Poverty

Stop Conflating Inequality With Poverty

By  Bryan Cheang

The problem of inequality has often been considered to be one of the biggest social problems of our generation.

Widespread concern about the great disparities of income and wealth have fueled anti-globalization sentiments all around the world, and threaten to undermine the advances in trade, investment, and immigration we have seen.

One key problem is that contemporary discussions of inequality have often conflated it with poverty. Not only are inequality and poverty conceptually distinct, a failure to distinguish between them can lead to problematic policy conclusions. Additionally, when market advocates criticize redistributive policies and government welfare programs, they are seen as anti-poor. Thus, separating these two concepts can help market advocates regain the moral high ground in this debate.

Conflating Inequality and Poverty

It is generally assumed that inequality implies poverty, i.e. the rich people are prospering, so poor people must be suffering. This conflation is very subtle and is best seen through the presentation of inequality in the widely-used high school economics textbook Economics (7th ed) by John Sloman (2009). According to Sloman (2009, p. 276):

Inequality is one of the most contentious issues in the world of economics and politics. Some people have incomes far in excess of what they need to enjoy a luxurious lifestyle, while others struggle to purchase even the basic necessities. The need for redistribution from rich to poor is broadly accepted across the political spectrum. Thus the government taxes the rich more than the poor and then transfers some of the proceeds to the poor, either as cash benefits or in kind.”

The chapter seeks to explain the phenomenon of inequality but, almost imperceptibly within this opening paragraph, implicitly suggests that under such unequal situations, there are poor people who “struggle to purchase even the basic necessities.” In fact, this is not necessarily the case.

Inequality in relation to income simply means the existence of a gap between those who earn the most and those who earn the least. The mere existence of an income gap, even if it’s widening, says nothing about the actual income levels of those who do earn the least. In other words, an income gap does not necessarily mean that those at the lowest income brackets are poor. Just because Bill Gates is loaded with greenbacks and is many times richer than I am does not, by itself, suggest that I am “poor” in an absolute sense.

It is clear that a society with a very uneven distribution of income can still be one with high levels of absolute prosperity, in such a way that even those who earn the least (relatively) have enough to survive – comfortably.

Implications of the Conflation

Not only is it possible that the least well-off in unequal societies have enough to survive, it is actually likely for them to be much better off in unequal societies than in more equal ones.

Assuming the absence of crony capitalism, income inequality is a corollary of a free, dynamic, and growing economy that increases prosperity for all.

Attempts to close inequality through standard welfare-state policies such as redistributive taxes, subsidies, minimum wage laws, price controls, and the public provision of “free social goods” like health care can, and often have, slowed down economic growth. Thus impacting the generation of wealth that the least-well-off depend on.

If poor people were truly at the centre of our attention, we should endorse inequality.

Put another way, policy attempts to fight inequality retard economic growth, slow down poverty reduction at best, and exacerbate poverty at worst.

Aside from the economic costs of state-centric welfare programs, there are less quantifiable human costs as well. Generous welfare programs often trap individuals in a state of dependency on the government, which not only disincentivizes them from working but robs them of the dignity and sense of achievement that comes from earning their own income and being independent and self-sufficient.

Consequently, if poor people were truly at the center of our attention, we should endorse inequality, or at least the market system it is based on. When people are left free to trade, invest and innovate in the market, inequality is inevitable simply because people are different, and some may be more adept at spotting profit opportunities. Yet, if this system is left largely unhampered, it generates vast amounts of wealth that benefits everyone, including the least well off.

This is precisely why poverty rates have fallen dramatically in the recent age of globalisation, and, to that extent, so has global inequality.

The above does not mean that there is no role for government in social policymaking. Yet there is a need to ensure that implemented policies facilitate wealth-creation for all rather than redraw the relative shares of the economic pie. The social policies implemented in the country of Singapore provide useful lessons on how best to help the least well off in any society.

Social Policies that Reward Working

Singapore’s main “welfare” scheme is titled “Workfare”.

Singapore’s social-welfare system is based on the fundamental principle of meritocracy,considered a cardinal principle in the Singaporean psyche. It has been said that one of the shared values in Singapore is “work for reward, reward for work.” Even where government assistance is provided to the least-well-off, such schemes are carefully designed to promote and encourage work and thus to promote self-reliance. The belief is that Singaporeans should work and take care of themselves, rather than solely depend on the government.

These principles are reflected in several key initiatives. A testament to its pro-work orientation, Singapore’s main “welfare” scheme is titled “Workfare”. One of its components is the Workfare Income Supplement, which provides a cash payment to low-income individuals who are working. It is not a “free handout” but essentially an incentive to encourage work.

A further illustration of Singapore’s pro-work orientation is the other component of this policy: a training support scheme, which incentivizes workers to upgrade their skills in order to increase their productivity and thus their earning potential.

Singapore has also deliberately rejected a national minimum wage law. In its place, it has instead introduced a targeted “Progressive Wage Model” in several low-wage sectors such as cleaning, security, and landscaping. Employers in these sectors are expected to pay their workers a minimum but are also incentivized to send them for retraining in order to increase their productivity. Where typical minimum wage legislation simply expects employers to pay the mandated wage, Singapore’s take on it goes further in its encouragement of productivity improvements.

Singapore’s leaders have opted to pursue growth-oriented policies.

Subsidies are also provided but only in a limited and targeted fashion. In the healthcare sector, for example, individuals are expected to make co-payments for their medical expenses and cannot rely on government subsidies to simply cover 100% of their bill. More aid is in fact given to the neediest individuals who cannot afford even basic essentials, but the principle of self-responsibility looms heavy in the Singapore system. Not surprisingly, health outcomes in Singapore far exceed those of the United States, even though it spends only a fraction of its GDP on health care in comparison to the USA.

Growth-Oriented Policy

These Singaporean social policies might remain anathema to purist libertarians, who prefer to eliminate all social assistance entirely, but if we must have social welfare policies in the world of here and now, there is a lot to admire in this system.Particularly when observing its targeted, limited nature and its pro-work, pro-responsibility orientation.

Singapore’s leaders have managed to identify the difference between inequality and poverty, and have opted to pursue growth-oriented policies, sometimes even at the expense of the income gap. The Prime Minister Lee Hsien Loong said in 2013:

If I can get another ten billionaires to move to Singapore, my Gini coefficient will get worse, but I think Singaporeans will be better off because they will bring in business, bring in opportunities, open new doors, and create new jobs.”

In conclusion, there is cause for concern about most societies’ obsessive focus on inequality at the expense of the very poor. Conflating inequality and poverty can ironically lead to misguided policies that ultimately hurt the poor.

The next time you’re asked about whether you care about the “problem of inequality”, respond in the negative and that you care too much for poor people instead. Market advocates should always frame markets as a powerful, poverty-killing device, and regain the moral high ground in this most essential debate.

References:

Sloman, John, & Wride, Alison (2009). Economics (7th ed.). Edinburgh Gate: Pearson Education.

Republished from FEE.org

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Why is the number of poor people in Africa increasing when Africa’s economies are growing?

By Laurence Chandy

2015 marks the 20th year since sub-Saharan Africa started on a path of faster economic growth. During that period, growth has averaged 5.2 percent per year. Meanwhile, the number of people on the continent reportedly living under $1.25 a day has continued to creep upwards from 358 million in 1996 to 415 million in 2011—the most recent year for which official estimates exist.

What can explain these divergent trends? 

The most obvious explanation would be if all the benefits of growth were captured by the rich, resulting in ever-increasing inequality within each country. But the data don’t show much evidence of that, thankfully. Distribution trends within African countries are a wash: The distribution is widening in about as many countries as it is narrowing. And in most countries the distribution isn’t changing much at all. It might be that the very richest people—the top 1 percent—are enjoying more than their share of the spoils of growth but that this is missing from the data, as this rarified class tends not to participate in household surveys from which distributions are derived. Yet, in the absence of supplementary data to back this theory up, such as the tax records used to measure top incomes in rich countries, this is mere speculation. Moreover, there is certainly evidence of rising average incomes for the people who do participate in surveys. 

Instead, there are five factors that can account for sub-Saharan Africa’s disappointing poverty numbers.

The first is the region’s rapid population growth of 2.6 percent a year. While African economies are generating more income, that income has to be shared among an ever-increasing number of people. Since the region’s income is growing faster than its population, average incomes are rising and the share of Africans living in extreme poverty is falling—from 60 percent in 1996 to 47 percent in 2011. But the rate at which poverty is falling is less than the rate at which the population is rising, so the number of people living in poverty continues to grow. More generally, sub-Saharan Africa’s record on economic growth looks much less impressive in per capita terms. The World Bank has just released a revised growth forecast for the region in 2015 of 4.0 percent. When you lop off 2.6 for population growth, you’re left with per capita income growth of only 1.4 percent. Compare that with the world average where projected economic growth of 2.9 percent combined with population growth of 1.1 percent results in per capita income growth of 1.8 percent in 2015. So, in per capita terms, Africa’s growth this year is expected to be below the global average.

The second factor is the depth of Africa’s poverty compared to poverty elsewhere. In other words, poor people in Africa start further behind the poverty line. So even if their income is growing, it is rarely enough to push them over the $1.25 threshold. In 2011, the average person living in extreme poverty in Africa lived on 74 cents a day, whereas for the rest of the developing world, it was 98 cents. I’ve written before about the implications of this trend for poverty reduction in Africa here.

The third factor is that even though inequality isn’t rising in most African countries, inequality is already at unusually high levels. Where initial inequality is high, it is to be expected that economic growth delivers less poverty reduction, since the absolute increases in income associated with rising average incomes will be that much smaller for the have-nots versus the haves. Moreover, the degree of inequality that exists on the continent is worse than it looks. The fact that Africa is divided into so many countries masks big differences in income between them. If Africa were a single country, its inequality would look much worse—worse even than Latin America. Since incomes across African people vary so widely, only a fraction of people are likely to cross the poverty line at any one time. That contrasts with India where a concentration of people immediately below the $1.25 mark means that even a small increase in incomes can result in a sudden flood of people moving above the poverty line.

The above three factors explain why you would expect relatively little poverty reduction for a given amount of growth in Africa compared to elsewhere (in technical terms, a lower poverty elasticity). But they can’t explain why the number of poor people in Africa has actually increased since the start of the century. For this we need the two final factors.

The fourth factor is that there is a degree of mismatch between where growth is occurring and where the poor are on the continent. To be sure, the region’s growth acceleration has benefited some of its poorest countries, including Ethiopia, Mozambique, and Rwanda. Yet others such as the Democratic Republic of the Congo and Madagascar have recorded little or no growth over the past 20 years, and the number of poor people in these countries has risen accordingly. So long as a handful of the region’s fragile states struggle to build and sustain economic momentum, the number of poor people in Africa need not fall. 

The fifth and final factor concerns data quality. Poverty estimates are drawn from household surveys which in most African countries are conducted infrequently. Those that do take place often suffer from operational glitches that affect the credibility of the results. Take Nigeria, which accounts for a quarter of the people on the continent living in poverty. There are some well-documented flaws with its most recent national survey of living standards (not to be confused with the issues concerning the country’s national accounts, which were recently rebased). When new data become available, be prepared to discover that Nigeria’s poverty rate is considerably lower and has been falling at a faster pace than previously thought. As a general rule, aggregate poverty numbers for Africa should be handled with care, and small increases or decreases should not be taken too seriously.

The dissonance between Africa’s growth performance and its poverty numbers is a striking phenomenon that demands an explanation. While intuition may lead us to call into question the region’s growth—it only benefits the rich, the quality of growth is deficient, the growth numbers are exaggerated—the above five factors suggest that the answer can instead be found by analyzing Africa’s poverty data more closely.  

 

Laurence Chandy is a former fellow in the Global Economy and Development program and the Development Assistance and Governance Initiative. His research focused on poverty, fragile states, aid effectiveness, and globalization.

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