ECON216 LECTURE 6-INEQUALITY MEASUREMENT AND IMPLICATIONS.pdf

ECON 216: INTRODUCTION TO ECONOMY OF GHANA II LECTURE 6 – INEQUALITY MEASUREMENT AND ITS IMPLICATIONS ON THE ECONOMY Dr. Adu Owusu Sarkodie Department of Economics [email protected] College of Education School of Continuing and Dist...

ECON 216: INTRODUCTION TO ECONOMY OF GHANA II LECTURE 6 – INEQUALITY MEASUREMENT AND ITS IMPLICATIONS ON THE ECONOMY Dr. Adu Owusu Sarkodie Department of Economics [email protected] College of Education School of Continuing and Distance Education 2022/2023 – 2023/2024  Session Overview The country’s GDP may be growing all right, but it is not everyone who enjoys the economic growth. The economic actors do not contribute equally to the GDP growth and so do not receive the same income. The session lectures on the measurement of inequality: extent and magnitude. The lecture will introduce students to the trends of inequality in Ghana and their regional distributions. Finally, it talks about the policy options for reducing inequality in the country. Slide 2  Session Outline The key topics to be covered in the session are as follows: ❑ Measure and interpret inequality. ❑ Know the spatial distribution of inequality ❑ Understand how poverty and inequality are related to economic growth. ❑ Know the available policy options to reduce inequality Slide 3  Session Learning Objectives At the end of the session, the student will Understand how inequality is measured. Study the trend of inequality in the country. Know the policies to reduce inequality. Slide 4  Reading List Refer to students to relevant text/chapter or reading materials you will make available on Sakai Required Text 1. Ghana Inequality Report (2018) http://www.gaccgh.org/publications/Ghana_Inequality_Report _2018_WEB.pdf Supplemental Texts – Lecture slides Slide 5 Topic One DEFINING INEQUALITY Slide 6  INEQUALITY: Basic concepts and measurement Measuring Inequality – Size distributions - quintiles (5 categories), deciles (10 categories) – Lorenz curves – Gini coefficients and aggregate measures of inequality 1. Size Distribution of Personal Income in a Developing Country by Income Shares—Quintiles and Deciles  Size distribution ▪ A common method of size distribution is to group the population into quintiles (fifths) and deciles (tenths) after arranging income levels in ascending order, and then determine the what proportion of the national income is received by each income group. ▪ From the table above, there are 20 individuals, with income levels arranged in ascending order (0.8 units to 15 units), all totaling 100 units. ▪ In the third column, the bottom 20% of the population receive 5 units while the top 20% receive 51 units of the national income. ▪ Similarly, in terms of deciles, the bottom 10% receive only 1.8 units whereas the top 10% receive 28.5 units of the national income. 2. The Lorenz Curve ▪ The numbers of income recipients are plotted on the horizontal axis, not in absolute terms but in cumulative percentages. ▪ The vertical axis shows the share of total income received by each percentage of population. ▪ It’s also cumulative up to 100%, meaning that both axes are equally long. ▪ The entire figure is enclosed in a square, and a diagonal line is drawn from the lower left corner (the origin) of the square to the upper right corner. ▪ At every point, on the diagonal line, the percentage of income received is exactly equal to the percentage of income recipients ▪ The Lorenz curve shows the actual quantitative relationship between the percentage of income recipients and the percentage of the total income they did in fact receive during the period. The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of Inequality 3. Estimating the Gini Coefficient ▪ The GINI coefficient measures the relative degree of variation represented in a set of values (especially, incomes) ▪ A higher GINI coefficient signifies a higher inequality, and a smaller value shows a more equal income distribution. 6/6/2024 Topic Two INEQUALITY IN GHANA Slide 15  Introduction ▪ Between 2013 and 2017, Ghana’s GDP per capita increased by 11% – What does this mean? ▪ Has everyone benefitted from this growth? – Have the poorest segments of Ghana's population experienced increases in income? – Benefits of record levels of economic development experienced over the past decade have gone to the wealthy (Oxfam, 2018) ▪ Difference between economic growth and inclusive growth?  Introduction cont’d ▪ Difference between economic growth and inclusive growth? – Economic growth refers to the overall growth in the economy, and generally measured using the concept of Gross Domestic Product or GDP – Inclusive growth is concerned with ensuring that economic growth benefits everyone i.e. More equal society ▪ The bottom 60% of Ghanaians had a 35% share of total national income in 1988, but this declined to 30% in 2012. – Meanwhile, 1,000 more $ millionaires were created between 2006 and 2016. (Oxfam, 2018) ▪ The wealthiest 10% of Ghanaians now share 32% of the Ghana’s total consumption while the very poorest 10% of the population consume only 2%  Some statistics: Gini coefficient analysis Inequality has been rising Gini Coefficient, Ghana: 2006- 2017) in Ghana 43.2 43 Benefits of growth have 43 not been equally 42.8 distributed 42.6 – Some groups have been 42.4 42.3 left out 42.2 42 41.9 41.8 2004 2006 2008 2010 2012 2014 2016 2018  Gini coefficient analysis Inequality in Ghana, by Locality: What do you 2006- 2017 notice about 42 41.5 inequality in rural 41 40.5 and urban Ghana? 40 39.5 39 38.5 38 37.5 2006 2011 2016 Urban Rural Inter-zonal differences in Gini coefficients What area has experienced a persistent increase in inequality over time? What zone has the lowest Gini Coefficient in 2017? Inequality in Ghana, by Geographical Zones: 2006- 2017 46 44 42 40 38 36 34 32 30 2004 2006 2008 2010 2012 2014 2016 2018 Rural Savannah Rural Forest Rural Coastal Urban Savannah Urban Forest Urban Coastal Accra (GAMA)  Regional variations ▪ In 2017, inequality was highest in the Upper West region (Gini: 48.1), followed by the Northern region (Gini: 45.3) – Nearly 30% of the poorest children in the Northern Region have never been to school, compared with just 5% of the wealthiest (Oxfam, 2018) ▪ Clear division with respect to inequality in Ghana, even within one region  A Palma ratio analysis ▪ Some identified limitations of the Gini Index – Cannot provide information on welfare of poorest and richest people, and the gap between them ▪ Palma index takes into account information on the richest 10 percent and the poorest 40 percent of the population – defined as the ratio of the share of the gross national income of the most affluent 10 percent divided by the share of the poorest 40 percent. – E.g. Palma index of 3 means that the consumption of the richest 10 percent is three times higher than the consumption of the poorest 40 percent of the population. Palma index by region What region has the Palma Index, Ghana, 2017 highest inequality? U.West 2.79 Interpret the Palma index for this region. Northern 2.35 U.East 2.22 What region has the Volta 1.76 lowest inequality? B. Ahafo 1.68 Interpret the Palma index Ashanti 1.6 for this region. Central 1.55 Western 1.47 Eastern 1.4 G. Accra 1.38 0 0.5 1 1.5 2 2.5 3  North-South inequality divide ▪ What do you think explains persistence of inequality between northern and southern Ghana? – Discordant climate (with extremes of droughts, flooding and windstorms) Dependence on single annual harvest – Non-inclusive governance practices – High fertility – Colonial influence Heavier investment in south (mining, cash and tree crops, proximity to ports, etc)  Gender and inequality ▪ Oxfam estimates that just one of the richest men in Ghana earns from his wealth more in a month than one of the poorest women could earn in 1,000 years ▪ Only an estimated 6% of the richest people in Ghana are women ▪ Evidence in Ghana points to persistent gender disparities in access to and control of a wide range of assets – human capital assets (education and health) – directly productive assets (labor, land, and financial services) – social capital assets (e.g., gender differences in participation at various levels, and in legal rights and protections)  Gender and employment inequality ▪ Despite increasing participation of women in labour markets they are disadvantaged compared to their male counterparts. – More likely to be engaged in vulnerable employment (i.e. less likely to have formal work arrangements, and are therefore more likely to lack decent working conditions.) – Less likely to be wage workers (family workers) – Wage employment likely to be part-time, seasonal and/or low-paying elementary jobs in the informal economy  Gender and wealth inequality Gender distribution of wealth in Ghana is biased in favour of males – Why? – Women in parts of the country still face notional cultural constraints on their ownership and control over a range of assets – Women dependent on men for permission to access productive resources; difficult to break free of poverty Topic Two FACTORS THAT INFLUENCE INEQUALITY Slide 28  Factors that influence inequality ▪ Endogenous and exogenous factors Endogenous factors – Characteristics or circumstances pertaining to an individual that can determine the future income Intelligence Personality (e.g. responsible, trustworthy, etc) Charisma Physical attributes such as strength or skills, height Gender Race Ethnicity Religion family  Factors that influence inequality ▪ Exogenous factors – external factors that determine income levels land distribution – land distribution is more associated to the rural setting where the possession of more lands means an increase in productivity Education – In a society with poor access to education, the few inhabitants who obtain education may be allocated with positions that come with very high salaries. – Most often, higher levels of education translate into higher salaries. – This brings disparities in the income levels of individuals, thus influencing income inequalities  Factors that influence inequality Exogenous factors, contd. Labour market or wage distribution – Most employment, for example, is found in the informal economy – 88 per cent according to the Ghana Living Standards Survey – most workers earning below the GHC 8 a day or GHC 240 a month minimum wage, still dangerously close to the national poverty level of Ghc4 a day  Why should we be concerned about inequality? 1. Extreme income inequality leads to Economic Inefficiencies – A growth strategy based on sizeable and growing income inequalities may in reality be nothing more than an opportunistic myth designed to perpetuate the vested interests and maintain the status quo of the economic and political elites of developing nations often at the expense of the great majority. 2. Extreme income disparities undermine Social Stability and solidarity. High income inequality strengthens the political power of the rich, as well as the economic bargaining power causing civil unrest and upheavals. 3. Extreme income inequality is generally viewed as unfair. Much of the inequality we see in the world are based on luck or extraneous factors, such as inborn ability. Topic Four POLICIES TO REDUCE INEQUALITY IN GHANA Slide 33  How can we address inequality as a nation? ▪ Government healthcare spending should be increased and be more progressive – NHIS exists but premiums unaffordable ▪ Address education inequalities, particularly for girls – only 26% of the poorest girls from the Northern Region finish primary school, compared with 90% of boys from the richest quintile in Accra – ▪ Fully tap the potentials of social intervention – social protection coverage is low, and its impact on poverty and inequality are constrained by the size of the transfers and insufficient linkages with other programmes and services How can we address inequality as a nation, contd.? ▪ Address inequalities in the labour market e.g. informal sector employment, youth unemployment, etc – The wage gap between political elites and higher-income groups on one hand, and the rest of the population on the other, keeps widening. For example, the basic salary and allowances of a minister of state is about 103 times the monthly minimum wage set by the government in 2017 (Oxfam, 2018) ▪ More representation for women in political positions and policy making processes at both local and national levels – Women account for only 11% of the 275 seats in Parliament and comprise only 8.2% of District Chief Executives at the local government level. The situation is far worse in the Northern Region, where women’s representation is just over 3% How can we address inequality as a nation, contd.? ▪ Wealth and asset ownership should be more evenly distributed among men and women – women are half as likely as men to own land, and almost twice as many men are owners of their place of residence compared with women – Wealth and asset ownership also varies geographically – women’s share of wealth ranges from 39.2% in the Central Region to as little as 3.8% in the Upper West Region  Concluding remarks ▪ In recent times, several poverty reduction strategies have been adopted in Ghana. ▪ These include the Savannah Accelerated Development Authority (SADA) and social cash transfer programmes such as the Livelihood Empowerment against Poverty (LEAP). ▪ While these programmes are important for poverty reduction, directing them towards specific income components will be crucial for effective pro-poor income distribution.  Take home exercise 1. How is inequality measured, and why should we be concerned about it? 2. What factors do you think contribute to inequality in Ghana? 3. What interventions are there to reduce poverty and inequality in Ghana.  References Ghana Statistical Service at www.statsghana.gov.gh Slide 39