50% of the national median income. This (as opposed to absolute poverty) is not comparable internationally as what is labelled as a low income in the UK may be high somewhere with cheaper labour like India. It also differs from absolute poverty in that it is subject to change over time.


The Lorenz Curve measures the degree of inequality in a country by showing what percentage of income is earned by what percentage of the population.
                                            

The Gini Coefficient quantifies the degree of inequality using the formula:

G = A/B

(A in this diagram being the area above the Lorenz curve and below the line of perfect equality, and B being the area below the Lorenz curve)


Some factors which can cause poverty

1. Corruption - This is when government officials and civil servants look out for their own interests and not the interests of the rest of the population - they use their power for personal gain. This is an example of an unequal society where the top (say) 10% of the population earns a much larger proportion of income e.g. 70%. Aid given to these countries is not often used constructively in supply side policies, rather kept by officials.
2. Primary product dependency - This can cause a large proportion of a population to live in poverty. Firstly because soft commodities (like coffee) are hugely affected weather conditions and fluctuations in demand and so there is no guarantee of income for the producers of these goods. Secondly hard commodities like oil can cause dutch disease in the economy. This is where an oil exporter suddenly experiences a huge appreciation in its exchange rate due to the demand for their oil and speculation into the future prospects of their economy. This is great for anyone working in the oil industry in that country. However people who work in agriculture and other sectors find their goods uncompetitive on the world market, the exchange rate being so high, and subsequently can find themselves living in poverty.
3. Savings gaps - This is where a developing country does not have adequate savings to fund investment due to its population having (in general) a low GDP per capita. Investment is essential to achieving growth. Without growth it is unlikely that national income will rise, and so a country in this situation is likely to have a population high in poverty.
4. Lack of human capital - Many developing countries have poor education and low school enrollment ratios. This means that the workforce is not as efficient as it could be and therefore productivity of the economy is low. Again this would promote slow growth and wouldn't help to increase national income levels.

Limitations of the Lorenz curve:

• Income changes over time and this is not taken into account by the curve
• The amount of inequality may be misleading. If richer households are able to use their incomes more efficiently than lower income households, the amount of inequality could be understated.

Limitations of the Gini coefficient:

• The coefficient will give different results when applied to individuals or households. To be able to make a valid comparison between countries, definitions must be constant across countries.
• different countries may have different systems of benefits and these are not accounted for by the Gini coefficient