Topic 2: Poverty and Inequality (NU Dasmariñas)

DISCUSSION DOCUMENT IN ECONOMIC DEVELOPMENT (BAECODEX) TOPIC 2 POVERTY AND INEQUALITY Prepared by Azelle Charese A. Tayson, MBA, LPT Subject Professor 1 ...

DISCUSSION DOCUMENT IN ECONOMIC DEVELOPMENT (BAECODEX) TOPIC 2 POVERTY AND INEQUALITY Prepared by Azelle Charese A. Tayson, MBA, LPT Subject Professor 1  TOPIC 2 POVERTY AND INEQUALITY Learning Objectives By the end of this topic, learners will be able to 1. Understand the Malthusian Theory's core principles on population growth and resource constraints. 2. Recognize its implications for poverty, especially in rapidly growing and economically underdeveloped regions. 3. Explore how technological advancements impact the theory's relevance today. 4. Analyze the importance of equitable resource distribution and sustainable management in poverty reduction. Introduction Poverty and inequality are global phenomena with far-reaching social, economic, and political consequences. Poverty, typically assessed through income levels and access to fundamental resources, reflects the inability to meet basic living standards. Conversely, inequality emphasizes the plain differences in income, wealth, education, healthcare, and opportunities among diverse segments of society. These intertwined issues often reinforce each other, as inequality can perpetuate poverty, and poverty can worsen inequality. This chapter provides a concise exploration of the complicated dimensions of poverty and inequality, emphasizing their intricate interplay and the deep effects they exert on individuals, communities, and nations. Furthermore, it considers strategies and initiatives to address these complex challenges, spanning local and global contexts. Malthusian Theory and Poverty The Malthusian Theory, made known by the Reverend Thomas Robert Malthus in the late 18th century, remains a essential concept in understanding the dynamics of population growth and its relationship with poverty. At its core, this theory asserts that population tends to grow exponentially, while the means of subsistence, primarily food production, grows at a slower, linear rate. This mismatch between population and resources leads to what Malthus termed "checks on population," which include factors like famine, disease, and wars. Malthus's theory had significant implications for poverty, and it's worth noting that in some developing countries, aspects of this theory still hold true today. These regions often experience rapid population growth without corresponding increases in agricultural productivity or economic development. As a result, they contend with challenges related to food security, limited resources, and persistent poverty. 2  However, it's essential to recognize that the global context has evolved since Malthus's time. Technological advancements, particularly in agriculture, have led to increased food production and improved living standards in many parts of the world. Nonetheless, the Malthusian Theory serves as a historical reference point in the study of poverty and population dynamics, reminding us of the complex relationship between demographic factors and economic well-being. It highlights the ongoing need for sustainable resource management, equitable distribution, and targeted development efforts to lessen poverty, particularly in developing countries where Malthus's concerns remain relevant. The Viscious Cycle of Poverty The vicious cycle of poverty" has been widely used in academic and policy discussions to describe the self-reinforcing mechanisms by which poverty can persist and even deepen over time. This concept has been built upon and expanded by many scholars and researchers over the years to encompass various factors such as low employment, low income, low savings, low investments, and low production. Figure 1. The Vicious Cycle of Poverty In impoverished regions, the vicious cycle of poverty begins with low employment opportunities due to high unemployment rates and limited industries. This results in low income, as many are forced into low-paying, informal, or seasonal jobs that can't cover basic needs. With meager incomes, savings become a luxury, leaving families financially vulnerable. Consequently, there are limited funds available for investments in education, skills development, or income- generating activities, which continues the cycle. This lack of investment leads to low productivity, as individuals can't access quality education or resources, keeping their economic potential underutilized. 3 Absolute Poverty and Relative Poverty Absolute poverty pertains to a situation in which individuals or families do not have access to the most basic necessities for survival, including food, clean water, shelter, healthcare, and education. An essential tool for identifying absolute poverty is the "poverty line," a benchmark income level set by governments or organizations. This threshold is adjusted over time to account for changes in purchasing power and cost of living. Absolute poverty is a plain and distressing condition that leaves individuals and families without access to the most fundamental requirements for survival. It is a concept deeply tangled with the idea of the "poverty line," which serves as a crucial yardstick for measuring whether people have the means to meet their basic needs. This poverty line isn't a static figure; rather, it's a benchmark income level established by governments or organizations. It takes into account various factors, such as the cost of living and purchasing power, to ensure it remains relevant over time. When a person's income falls below this threshold, they are officially considered to be living in absolute poverty. The root causes of absolute poverty are complex and interconnected. Income inequality, for instance, can significantly contribute to absolute poverty by concentrating wealth among a small portion of the population. Meanwhile, a lack of education limits opportunities for better employment, and high levels of unemployment or underemployment trap people in poverty. Health issues can also play a role, sapping resources and limiting income-earning potential. Political and social factors, such as conflict, corruption, and discrimination, can further exacerbate poverty by hindering economic growth and development. Relative poverty, often referred to as inequality, involves comparing the economic status of the poor in relation to the more affluent segments of society. It centers on the disparities between income and expenditure levels of different groups within a society. This perspective highlights the broader economic context and social dynamics that contribute to poverty. Alongside absolute poverty, there exists another critical aspect of poverty known as relative poverty, often referred to as inequality. Relative poverty frames poverty in the context of comparing the economic status of the poor with the more affluent segments of society. It goes beyond a mere measurement of basic needs and income levels, instead focusing on the disparities in income and expenditure between different groups within a society. This perspective sheds light on the broader economic context and the intricate social dynamics that contribute to poverty. In a society marked by relative poverty, the emphasis lies not only on whether individuals can meet their basic needs but also on their relative position within the economic hierarchy. This concept underscores the significance of social inclusion and participation. Relative poverty can lead to social exclusion and limit individuals' opportunities to engage fully in their communities and economies. It highlights the importance of addressing not only material deprivation but also the systemic inequalities that create and perpetuate disparities in income and wealth distribution. Addressing both absolute and relative poverty is crucial for creating a more equitable and just society. It involves not only ensuring that everyone has access to basic necessities for survival but also striving to reduce income inequality and promote social cohesion. Combining efforts to alleviate absolute poverty with policies aimed at reducing relative poverty can lead to a more 4 inclusive and prosperous society, where individuals are not only able to survive but also thrive and actively participate in the economic and social life of their communities. Poverty and the World Poverty is not a static phenomenon but rather varies based on the prevailing standard of living within a specific country. To address this, a poverty threshold is established to determine who falls below this line and is considered impoverished. The threshold accounts for the unique economic landscape of each country. Extreme poverty goes beyond monetary measures and encompasses the deprivation of basic human needs such as nutrition, clean water, sanitation, housing, and healthcare. It also extends to access to information and opportunities, which are crucial for breaking the cycle of poverty. Poverty remains one of the most pressing and enduring challenges facing the world today. As we explore the dynamics of poverty within the context of economic development, it becomes evident that this issue transcends geographic boundaries and socioeconomic distinctions. Poverty, in its various forms, not only hinders individual well-being but also poses significant obstacles to overall economic progress and social harmony. The COVID-19 pandemic, which swept across the globe, served as a reminder of the severity of this challenge. It highlighted the fragility of poverty reduction efforts worldwide, as the disruption caused by the pandemic, including economic contractions and lockdowns, led to the first significant increase in global poverty in years. Over 71 million people were pushed into extreme poverty during 2020 alone. This crisis underscored the urgency of addressing poverty on a global scale and the critical role played by developed countries in raising awareness about the struggles of impoverished nations, including issues such as child abuse. Measuring Poverty Poverty, in all its complexity, is a challenge that governments, organizations, and societies worldwide endeavor to tackle. It's a problem that demands not only attention but also a systematic way to measure and understand its extent. Two key metrics in this endeavor are the poverty line and the poverty rate, which together provide critical insights into the prevalence of poverty within a society. The poverty line is a fundamental concept in the measurement of poverty. It represents the minimum income or resources required to cover the cost of basic necessities for an individual or a family. These necessities typically include food, shelter, clothing, healthcare, and education. Governments or organizations set this threshold, which varies from place to place and evolves over time to account for changes in the cost of living and purchasing power. The poverty line serves as a benchmark, a reference point that distinguishes those who have access to these basic necessities from those who do not. 5  Once the poverty line is established, the poverty rate is calculated. This rate provides a quantitative measure of poverty prevalence within a society. It represents the proportion of the population that falls below the established poverty line. In essence, it tells us how many people within a given population are living in poverty. In the context of the Philippines, there is a specific measure known as subsistence incidence. This metric goes beyond the poverty line and digs deeper into the most basic level of poverty, focusing on those who cannot afford the minimum food and non-food essentials required for survival. Subsistence incidence helps identify those in extreme need, offering insights into the most vulnerable segments of the population. In addition to subsistence incidence, there is poverty incidence, which provides a comprehensive view of poverty in the Philippines. Poverty incidence considers the percentage of the population living below the poverty line, encompassing both basic needs and broader living standards. This metric takes into account various dimensions of poverty, including income, education, and healthcare access. Both poverty incidence and subsistence incidence are crucial tools for policymakers, researchers, and advocates in the Philippines and beyond. They allow for the monitoring and assessment of poverty trends over time, enabling the identification of vulnerable groups and regions. Moreover, they aid in the evaluation of the effectiveness of poverty alleviation programs and policies. Lorenz Curve of Inequality Inequality encompasses disparities in income, wealth, education, healthcare access, and opportunities, among other aspects of life. It serves as a stark reminder of the uneven distribution of resources and opportunities, affecting individuals and communities in profound ways. By examining inequality, we can begin to unravel its root causes, grasp its consequences, and explore the tools available for measuring and addressing this pervasive challenge. The Lorenz Curve is a graphical tool that paints a vivid picture of income distribution within a society, offering real-world insights into the dynamics of wealth and inequality. To understand the power of the Lorenz Curve, let's investigate into its key components and consider examples that illustrate its significance in understanding income distribution. 6 Figure 2. Lorenz Curve of Inequality In a hypothetical world of perfect equality, each member of society would possess an identical share of the total income. Picture a scenario where everyone's income is exactly the same. In this ideal state, the Lorenz Curve would be a straight diagonal line, often called the "line of perfect equality." However, this utopian vision rarely materializes in real-world economies. The Lorenz Curve's deviation from the line of perfect equality quantifies the degree of income inequality within a society. The further the Lorenz Curve strays from this line, the greater the income inequality. This gap between the Lorenz Curve and the line of perfect equality illustrates the concentration of income among different segments of the population. Actual Income Distribution The Lorenz Curve's shape, compared to the line of perfect equality, reveals the actual income distribution in a society. Let's explore examples to understand this concept better: 1. Concave Curve. Consider a country where the Lorenz Curve bows significantly below the line of perfect equality. In this scenario, a relatively small percentage of high-income individuals or households control a substantial portion of the total income. The majority of the population is left with a smaller share, highlighting significant income inequality. 2. Convex Curve. Now, envision another society where the Lorenz Curve arches above the line of perfect equality. Here, income distribution is more equitable, with a more extensive portion of the population enjoying a fairer share of the total income. This suggests that income is more evenly distributed among the population. 3. Linear Curve. While rare in reality, a linear Lorenz Curve represents a situation where income distribution closely approximates perfect equality. It signifies a society where income is evenly spread among its members, with minimal income disparities. The Lorenz Curve graphically represents income inequality within a society. It plots the cumulative 7  share of population against the cumulative share of income. The greater the divergence from the line of perfect equality, the higher the income inequality. The Poverty Trap and Strategies for Poverty Reduction The poverty trap is a phenomenon that occurs in systems with means-tested social security benefits. It arises when marginal increases in earnings lead to overall decreased well- being due to loss of benefit entitlements. Imagine you're getting help from the government because your income is very low. This help is there to make sure you can afford basic things like food and housing. But, here's the tricky part, when you start making a bit more money, you might lose some or all of that help. So, even though you're earning more, you don't end up better off because you lose the help you were getting. This can be frustrating because it feels like you're stuck in a low-paying job or situation, unable to make more money without losing the support you need. It's like being caught in a trap, which is why it's called the "poverty trap." It's a challenge for people who want to improve their lives, and it's something that policymakers and others are trying to make better by changing the rules so that earning more money doesn't mean losing the help you need. To combat poverty, a range of strategies is being implemented globally: 1. Cash transfers 2. In-kind transfers 3. Work incentives 4. Minimum wage laws 5. Adjustments to tax codes The United Nations' Social Development Goals emphasize several key actions for addressing global poverty: 1. Enhancing access to sustainable livelihoods and entrepreneurial opportunities 2. Providing universal access to essential social services 3. Developing social protection systems to aid vulnerable populations 4. Empowering individuals living in poverty and their organizations 5. Addressing gender-based disparities in poverty 6. Increasing international cooperation and allocation of resources to poverty reduction Summary This chapter explores into the pervasive and interconnected issues of poverty and inequality, offering a concise overview of their global significance. Poverty, characterized by 8 insufficient resources to meet basic needs, coexists with inequality, which manifests as disparities in income, wealth, and access to essential services. These intertwined challenges have profound implications for societies, affecting individual well-being and economic stability. Poverty and inequality often perpetuate one another, creating self-reinforcing cycles that hinder social progress. Poverty is complex in nature, it covers absolute poverty, marked by deprivation of basic necessities, to relative poverty, which emphasizes disparities in living standards within societies. The poverty line, a key tool in measuring poverty, provides benchmarks for assessing access to fundamental resources. Additionally, this chapter explores inequality, examining its various dimensions, including income, education, healthcare, and opportunities. The Lorenz Curve illustrates the distribution of wealth and income, highlighting the disparities that exist. While acknowledging the complex challenges posed by poverty and inequality, the chapter also highlights strategies to address these issues. Cash transfers, in-kind assistance, work incentives, minimum wage laws, and tax code adjustments are among the measures employed globally to combat poverty. The United Nations' Social Development Goals emphasize the importance of sustainable livelihoods, universal access to social services, social protection systems, empowerment, gender equity, and international cooperation in poverty reduction efforts. Reflection Questions 1. In what ways does income inequality, as depicted by the Lorenz Curve, influence economic and social dynamics within a society? How can policies and initiatives be designed to promote more equitable wealth distribution and reduce disparities? 9