Explain the relationship between income and poverty
Answers
Answer:
there is a technical link between
poverty and inequality. For a given level of income, small changes in the
income distribution (or the level of inequality) can have large effects on
reducing absolute poverty (both the extent of poverty but also the depth
and the severity of poverty). Conversely, (and as has been demonstrated
by a number of studies in the international development literature), for a
given level of inequality, growth is a mathematical condition for poverty
reduction (Bourguignon, 2004; Deininger and Squire, 1997; Dollar and
Kraay, 2001). Regarding this issue it should be stressed, however, that
when referring to poverty, most studies in the international development
literature refer to an absolute notion of poverty (poverty measured against
a fixed cut-off). When poverty is measured in relative terms, it is still likely
that increases in dispersion of income lead to corresponding increases in
poverty. However, it is also equally likely that poverty may not follow
changes in the income inequality if all the action takes place above the
median (which is the typically used poverty threshold). Conversely, poverty
could increase without inequality increasing if median incomes increased
while top incomes reduced (and vice versa). Indeed as Bourguignon (2004)
notes “…a relative definition of poverty – sometimes referred to as ‘relative
deprivation’ – becomes in some sense independent of growth. The absolute
level of income and therefore a large part of the development process does
not matter anymore with such definition. Only relative income, or pure
distributional features matter. Fixing the poverty line relative to average
incomes can show rising inequality even when the standards of living of the
poor have in fact risen. There is an increasing consensus among economists
that relative deprivation matters, but there does not appear to be a
consensus that individual welfare depends only on one’s relative position
and not at all on absolute standards of living as determined by incomes.”
Despite the lack of consensus in the literature on how to define and
measure individual welfare, there is little doubt, that for a given rate of
growth, the initial level of inequality and how the pattern of growth changes
inequality over time can determine the effectiveness (or ineffectiveness) of
(absolute) poverty reduction strategies and policies (Bourguignon, 2004).
For many years the dominant view in the economic and political debates
was that higher levels of inequality provide the incentives that drive
economic growth (Lazear and Rosen, 1981) and raise savings and
investment (Kaldor, 1957) which in turn will accrue benefits for the middle
and lower parts of the distribution through higher real incomes. More
recently, however there has been a shift away from this thinking and
towards the position that inequality is detrimental to economic growth and
the real income of people in the middle and lower parts of the income
distribution.