Poverty & Underdevelopment

Edwin B. R. Gbargaye

Graduate Student, MDM

1st Semester 2010

Pangasinan State University

Prof. Jo B. Bitonio, DPA

What is poverty?

The shortage of common things such as food, clothing, shelter and safe drinking water, all of which determine the quality of life.

It may also include the lack of access to opportunities such as education and employment which aid the escape from poverty

It could be lack of choice: “Beggars cannot be choosers.”

What is poverty?

It could also mean deprivation: According to Mollie Orshansky who developed the poverty measurements used by the U.S. government, "to be poor is to be deprived of those goods and services and pleasures which others around us take for granted.“

It could mean social exclusion: process through w/c individuals or groups are wholly or partially excluded from full participation in the society in w/c they live.

What is poverty?

Or if David Korten is to be believed, poverty

also involves social disintegration and

environmental degradation, which he

describes as forming the threefold human

crisis in the world today.

Caveat

The definition of poverty may differ relative to the norms of each particular society

“The poor of different times & places differ between themselves in virtually every aspect of their conditions, just like the societies of w/c they are part. Who is cast in this way depends not on how the poor live, but on the way society as whole lives.”

—Bauman 1999

The World Bank's "Voices of the Poor," based on research with over

20,000 poor people in 23 countries, identifies a range of factors which

poor people identify as part of poverty. These include:

Precarious livelihoods

Excluded locations

Physical limitations

Gender relationships

Problems in social

relationships

Lack of security

Abuse by those in

power

Dis-empowering

institutions

Limited capabilities

Weak community

organizations

What is poverty?

Not only income, but also

entitlements (related to human rights

& as asserted by Amartya Sen)

Social exclusion

Multi-dimensional aspects of poverty

Who are the poor?

Republic Act No. 8425 - Social Reform and Poverty Alleviation Act, passed by Congress in December 1997:

The poor refers to individuals and families whose incomes fall below the official poverty threshold as defined by the government and/or cannot afford to provide in a sustained manner for their minimum basic needs for food, health, education, housing, and other social amenities of life.

Causes of Poverty: Economic

Historical factors—colonialism & neo-

colonialism; post-communism (political

economy)

Economic inequality/socio-economic

stratification

Recession

Shock to food prices

Causes of Poverty: Governance

Lack of democracy

Governance incompetence & corruption

Weak rule of law

Lack of peace & order

Contributory Factors

Overpopulation

Educational attainment & employable skills

Brain drain

Cultural causes: pre-scientific beliefs

Social discrimination: gender, caste,

race/ethnicity, age, disability, religious/political

beliefs

Matthew Effect

The Matthew Effect It describes the phenomenon that "the rich get richer and the poor get

poorer". Those who possess power and economic or social capital can leverage those resources to gain more power or capital.

The Matthew effect results in a power law distribution of resources. The term was first coined by sociologist Robert K. Merton and takes its name from a line in the biblical Gospel of Matthew:

“For to all those who have, more will be given, and they will have an abundance; but from those who have nothing, even what they have

will be taken away.”

—Matthew 25:29, New Revised Standard Version.

Phenomenon that the middle classes tend to be the main beneficiaries of social benefits and services, even if these are primarily targeted at the poor.

Environmental factors

Erosion

Desertification & overgrazing

Deforestation

Geographic & natural resource factors

Drought & water crisis

Climate change

Effects of Poverty

The effects of poverty may also be causes, thus

creating a "poverty cycle" operating across

multiple levels, individual, household, local,

national and global

"set of factors or events by which poverty, once

started, is likely to continue unless there is

outside intervention."

Sometimes called the “Poverty trap”

Economic inequality

Poverty

Illiteracy/Ignorance

Malnutrition

Weak resistance

Unsanitary

surrounding

Spread of disease-causing

microbes

Sickness

Death

Unsustainable

Family size Lack of investment

Homelessness/

Inadequate housing

Relationship

of Health &

Poverty

Dr. Ruby K. Payne distinguishes

between

Situational poverty, which can generally be

traced to a specific incident within the lifetimes

of the person or family members in poverty;

Generational poverty, which is a cycle that

passes from generation to generation, and

goes on to argue that generational poverty has

its own distinct culture and belief patterns.

Gelia Castillo distinguished poverty

according to the ff:

Stage-in-the-Family-Life-Cycle—poverty for those starting from scratch or those who are in their sunset years have become unemployed

Lifetime poverty—poor from cradle to grave but their children might manage to be better off

Acquired poverty—those who became poor because accident, illness, abuse, abandonment, gambling, alcoholism, etc.

Intergenerational poverty—passing on poverty to the next generation

Situational

Poverty

Measuring Poverty: Absolute Poverty

A set standard which is consistent over time and between locations. An example of an absolute measurement would be the percentage of the population eating less food than is required to sustain the human body (approximately 2000-2500 calories per day for an adult male).

Put another way, it quantifies the number of people below a poverty threshold.

Notice that if everyone's real income in an economy increases, and the income distribution does not change, absolute poverty will decline.

Furthermore, the rate of absolute poverty can decline even though inequality is increasing – as long as the poorest get a higher real income than they had before

Measuring Poverty: Relative Poverty

Views poverty as socially defined and dependent on social context, hence relative poverty is a measure of income inequality.

Usually measured as the percentage of population with income less than some fixed proportion of median income.

Or put another way, it classify individuals or families as "poor" not by comparing them to a fixed cutoff point, but by comparing them to others in the population under study

Notice that if everyone's real income in an economy increases, but the income distribution stays the same, relative poverty will also stay the same

There are several other different income inequality metrics, for example the Gini coefficient or the Theil Index.

What is food threshold?

Also referred to as the subsistence threshold or

the food poverty line

Refers to the minimum income/expenditure

required for a family/individual to meet the basic

food needs, which satisfies the nutritional

requirements for economically necessary and

socially desirable physical activities

What is poverty threshold?

Refers to the cost of minimum basic needs:

food + non-food

Refers to the minimum income/expenditure

required for a family/individual to meet the

basic food and non-food requirements

What is subsistence incidence?

Refers to the proportion of

families/individuals with per capita

income/expenditure less than the per

capita food threshold to the total number

of families/ individuals

What is poverty incidence?

Refers to the proportion of

families/individuals with per capita

income/expenditure less than the per capita

poverty threshold to the total number of

families/individuals

Subjective (self-rated) Poverty Line

Poverty measurement is done by the people themselves called as “bottom-up approach” by Mahar Mangahas.

In principle, people who don’t feel poor should not be counted as such, including those whose level may appear miserable to outsiders; & those who feel poor should be accepted as such including those whom outsiders may regard as well to do.

The difference between bottom-up & top-down approach are not “errors of measurement” but simply difference between the subjective norms of people.

Subjective (self-rated) Poverty Line

Advantages (Mangahas)

Simple & inexpensive, making frequent poverty monitoring possible

Does not depend on pre-determined poverty line. Sufficient in itself to estimate poverty incidence

Can include other variables related to public opinion

Extensive data “cleaning” not required

Limitations (Gaurav Datt, WB)

Self-rated poverty lines are higher than “top-down approach”

Self-rated poverty line has risen rapidly overtime (volatile); no trend is established in the long run

Self-rated poverty line given by poor HH is only slightly lower than non-poor HH.

Gross National Product &

Gross Domestic Product

GNP—total income available for private & public spending in a country; total domestic & foreign output claimed by residents of a country.

What they claim is income, thus GNP is a measure of national income. GNP per capita is average income of each member of the population.

GDP—measures the size of the economy; total final output of goods & services produced by an economy

Limitations

Tells nothing about income distribution

Cannot be used to compare poverty across countries because the wage represented by the average GNP per capita in local currency doesn’t have the same purchasing power for commodities at local prices—but if necessary, use Purchasing Power Parity (PPP) dollars.

Well-being is not totally about purchasing power

What is PPP?

Purchasing power parity (PPP) is an economic technique used when attempting to determine the relative values of two currencies.

It is useful because often the amount of goods a currency can purchase within two nations varies drastically, based on availability of goods, demand for the goods, and a number of other, difficult to determine factors.

PPP solves this problem by taking some international measure and determining the cost for that measure in each of the two currencies, then comparing that amount.

Rough Measure of PPP: Big Mac

Index

An example of purchasing power parity was given by The Economist magazine as the Big Mac® index.

Using the Big Mac® index, the cost of a McDonald's Big Mac® sandwich can be determined in a number of countries, and then an exchange rate can be concluded based on this index.

For example, if a Big Mac® costs $3 US Dollars (USD) in the US, and 9,000 riel in Cambodia, the exchange rate can be determined as $1 USD for 3,000 riel. This indexed exchange rate would then be used to determine relative value of other items.

Computing Big Mac Index

The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency). This value is then compared with the actual exchange rate; if it is lower, then the first currency is under-valued (according to PPP theory) compared with the second, and conversely, if it is higher, then the first currency is over-valued.

For example, using figures in July 2008:

the price of a Big Mac was $3.57 in the United States

the price of a Big Mac was £2.29 in the United Kingdom (Britain) (Varies by region)

the implied purchasing power parity was $1.56 to £1, that is $3.57/£2.29 = 1.56

this compares with an actual exchange rate of $2.00 to £1 at the time

[(1.56-2.00)/2.00]*100= -22%

the pound was thus overvalued against the dollar by 22%

Human Development Index (HDI)

An index used to rank countries by level of "human development", which usually also implies whether a country is a developed, developing, or underdeveloped country.

It is claimed as a standard means of measuring human development—a concept that, according to the United Nations Development Program (UNDP), refers to the process of widening the options of persons, giving them greater opportunities for education, health care, income, employment, etc.

HDI combines 3 basic dimensions:

Life expectancy at birth, as an index of

population health and longevity

Knowledge and education, as measured by the

adult literacy rate (with two-thirds weighting) and

the combined primary, secondary, and tertiary

gross enrollment ratio (with one-third weighting).

Standard of living, as measured by the GDP per

capita (in PPP dollars)

HDI Formula

Dimension = actual value – minimum value

Maximum value – minimum value

In general, to transform a raw variable, say x, into a unit-free index

between 0 and 1 (which allows different indices to be added

together), the following formula is used:

x-index =

where and are the lowest and highest values the

variable x can attain, respectively.

Limitations

Do not consider ecological factors

Criticized the way scores in each of the three

components are bounded between zero and one,

so rich countries effectively cannot improve their

ranking in certain categories, even though there

is a lot of scope for economic growth and

longevity left

Comparative HDI of Selected Countries:

1975-2002

HDIRa

nk Country 1975 1980 1985 1990 1995 2000 2002

1 Norway 0.866 0.886 0.897 0.911 0.935 0.954 0.956

8 United States 0.866 0.886 0.899 0.914 0.926 0.935 0.939

25 Singapore 0.724 0.761 0.784 0.821 0.859 .. 0.902

59 Malaysia 0.614 0.657 0.693 0.720 0.759 0.789 0.793

76 Thailand 0.613 0.651 0.676 0.707 0.742 .. 0.768

83 Philippines 0.653 0.686 0.692 0.719 0.735 .. 0.753

94 China 0.523 0.557 0.593 0.627 0.683 0.721 0.745

130 Cambodia .. .. .. .. 0.540 0.551 0.568

127 India 0.411 0.437 0.476 0.514 0.548 0.579 0.595

176 Niger 0.237 0.257 0.250 0.259 0.265 0.279 0.292

Lorenz Curve

It is a graphical representation of the proportionality of a distribution. It represents a probability distribution of statistical values, and is often associated with income distribution calculations and commonly used in the analysis of inequality.

The population in the Lorenz curve is represented as households and plotted on the x axis from 0% to 100%. The income is plotted on the y axis and is also from 0% to 100%.

For example, a Lorenz curve can show that the bottom 50% of households bring in 35% of a country's income.

The Lorenz Curve model was developed by economist Max Lorenz in 1905.

Lorenz Curve

Sorted by

income

Gini Coefficient

The Gini coefficient is another way to measure equity and is derived from the Lorenz curve.

It is defined graphically as a ratio of two surfaces involving the summation of all vertical deviations between the Lorenz curve and the perfect equality line (A) divided by the difference between the perfect equality and perfect inequality lines (A+B).

If the area between the line of perfect equality and Lorenz curve is A, and the area under the Lorenz curve is B, then the Gini coefficient is A/(A + B).

It is defined as a ratio with values between 0 and 1: A low Gini coefficient indicates more equal income or wealth distribution, while a high Gini coefficient indicates more unequal distribution

Gini Coefficient & Lorenz Curve

The area of the

whole triangle is

defined as 1, not 0.5

Gini

Index

Advantages

It is a measure of inequality by means of a ratio analysis, rather than a variable unrepresentative of most of the population, such as per capita income or gross domestic product.

Can be used to compare income distributions across different population sectors as well as countries, for example the Gini coefficient for urban areas differs from that of rural areas in many countries.

It is simple that it can be compared across countries and be easily interpreted. GDP statistics are often criticized as they do not represent changes for the whole population; the Gini coefficient demonstrates how income has changed for poor and rich. If the Gini coefficient is rising as well as GDP, poverty may not be improving for the majority of the population.

The Gini coefficient can be used to indicate how the distribution of income has changed within a country over a period of time, thus it is possible to see if inequality is increasing or decreasing.