Economics Grade 12 - Poverty Notes

Dimensions of Poverty

  • Poverty is multifaceted, with psychological dimensions.
  • Limited access to basic infrastructure (roads, transportation, clean water).
  • Desire for literacy, but mixed views on schooling.
  • Poor health is a major concern.
  • Focus on managing rather than income.

Poverty Defined

  • Encompasses income and non-income aspects of deprivation.
  • Lack of income and material means.
  • Limited access to basic social services (education, health, water).
  • Compromised personal security.
  • Lack of empowerment in political processes.

World Bank's Definition of Poverty

  • "Pronounced deprivation in wellbeing."
  • Wellbeing linked to command over commodities.
  • Focus on individual's capability to function in society.

Types of Poverty

  • Relative poverty: Defined in comparison to others in the economy.
  • Absolute poverty: Failure to meet basic human dignity or rights; distributive justice issue.

Absolute Poverty

  • Inability to meet basic needs (food, clothing, shelter).
  • Measured by the number of people below a specified minimum income level.
  • International poverty line: Less than $1.25 or $2 per day (PPP).

Relative Poverty

  • Defined by comparison to others' economic standing.
  • Relevant in societies without acute absolute poverty.
  • Meeting basic needs doesn't preclude relative poverty.

Generalizations About the Poor

  • Disproportionately in rural areas.
  • Engaged in agriculture.
  • More likely to be women and children.
  • Often from minority ethnic groups.
  • In Africa/Asia, 80% of target poverty groups are in rural areas; in Latin America, about 50%.

Reasons to Measure Poverty

  • To keep poor people on the agenda.
  • To identify and target interventions.
  • To monitor and evaluate projects.
  • To evaluate the effectiveness of institutions.

Steps to Measure Poverty

  • Define a welfare indicator.
  • Establish a minimum acceptable standard (poverty line).
  • Generate a summary statistic.

Steps in Measuring Poverty

  • Identify the poor.
  • Set a minimum income/consumption level (poverty line).
  • Conduct a representative survey.
  • Calculate a specific poverty measure.
  • Common approach: fixed, monetary, consumption-based threshold.

Poverty Headcount Index

  • Headcount (H): Number of people below the poverty line (Yp).
  • Headcount Index: H/NH/N (H: headcount, N: total population).
  • Sets a standard below which a person's health is in jeopardy.

Total Poverty Gap (TPG)

  • Income needed to raise everyone below the poverty line up to that line.
  • Sum of the difference between the poverty line and income levels of the poor.
  • Average Poverty Gap (APG): TPG divided by the total population.

Foster-Greer-Thorbecke Index (FGT)

  • Measures the level of absolute poverty.
  • Helps understand income inequality among the poor.

Multidimensional Poverty Index (MPI)

  • Dimensions: health, education, and wealth.
  • Accounts for multiple deprivations.
  • Uses the "dual cut-off method."
    • Cut-off levels within each dimension.
    • Cut-off of the number of deprived dimensions.

MPI Indicators

  • Health: Child mortality and malnutrition (each weighted 1/6).
  • Education: <5 years of schooling and out-of-school children (each weighted 1/6).
  • Standard of Living: Lack of electricity, unsafe water, inadequate sanitation/flooring, unimproved fuel, and asset deprivation.

Sen’s Approach to Poverty and Wellbeing

  • Traditional welfare economics lacks sufficient information to assess social good.
  • Relies on individuals’ capabilities, not just attainments.
  • Income and wealth as instruments, not ends.

Capability to Function

  • Key determinant of poverty status.
  • Commodity production is valued as a means to human welfare.
  • Poverty is the inability to pursue wellbeing due to lack of economic means.
  • Focus on what a person is or can be and does or can do.

Sen's Arguments

  • Against relying solely on poverty percentage/headcount.
  • Need to consider the use of commodities (functionings).
  • Functionings: what a person does or can do with commodities.
  • Freedom of choice is a central aspect of wellbeing.
  • Wellbeing includes health, nutrition, clothing, mobility, self-esteem, and community participation.

Capabilities

  • Ability to do something.
  • Real freedoms to achieve potential.
  • Conversion factors: personal, socio-political, and environmental conditions.
  • Human wellbeing: being well (healthy, nourished, literate, free).

Concept of Inequality

  • Unequal distribution of opportunities.
  • Economic, social, and political dimensions.
  • Economic inequality: disproportionate distribution of national income.

Income Distribution

  • Functional/Factor Share Distribution: Income share of factors of production (land, labor, capital).
  • Personal/Size Distribution: Income distribution among individuals/households.

Functional or Factor Share Distribution

  • Share of national income received by factors of production.
  • Percentages of income distributed as rent, interest, and profit.
  • Explains income of factors by their contribution to production.

Personal/Size Distribution of Income

  • The most commonly used indicator of income distribution.
  • Deals with total incomes received by individuals or households.

Kuznets Ratio

  • Arrange individuals by ascending income.
  • Divide population into quintiles or deciles.
  • Determine the proportion of total income received by each group.
  • Ratio of incomes received by the top 20% and bottom 40%.

Kuznets Ratio as Inequality Measure

  • Ratio of incomes received by the bottom 40% and top 20%.
  • Example: a ratio of 14/51 ≈ 0.28 indicates inequality.

Lorenz Curve

  • Shows cumulative income shares received by individuals or groups.
  • Number of recipients is on cumulative percentage on the x axis and income share by each group is on the y axis.
  • Diagonal Line: Represents perfect equality in income distribution.

Gini Coefficient

  • Measures inequality using the ratio of the area between the Lorenz curve and the line of equality to the total area under the line of equality. (Area A/(A+B))
  • Ranges from 0 (perfect equality) to 1 (perfect inequality).
  • Higher Gini coefficient means higher inequality.

Global and Regional Poverty

  • Poverty conditions have improved over the past half-century.
  • Extreme poverty declined from 36% in 1990 to 10% in 2015.
  • Extreme poverty remains widespread in sub-Saharan Africa.

Global Poverty Statistics

  • In 2010, >1.2 billion people lived on < $1.25/day; 2.4 billion on < $2/day.
  • >700 million people (10% of world population) lived in extreme poverty.
  • Most of those living on < $1.90/day are in sub-Saharan Africa.

Poverty Reduction Strategies

  • Developing countries aim to eradicate poverty.
  • UN Sustainable Development Goals (2015-2030): Goal 1 is to end poverty.
  • World Bank favors Poverty Reduction Strategy Paper (PRSP) process.
  • Inequality has been rising globally.

Women and Poverty

  • Women are a substantial majority of the world’s poor.
  • They experience harsher deprivation.
  • Factors: female-headed households, lower earning capacity, limited control over income.
  • Less access to education, formal employment, social security, and government programs.

Women and Poverty (Cont.)

  • Urban women are less likely to obtain formal employment.
  • Rural women have less access to resources.
  • Social customs and laws restrict property ownership.
  • Biases against females in nutrition, healthcare, education, and inheritance.

Women's Economic Status

  • Higher women's share of income leads to less discrimination against girls.
  • Programs targeting women are more effective for nutrition and health.
  • A large proportion of women's is unremunerated
  • Women’s control over household resources may also be constrained by the fact that many women from poor households are not paid for the work they perform in family agriculture or business.

Addressing Gender Inequality

  • Development policy needs to integrate women.
  • Increase female participation rates in education, training, employment, and agriculture.
  • Ensure equal access to government resources.
  • Formalize informal sector employment.

Long-Term Implications

  • Growth that fails to improve the welfare of the most vulnerable has failed.
  • Low status of women translates to slower economic growth.
  • Women-centered poverty strategies need to challenge basic assumptions.

Poverty and Inequalities in Ethiopia

  • Population~118 million (2021).
  • Strong economic growth averaging 9.8% (2008/09-2018/19).
  • Poverty rate declined from 38% to 24%.
  • One of the poorest countries with $883 per capita income (2019).

Poverty in Ethiopia (Cont.)

  • HDI value of 0.485 (2019), ranked 173 out of 189.
  • 44% earn < $1/day; 89% < $2/day.
  • >12 million people are chronically food insecure.
  • Most poor people are smallholder farmers in rural areas.

Poverty Reduction Efforts in Ethiopia

  • Poverty remains a challenge, especially in rural areas.
  • Rural livelihoods depend on rain-fed agriculture.
  • Inadequate health and education systems.
  • Pursues World Bank’s PRSP process.
  • Conducts regular household income and consumption surveys.

Indigenous Knowledge in Reducing Poverty

  • Accumulated knowledge of local people about their realities.
  • Locally based and dynamic.
  • Used to solve problems within society.
  • Practices serve as pooling resources for a common good.

Indigenous Practices in Ethiopia

  • Ethiopia has diverse cultures with rich indigenous knowledge.
  • Practices unique to localities; others common to wider environment.
  • Idir: Burial society providing support during emergencies.

Idir

  • Most common informal institution in Ethiopia.
  • Also known as traditional burial association that guarantee grieving families the complete assistance (f inancial or otherwise) they seek in times of emergency.
  • Offers financial and other support to members during bereavement.
  • Functions as a group life insurance and it usually has a large membership
  • Members attend funerals and provide assistance.

Iqub

  • Rotating credit association for substantial funding.
  • Acts as a savings club with weekly/monthly contributions.
  • Helps families fund activities like weddings or starting a business.
  • More flexible and accessible than banks.

Iqub and Idir Characterization

  • Iqub and Idir are traditional f inancial associations.
  • Bottom-up socio-economic traditions in Ethiopia.
  • They serve the needs of the society in a sustainable way and they are based on available human or material resources.
  • Guarantee care in times of need through participatory means.
  • Promote accountability, transparency, tolerance, and friendship.

Other Informal Associations

  • Debo: Work group where community members assist each other.
  • Numerous similar institutions play roles in poverty reduction.
  • However, they don't figure out in the formal, documented arena of social and economic life.

Cottage Industries

  • Small-scale manufacturing using conventional methods.
  • Often operated out of homes.
  • Offer employment and self-employment opportunities.
  • Examples: handicrafts, textiles, weaving, leather working, pottery.

Cooperative and Poverty Reduction

  • Cottage industries make important contributions to local and national economies.
  • Have the advantage of employing labor-intensive techniques providing employment, thus reducing unemployment and offering opportunities for self-employment for men and women.
  • Modern cooperatives, like coffee unions, are key for poverty reduction and sustainable development.