Income inequality and poverty
Abstract
A number of international human rights watchdogs recently commented about the increasing gap between the rich and the poor. They argue that while middle classes tend to be gradually transformed into the rich, more and more people cross the line of absolute poverty. Many analysts advocate the idea that the cornerstone of the poverty is
This paper seeks to establish the connections between the concepts of income inequality, operating the regression analysis method. It also discusses the differences between absolute and relative poverty in the context of global campaign for poverty reduction.
Introduction
The concepts of poverty and income are inherently related to each other (Heltberg, 2001). Statistically, it is evident that the bigger gross domestic project for particular countries, the lower poverty rates the population of this country has (Ravallion et al., 2009). It is, however, important to bear in mind the fact that the statistical assumption is valid only if competitions are made based on gross domestic product per capita (Draper & Smith, 1998). For more than 20 years the international community, reentering mainstream international agenda in 2001, has neglected the problem of income inequality and rising power to rates. The adoption of the millennium universal goals played a crucial role in the global campaign of poverty eradication. This document stresses that income inequality exercises tremendous negative effect on the global population itself while significantly contributing to the poverty increase.
The coalescence of the theory and the practice expressly demonstrated that inequality and poverty are related concepts, affecting each other directly and consequentially (Birdsall, Pinckney & Kraay, 2000). They are both linked to their economic growth of the country. The international scholarly community considers the issue of poverty sensitivity and distribution changes as one of the key determinants to the inequality problem aggravation. The popular working model for computational analysis of the phenomena is the triangular correlation between poverty, growth and distribution. In particular, the popular academic notion is that poverty can be significantly reduced by means of increasing national income, changing the way this income is distributed among the population or by applying a combined methodology. This solution have been successfully applied by the socialist countries, which were heavily criticized by the capitalist world for their grave economic problems, but with the power to rates, nevertheless, were significantly lower than among the developed Western countries.
The objective of this paper is to introduce how the latest research accomplishments in terms of growth and inequality are leveraged in order to reduce poverty and to demonstrate how improper distribution affects the poverty reduction trends. The paper also stresses that separation the concepts of poverty and income inequality is wrong both academically and operationally. In other words, operate in the concepts of absolute and relative measurements of poverty; this paper seeks to explain that separating these issues is impossible. Then, the paper seeks to establish a relation between income increases in poverty reduction exists.
The paper starts with the formulation of the research goals and objectives, stressing the research hypotheses. Literature review section provides conceptual overview of the problems, discusses the links between income inequality and poverty, analyzes the links between income inequality, poverty and economic growth of a particular country, speculates about the issues of separating poverty and income inequality and concludes white this separation is not sound. The data analysis section provides empirical calculations conducted for the European and African and American countries, showing the ratios of income inequality and poverty rates of their respective populations. Regression models and other methods of statistical analysis have been applied for these needs. Their results section of this paper interprets the collected findings and concludes on their applicability for the needs of economic practice and related further academic research. Finally, the conclusions of this paper summarize the main issues discussed, and emphasizes the main determinants which think gross income inequality to the poverty rates.
The research objective of this paper is to demonstrate that with the increase of income inequality in any country, poverty rates increase progressively. Secondly, it seeks to demonstrate that the correlation between the poverty rates and income inequality is mutually dependent.
The research hypothesis for this paper is that the rise in income of the country leads to poverty rate reduction. The second hypothesis is that more equal distribution of the existing income among the population leads to poverty rate reduction as well.
Literature review
Extreme poverty is defined by the resolution of the United Nations adopted in 1995 (Komives, 2005). Under the concept of absolute or extreme poverty the one should understand the condition featured by severe deprivation of the most basic human needs, including sanitation, food, drinking water, shelter, education and information (DFID, 2000) . The international poverty line is established at $1.25 per day as defined by the World Bank (Komives, 2005). Special poverty lines can be established by the national governments of particular countries (Ravallion et al., 2009) while this figure is commonly used for the international calculations (Draper & Smith, 1998). The overwhelming majority of mostly in extreme poverty reside in Asian, African and Pacific regions, which totally combine 96% of the poorest international population. India and China host 50% of those 96.
The Concepts of Absolute and Relative Poverty
Economics often distinguish between the concepts of relative and absolute poverty. Some analysts argue that absolute poverty is in no way linked to income inequality while relative poverty is connected to income distributional issues. The practice, however, shows that this statement is misleading. All indexes of poverty are somehow correlated to the distribution. The main difference is the extent to which they correlate.
Deciding whether to use absolute or relative metric is dependent on the circumstances of a particular case and on the objectives. For the countries, where the survival of the people (where deaths commonly occur because of famine, malnutrition, lack of potable water or inability to meet other biological necessities) the analysts usually apply absolute poverty index. The standards of absolute poverty typically coincide with the nationally established basic standard of living).
Developed countries (where the differences between standards of living and social exclusion is becoming the greatest concern for the citizens) usually operate the concept of relative poverty. This, however, does not signify that that relative poverty issue are not relevant for the analysis of the developed countries. Methods of relative poverty rates are important to analyzing dynamic improvements, and, therefore, for reshaping or formulating the distributive policies. However, under some circumstances these solutions may be effective while sometimes they can produce distorted results. For instance, for some countries high levels of absolute poverty may conform relative poverty indexes.
In practice, these issues cannot be separated. In social parlance, the one’s understanding of poverty depends on the relative financial position within a particular community. In some cases, relative poverty can virtually signify that an individual can’t access the most basic needs. Moreover, distinguishing between absolute and relative poverty may be practically unacceptable for some countries, especially where the rates of absolute poverty are prevalent (e.g. the countries of Sub-Sarah Africa or Latin America).
Moreover, the aspects of relative and absolute poverty are not suitable for separation technically. Elements of relativity are always inherent to the concept of absolute poverty.
Overall, it is reasonable to summarize that that no conventionally accepted measures of poverty can be universally applied nowadays. Moreover, even the well-established headcount ratio method should be considered a bit relative in its nature because the calculations on a household basis is partially functional. Consequently, it is reasonable to conclude that poverty metrics nature may be determined by analyzing the extent of relativity involved. This analysis may have far-reaching practical implications since it sets standards for the poverty line, hereby designing the way the distribution policies are adjusted.
Recent trends
Eradication of extreme poverty and global hunger are the first Millennium Development Goal Determined by the United Nations member states (World Bank, 2001). Moreover, this organization schedules to reduce the level of extreme poverty by half by 2015. Based on objective was accomplished for shares ahead of schedule, while the poverty is considered to be totally eradicated by 2030 (World Bank, 2001). Current poverty statistics across the globe and the nature of the international campaigns designed to eradicate it demonstrate that this objective has very big chances to be achieved.
Poverty and inequality in income increases are connected (World Bank and International Monetary Fund, 2001). The scholars currently argue that while some of these links can be separately analyzed, usually the influence of the one exercise affect both direct and indirect on the others (Cook et al, 1982). To illustrate, income inequality exercises indirect influence on poverty and growth, while growth indirectly influences poverty. The entire scientific community does not agree upon this notion. Some non-orthodox economic thinkers of the United States of America in particular suggest that the concept of growth is not applicable in this regard, since together was economic development of the country, the standards and criteria of poverty are rapidly changing as well, remaining the progression constant (Dollar & Kray, 2000)
The practice and theory demonstrate that even minor changes in income distribution can largely affect poverty. To illustrate, in a country where 20% of the population is poor the share of national income is increased from 6% to 6.25%. For the poor people, this insignificant influence means 4% rise of their total income. Moreover, this is a small addition to their income is equal to 4% growth of national income. This 4 % is the estimated increase of the national income of the majority African countries. The income poverty millennium development goals program operate this figure to achieve their objectives formulated by this international initiative.
The countries like Côte d'Ivoire, Bangladesh, the United Republic of Tanzania and many other developing countries demonstrate that changes in income distribution can potentially have enormous effect on the measures utilized to assess depth and severity of poverty. The scholars also unanimously confirmed assumption that the decrease of poverty gap and headcount make Gini coefficient, utilized to measure poverty progressively decreases as well. It illustrates that the process of income distribution is practically important not only in terms of poverty rates, but also in terms of poverty depth marginal analysis.
Current studies demonstrate that if bad income distribution channels are not changed over the periods of time, no other factors can significantly improve the poverty situation of a particular country. To illustrate, the same percent of the population still remains in Argentina for almost 20 years. However, recent national and regional studies have completely refused this cross-sectional evidence, demonstrated that huge distributional modifications can occur during very small periods of time. This assumption has been confirmed by the examples of sub-Saharan African countries, or by the members of Latin American community, where the situation significantly improved in 1970s, while the global economic reduction worsened the poverty rate of the population in 1980s. The same assumption is equally applicable for the countries with the transition economies located in Eastern Europe and in Asia.
Moreover, some new evidence suggests that income inequality sometimes act as proxy for income inequality. When the means of asset distribution are taken into consideration, for instance land the relationship between income distribution and growth typically disappears. Moreover, the studies demonstrate that improper asset distribution has considerably more aggravated effect on the poor population of the country, then on the rest of the citizens (Ravallion et al, 2009). These issues are particularly important for the countries, where credit and insurance markets are not functioning in full accordance with international standards.
Non-income related inequality and poverty reduction
Current knowledge about the connections between non-income inequality and poverty rates of a particular population is not significant. The main reason for this limited data is that the academic community has not resolved some fundamental issues in so far. To illustrate, no appropriate measures for determining inequality rates in health or in education have been developed up to date. The available studies typically focus on the outcomes of the non-income inequality on revelations, rather than examining other dimensions of the poverty phenomenon.
The main elements for achieving economic growth and poverty reduction are proper distribution of productive assets. This statement is especially relevant for human capital. They scholars unanimously agree on the fact that improper distribution of human capital is the major restraint of poverty reduction in the countries of Latin America and sub-Saharan African community. Several studies, however, also demonstrate that inequalities in schooling and education are always negatively related to economic growth, while different educational levels determined the way income is distributed in a particular country. Another important argument for improving the quality of human capital office economic efficiency. To be more specific, physical capital is easily traded on the market. Marginal product, therefore, is not equalized.
Growth, inequality and poverty eradication
Generally, income growth is the dominant aspect regulating poverty lines on a national level. This assumption ,however, is not valid for all countries. For instance, for the developing countries income inequality is the more important determinants of poverty reduction. The more specific, common mistake committed by the national governments of the developing states is that they focus on the country's economic policies is made on the growth, while distribution is not sufficiently accentuated by the policymakers. Another important conclusion is that if economic growth cannot be achieved for any circumstances, such as global financial recession, poverty can be reduced by means of implementing new distribution policies.
Then, economic growth is considered significantly less effective in the poverty reduction campaign in the high inequality countries. The fact that matters for quality eradication is not the rate of growth, but the rate of distribution. For the countries with particular income inequality, this assumption signifies that the changes in income distribution can have more fundamental improving effect in reducing poverty, than the measures designed to increase economic growth of this country. Then, income increase is less effective for the needs of poverty reduction in the least developed countries. To be more specific, the least developed countries like sub-Saharan Africa or Asia should concentrate on distribution issues while growth should be accentuated secondly.
Data analysis
In order to establish a correlation between income inequality and poverty rate of a country, we will apply the following regression model:
Where the variables represent the income inequality, poverty rate of a particular geographical region . and international poverty index of a country
Using the regression model, the following results have been obtained:
The following chart shows how the GDP of the major contributors is represented:
Results interpretation
The data provided about illustrates several important assumptions. Firstly, the power to elasticity of growth signifies the effectiveness of income increase used to reduce poverty. It is, therefore, reasonable to assume that increasing the elasticity has a tremendously positive effect on poverty reduction. The studies demonstrate that increasing elasticity two times makes the same positive affect as increasing rates of income two times respectively. Therefore, the level of the elasticity of income can make significant improvements in terms of millennium development goals achievement.
Poverty elasticity in its turn is highly dependent on the following factors. Firstly, while making the necessary computations the level of inequality should be taken into consideration.
Then, the level of poverty inequality elasticity is directly dependent with economic growth. To be more specific, the higher levels of inequality become, the lower elasticity of poverty becomes. The repercussions of this issue can be dramatic, resulting in the fact that the high inequality countries may need to increase income three times to attain the same goal as low-inequality countries.
Conclusion
Having analyzed the issues raised above, the following conclusions can be drawn:
- The concepts of poverty and income distribution inequality and inherently related. Poverty can be significantly reduced in the developing countries if proper distributional policies are followed. Therefore, the formulation of distributional objectives should become a priority of the poverty reduction program.
- The trends in income growth and income distribution are not competing in the campaign against poverty. As suggested by the commentators, equal distribution policies foster growth, while unequal distribution may fundamentally retard these processes.
- Distribution policies can be effective in the countries where they can remove dysfunctional or redundant income inequalities, or where the estimations show that the inequality is more contributive to poverty reduction than the income effect.
References
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DFID (2000). Halving world poverty by 2015: Economic Growth, Equity and Security Target Strategy Paper.
Dollar, D. and Kraay, A. (2000). Growth is good for the poor. Washington, D.C.: World Bank.
Draper, N. & Smith, H. (1998). Applied regression analysis. New York: Wiley.
Heltberg, R. (2001). The poverty elasticity of growth. Institute of Economics, University of Copenhagen.
Komives, K. (2005). Water, electricity, and the poor who benefits from utility Subsidies. Washington, DC: World Bank.
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