Chapter5 inequality - de Janvry and Sadoulet de Janvry and...

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de Janvry and Sadoulet 1 9/11/10 Chapter 5 Inequality and inequity September 15, 2010 By contrast to poverty, inequality is not measured relative to an arbitrary threshold: it does not require specification of a poverty line. However, it is more demanding in terms of data as it requires information on the expenditure level of not just the poor but all individuals in the population. 1 1. Describing and measuring inequality 1.1. Describing inequality: the Lorenz curve By analogy with the poverty profile, a graphic representation of inequality is given by the Lorenz curve (Figure 1). It is constructed using the expenditure (or income) levels for a representative sample of the population for which we want to measure inequality, say the inhabitants of a country. We first rank individuals from the poorest to the richest. We then represent the cumulative percentage of the population on the horizontal axis, and the corresponding cumulative percentage of expenditures on the vertical axis. The plot we obtain is the Lorenz curve. It gives us for example what percentage of total income is held by the 5% poorest, the 10% poorest, etc., until 100% of income has been accounted for. We can construct a Lorenz curve to characterize inequality in the distribution of other variables of interest such as land, education, and livestock. If income were perfectly equally distributed among members of the population, the Lorenz curve would the 45 degree line. If it were maximally unequally distributed, with all income held by just one person, the Lorenz curve would be the outer edge of the 100x100 box. The further away the Lorenz curve is from the 45 degree line, the more unequal is the distribution of income. 1 A useful reference on inequality measures is the World Bank’s (2005) Poverty Manual. Take home messages for Chapter 5 1. Inequality is an absolute concept that does not require definition of a threshold such as the poverty line. However, measuring inequality requires having information over per capita expenditures for the entire population. 2. Inequality is not as easy to decompose by population sub-groups as the P ! poverty indicators, but it can be decomposed by sources of income (Gini) and by within- and between-groups (Theil). 3. High inequality is generally thought to reduce economic growth in the long term, making greater equality both intrinsic to well-being and instrumental to sustained growth. However, there are likely short term trade- offs between growth and equality. 4. Inequality is unlikely to be reduced simply by higher levels of GDPpc, following the Kuznets-inverted U curve, or by higher levels of economic growth, meaning that specific policies to reduce inequality must be introduced if reducing inequality is a policy objective. 5. Lower inequality helps growth make a larger contribution to poverty reduction. If “pro-poor growth” is
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Chapter5 inequality - de Janvry and Sadoulet de Janvry and...

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