RELATIONSHIP BETWEEN INEQUALITY AND POVERTY

BASHIR OLAYINKA KOLAWOLE* kola_olayinka@yahoo.com +2348023526175

* Department of Economics, Lagos State University, Ojo, Lagos

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In an attempt to explain the relationship between inequality and poverty, it is of
paramount importance to view each concept individually and then identify, in
each, which features are common to both, and which are not.

As such, by definition, poverty refers to the economic status of some members

in a society relative to others. ‘Relative Poverty’ in this definition concerns such
questions as what percentage of total income is received by the bottom 10
percent of households and how poor their standards of living are as compared
with richer people. As such, poverty is the problem of inequality in income
distribution.

In another form, ‘Absolute’ poverty may be defined, according to Hayami and

Godo (2005), as the status of a person (or persons) whose material well-being is
below a certain minimum level deemed reasonable by the standards of a society
to which he belongs. The level of material well-being in this context is
commonly conceptualized as ‘the standard of living’ that is measured in
economic analysis by the aggregate market value of private goods and services
consumed by the person (usually not including public goods). Following this
approach, poverty in a society is measured in terms of the number of persons
whose living standards are below a certain minimum as well as their distances
from the minimum level.

Conceptually other approaches are also possible. For example, it is perfectly

legitimate to define poverty as the status of a person who is deprived of
opportunities to realize human capability inherently given to him, including
access to such public services as education and health care (Sen, 1999). Yet,
because of the difficulty of measuring the extent and scope of such
opportunities, economists have had to use the standard of living approach for
the empirical analysis of poverty in most cases.

Inequality, basically, may be defined as the disparity which exists in the

distribution of income among people. The problem of income distribution is
commonly understood as the problem of “personal income distribution”. That
is, how equally or inequally incomes are distributed among people. The units of
living for most people are families. Children of rich parents, for example, can
enjoy affluent lives even if they themselves earn no income. Therefore,
comparison among households rather than individuals is usually an appropriate
way to assess inequality (or equality) in society.

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Income inequality among households is usually measured by the distribution
across income-size classes is commonly called the ‘size distribution of income’.
The lower the income share of high-income classes and the higher the share of
low-income classes, the more equal income distribution is considered to be.
Thus, the size distribution is an intuitively appealing concept of income
distribution. However, in economics, income distribution has more often been
analysed in terms of the income shares of factors (factor shares) for production.
Because factor shares measure relative incomes accruing to production factors,
such as labour and capital, according to their contributions to value added, they
are called the ‘functional distribution of income’.

As such, in terms of relativity, relationship exists between poverty and

inequality. This is because both concepts in this regard connote the same
ideology. By this it means when an individual is said to be poor then there is
another individual (or individuals) who is rich. And when we say income
distribution is inequal we imply that there is another form of distribution that is
equal. Also, it implies that as a result of income distribution, some individuals
are getting more or less (better or worse off) than other individuals. In this sense
poverty and inequality go hand-in-hand. Because an individual that is under
poverty is also having a less share of the society’s income. And by inequality in
income distribution against an individual implies that the individual is living in
poverty especially when he lives on less than one dollar per day and in
environmentally degraded areas, has little or no literacy, undernourished, in
poor health, have little political voice, attempting to earn a living on small and
marginal farms or dilapidated urban slums, and socially excluded.

In order to ascertain whether the measure for reducing inequality will

necessarily assist in reducing poverty, it is pertinent to briefly discuss some of
the problems associated with relative inequality. Inequality breeds inefficient
distribution of resources, for example, where a small proportion of the
population qualifies for bank loans. Statistics from many countries show that the
rich qualifies for loan than the poor, hence inequality breeds inefficient
allocation of resources. Resources are skewed towards the rich because they
have resources at their disposal with which to obtain and repay loans. Whereas,
the poor have low probability of getting loans because they have little or no
resources (collateral) with which to obtain, not to talk of repaying, loans. As
such, the poor may not have business plan because of lack of loans from the
bank.

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This problem can also be viewed from the pressure from the rich to send their
children to school. They influence the government to establish more secondary
schools and universities, even the NGOs also establish schools (including
universities) where only the children of the rich can afford to attend. Inequality
tends to lower the overall rate of savings in the economy because the rich save
as much as their income, while the poor has little or nothing to save because of
their low income. Despite their high income, the rich have low marginal
propensity to consume (MPC) compared to the poor. This is due to the fact that
the poor, for survival, consume most, if not all, of their income, while the rich
spend most of their income on luxuries like cars and social vices. The rich also
keep their savings abroad rather than the home country.

Inequality in the distribution of income undermines social stability and

solidarity. It also reduces social welfare because absolute poverty and inequality
enter the social welfare function negatively thereby reducing it.

Meanwhile, if measures are put in place to reduce inequality (or the gap
between the rich and the poor), they will, to some extent, assist in reducing
poverty. As such, some of the measures that can reduce inequality and, as well,
assist in reducing poverty include the alteration of functional distribution of
income through change in factor prices: such that, there can be reduction in the
price of capital while income of labour is increased. Utilization levels of inputs
should also change in a way that the shares of output accruing to owners of
factors of production will increase.

Also there should be mitigation of size distribution of income in human,

physical, natural, financial, and social capital. By this approach poverty will be
reduced by educating the poor and redistributing natural capital like land in
favour of the poor. Low-cost housing units at affordable prices for low income
earners in rural and urban areas should be built and allocated for the needy.
Savings credit (soft loans) can be given out to the poor to assist in starting small
businesses. Sense of belonging should also be initiated through creation of
social capital like, for example, the slogan of ‘good people great nation’ created
by the Nigerian government to promote the values of the country, and its
people. The moderation (decrease) in the size distribution of income at upper
levels, and moderation (increase) in the size distribution of income at the lower
levels will reduce inequality and also assist in reducing poverty. Progressive tax
system where more revenue is collected from the rich than the poor should be
encouraged. Also, the introduction of unemployment allowances for the
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unemployed, bursary award for students, scholarship for the less-privileged
children and health insurance cover for the poor, will to a large extent, reduce
inequality and as well assist in reducing poverty.

REFERENCES

AERC-JFE, (2010), Development Economics, lecture series

Hayami, Y. And Y. Godo, (2005), “Development Economics” from the poverty to the wealth
of Nations, third edition, Oxford University Press.

Perkins, D.H., S. Radelet, D.R. Snodgrass, M. Gillis and M. Roemer (2001), Economics of
Development (5th Ed.), New York: W.W. Norton and Company Ltd.

Todaro, M and Smith, S (2009), Economic Development (10th ed.); Addison-Wesley, London