2016-03-04Staff Report 2 The well-being of the poor has to be enhanced by addressing and resolving poverty and the reduction of inequality at the same time because they are closely related goals of economic growth and development. Poverty is a situation when the basic needs such as food, clothes, shelter, education, clean water and sanitation cannot be met because people are poor or they do not have income to afford them. As I explained in my previous articles, income (simply money) or wealth is generated as payments (wages, rent, interest and profit) for factors of production (namely, labour, land, capital and entrepreneurship). People are poor when they do not have income to purchase the basic needs for survival. However, the pattern of distribution of factor incomes is not equal among people due to the variation of the distribution of factors of production or ownership and quality of factors of production among people. As an example, a person who has good educational qualifications and experience would receive an attractive salary, compared to a labourer (no education) who looks after cattle. This situation paves the way for some people being poor due to a very low income and others are rich in terms of the high income they receive. In other words, some people are substantially better off than others because of their income. In view of the above, it may be the case that the cattle labourer cannot afford the basic needs as his income is very low, and he is poor. The educated people are rich because of their high levels of income. In view of the above, we can form a situation. There is thus inequality between the two groups of people or in the country, which is the case in Namibia and other developing countries in the world. As poverty eradication is the utmost priority of the government, there is a very good understanding about the nature and extent of poverty and how to eradicate poverty through various policies and implementation strategies. Reduction of inequality is also important along with the commitment to poverty eradication. In this respect, good understanding about the source (s) and extent of inequality or measuring of inequality is very important and relevant. Economists have explained inequality on the basis of the Lorenz Curve and Gini Coefficient. Lorenz Curve can be used to explain changes in income distribution among people and countries over time. Figure 1 is obtained from www.economics online to illustrate the Lorenz Curve. As inequality is related to income and population (people), income and population are shown as cumulative (aggregate) in percentage (%) in figure 1. The maximum equality of income distribution we can expect is that each member of the population or percentage should receive an equal amount of income (i.e. 1:1). This is shown along the 45 degree centre line. As an example, 60% of the population should receive 60% of the national income, so that the income distribution is perfect or inequality does not exist at all. You can work out the abovementioned equality through any point of the cumulative population and income and on the basis of the 45 degree line. However, the reality in a country or the world is not as shown with respect to 60:60 or with respect to other points in figure 1. The reality can be seen along the Lorenz Curve (Information collected through the Household Income and Expenditure Survey can be used to prepare the Lorenz Curve for Namibia). According to the Lorenz Curve in figure 1, 60% of the population receives only 20% of the national income. As a result, there is inequality in income distribution among the people because the relationship between population and income is not 1:1. This situation or inequality of income distribution impacts on poverty as the majority of people are worse off than others. The above is the simple way to understand inequality through the Lorenz Curve. Two Lorenz Corves In a different perspective, the Lorenz Curve can be used to compare the situation of income distribution in two countries with the help of figure 2 which has two Lorenz Curves. On the basis of figure 1, 20:60 represents country “Y” in figure 2. With respect to figure 2, 10:60 (i.e. 60% of the population receives 10% of the national income) is the situation in country “X”. As a result, the income distribution in country “X” is worse than country “Y” (20:60). In other words, country “Y” is better than country “X” on the basis of the income distribution. In fact, figure 2 represents greater inequality in the comparison of two countries. The abovementioned two countries’ (i.e. two Lorenz Curves) situation may be a reality in one country as well because due to many reasons, income distribution could deteriorate over time. Generally, when the Lorenz Curve gradually moves from left to the right or to the 45 degree line (perfect equality), income distribution would improve gradually which is desirable for any country. The opposite of the above (please see the arrow in figure 2) is undesirable as the well-being of the people would deteriorate over time. Information in figure 3 can be used to explain Gini Coefficient which is very popular among economists to explain the pattern of income distribution. Gini Coefficient (this was invented by Corrado Gini – Italian sta-tistician) is a mathematical device to compare income distribution among people and among countries over time. The Gini Coefficient can be used along the Lorenz Curve to explain inequality. As can be seen in figure 3, the area “A” under the 45 degree line (perfect equality) and the area “B” under the Lorenz Curve are used to calculate the Gini Coefficient. As a result, the Gini Coefficient ranges from 0-1. If the Gini Coefficient is closer to 1, it indicates the greater degree of inequality in income distribution. It has been reported that at the time of independence, Gini Coefficient in Namibia was 0.7 and it declined to 0.597 in 2014. Indeed, this is a desirable outcome, but it has been indicated that Namibia is among the countries of high unequal income distribution in the world. This is indeed the reason for reduction of inequality along with commitment to poverty eradication. In this respect, it should be noted that polices and strategies for poverty eradication will help to reduce inequality as well. However, knowledge and understanding the nature and extent of inequality in a deeper sense is essential to poverty eradication as well as reduction of inequality to the desirable level. On the basis of the abovementioned knowledge and understanding, reduction of inequality would require specific policies and strategies. • Dr Asoka Seneviratne is the Director: Programmes and Institutional Development at the International University of Management (IUM), Windhoek. He was the Special Advisor, Office of the President, National Planning Commission (2006-2011) appointed by the President of Namibia. asoka.seneviratne@gmail.com Source: www.conomicsonline.co.uk Gini Coefficient 2016-03-04Staff Report 2
