INTRODUCTION 7

Thisapproach is necessary because poor individuals themselves cannot collect

these basic needs.Mere increase in cash income of the poor may not helpthem
to have these basic needs more. So, following the basic needs approach, the
government of an underdeveloped country can directly intervene to ensure the
supply of such basic needs to the poorer sections. Further, this approach is very
useful in assessing the relative gap between the rich and the poor countries in
terms of supply of basic needs to the weaker sections. It also helps in assessing
the relative performance of different countries. Moreover, this approach can be
a goodguide to monitor the direction of development and to judgethe rationale
of development policies of the less developed countries.
However, this approach also suffers from the same criticisms as does the
PQLI.There are the questions on the number of items to be considered as basic
needs. Economists seldom agree on this point as it involves subjectivity and
value judgement. The same problem arises in the question of assigning weights
todifferent items of 'basic' needs.
Still, it must be admitted that the basicneeds approach considers a significant
aspect of economic development. It seeks to remove poverty directly by providing
the basic needs to the poor. However, while providing basic needs, the
government of a country should not divert its attention from building up
productive capacity of the economy. Hence, the basic needs approach should be
regarded as a complementary to the income-index of development.
D.Human Development Index (HDI) :
One of the important social indicators of economic development is the Human
Development Index (HDI) introduced by the United Nations Development
Programme in its first Human Development Report published in 1990. The
index has been prepared under the able stewardship of Mahbub-ul Hag. In recent
years, economists like Hagen, Adelman, Harbison, Morris, Hicks, Streeten, Burki
and others have been in search for an alternative to per capita income as an
index of economic development. Morris D. Morris developed the concept of a
Physical Quality of Life Index (PQLI) while economists like Streeten, Hicks and
Burkiadvocated the concept of a basic needs approach. These attempts and
writings by different economists on similar lines have paved the way for the
emergence of the Human Development Index (HDI).
This index defines human development as the process of enlarging people's
choices. The most critical choices are to lead a long and healthy life, to be educated
and to enjoy a decent standard of living. These three factors may be measured
by three respective indicators, namely, longevity, educational attainment and
standard of living. The HDI is a composite index of these three indicators. Here,
longevity is measured by life expectancy at birth ; educational attainment is
measured by a combination of adult literacy (two thirds weight) and combined
primary, secondary and tertiary enrolment (one third weight) ratios while
standard of living is measured by real GDP per capita (in terms of dollar as per
purchasing power parity, in short, PPP $). Asimple average of these three indices
gives us the desired Human Development Index (HDI).
For the construction of conmponent indices of the HDI, fixed minimum and
maximum values have been established for each of these indicators. These values
are as follows :
 0£00£2 L06R YNI CINH CInorn

Indicators Minimum value Maximum value

Life expectancy at birth 25 years 85 years
Adult literacy 0%
100%
Combined gross enrolnent ratio 0% 100%
Real GDP per capita (PPP $) $ 100 $ 40,000
For any component of the HDI, individualindices can be computed according
to the general formula :
Actual value minimum value
Component Index =
Maximum value minimum value
For example, if the life expectancy at birth in a country is 55 years, the life
expectancy index for thiscountry is:
55- 25 30
= 0.50.
85-25 60
This index indicates how much of the maximum possible success in
the case
of the related variable has been attained by the
relevant country.
The construction of the income index is a little more complex. The world
average income of $ 5,835 (PPP$) in 1994 is taken as the threshold level. Any
income above this level is discounted using Atkinson's formula. The argument
is that utility of income above a certain threshold level will be
diminishing.
Applying Atkinson's formula, the discounted value of the maximum income of
$ 40,000(PPP $) stands at $ 6,154 (PPP$ ).
To calculate income index, we shall take this discounted value of income for
the maximum value of income.
We give below an illustration of the construction of HDI. We take the
of twocountries :Greece, an industrial country and Gabon, a examples
developing economy.
Country Life expectancy Adult Combined Real GDP
(years) literacy enrolment per capita
rate (%) rate (%) (PPP $)
Greece 77.8 96.7 82 11,265
Gabon 54.1 62.6 60 3,641
Life expectancy index:
77.8 25 52.8
Greece = 0.880
85 25 60
54.1 25 29.1
Gabon= =0.485
85- 25 60
Adult literacy index :
96.70 96.7
Greece = =0.967
100-0 100
Gabon = 62.6-0 62.6
= 0.626
100-0 100
Combined primary, secondary and tertiary enrolment ratio index :
82-0 82
Greece = =0.820
100-0 100
 POVERTY AND INEQUALITY 147
6.2. Measurement of Poverty
Poverty can be measured in two alternative ways. On the one hand,
based poverty indices measure the capacity of a person to income
of life. On the other hand, human development based purchase basic needs
poverty indices measure
the deprivation of choices and opportunities of a person to lead a decent
other words, in income nmeasure of poverty shortfall ofincome to purchaselife. In
basic
needs of life is measured, whereas in capability measure ofpoverty
basiccapabilities tolead a decent life is measured. shortfall in
6.2.1. Income Measure of Poverty
The most important concept in measuring poverty in
expenditure, as some one explained it) is poverty line. Onceterms of income (or
poverty is defined
as inability to meet some basicneeds of life
like food and clothing, the question
that looms large : how much of income is
minimum needs'. The critical level of money required to purchase the basket of
minimum needs of life is called the poverty incomeline.
required to purchase the
In income measurement of
poverty persons (or families)who lie beneath this line are
poverty is termned as absolute poverty. In 1990, the called poor. And their
Development Report, set a poverty line at $1 (measured at UNDP, in its World
day a person. This line, termed 1985 PPP prices) a
country comparision of poverty.
international poverty line, was set for cross
less than this amount are said toPersons all over the world, who earn (or spend)
be sufferring from absolute
Headcount Index (HI): The poverty line differes frompoverty.
one country to
another because of differences in the notion of
line isdefined the number of poors in a minimum needs. But once this
country
the number of heads below the critical level of can be known simply by counting
poor people is known as head count method. income. This method of counting
But the absolute number of poors in a
information about the extent of poverty in country neither provides sufficient
that country nor is helpful for any
cross-country comparision. For that what we require is a relative
poverty, head count of poor in relation to total measure of
population. This
measurement is provided by headcount index. IfH is the number of relative
below the poverty line and N is total population, then persons
HI =HN
Thus headcount index (HI) simply estimates the
poverty-line population ofa country. However, headcount percentage of below-the
accepted ás a good measure of poverty since it fails to index is als0 not
measure
poverty' jin a country. By »depth of poverty' we mean the extent to the depth of
ives below the poverty line. There is another which a poor
complaint against this index of
poverty. In this complaint it is argued that headcount
acts as a temptation to a short-run solution of the measurment of poverty
In this way there is a tendeny among the problem. If poverty is measured
umpsum money or to provide a temporary employment policymakers either to provide a
Opoverty line.The policy makers do so in order to to those who are closer
Partially, within a very short period of time and, bysolve this
the problem, at least
eir prospect of re-election. To overcome these process to brighten
ndex, an alternative index, poverty gap index, is shortcomings of headcount
Foverty-Gáp Index : Poverty gap is said to beprescribed.
a measure of the 'depth of
3155-10
148
poverty' of a country. This gap measures the shortfall of income from the poverty
line. Poverty gap is an aggregative measure, i.e., it is defined as the difference
between the poverty line and the aggregate income of the poors who lie below
poverty line
the poverty line. Let Y, be the critical level of income defined as the
and Y, be the income of the i-th person. Then
H
PG = i=l
(Y, -Y)
where H is the number of persons below the poverty line.
Thus by poverty gap we can have an idea of how much income is required to
bring all the poors up to the poverty line.
The concept of poverty gap is expressed as a ratio in order to make it useful
for cross country comparison of poverty. This ratio is defined as a proportion of
average income required to lift all the poors to the poverty line to average income
of the country, i.e.,
H H

PG =
Xo,-)/N
i=l
Sr,-Y)
i=l
M MN
where M is the average income of the country.
Income-Gap Index: Poverty gap ratio or poverty gap index runs into
some limitations again. For example, it cannot measure the degree of income
inequality among the poor. Income gap index helps us in this regard. This index
is very much similar to poverty gap index. The only difference is that unlike
PGI here we divide the poverty gap by the total income of the poor assuming
that they are on the poverty line. The purpose is to know the percentage of total
shortfall of income from the poverty line in relation to total income necessary to
lift allthe poors to the poverty line. Thus
H

IGI= isl
EY,-Y)
Y,H
Foster-Greer ThorbeckeIndex : In income gap index, although there is
an attempt tomeasure the degree of income inequality among the poor, it does
not speak of distributional aspect of povertyat all . Such an attempt was made
by Foster, Greer and Thorbecke. Foster, Greer and Thorbecke provide a class of
poverty measures, generally known as P, class of poverty measures. The P,
class (or the FGT class) is defined as

We can obtain different concepts of poverty measure for different values of

a. For example, when a=0, FGT index actually gives us the headcount concept
of povertyestimation. The poverty gap index can be obtained byputting a=1.
When a=2 we get.
P, =HI [IGI + (1-IGIY (CV}1
 POVERTY AND INEQUALITY 149

where CV, is the coefficient of variation of income among the poors. From this
P, measure, we get, when either HIor IGIor CV, increases, P, also inereases.
6.2.2. Capability Measure of Poverty
In income measures poverty is conceptualized as deprivation of people from
some very basic needs of life. The capability measure extends the concept of
deprivation by including three basic dimensions of human life, namely longevity,
knowledgeand decent standard of living. The UNDP developed a poverty
measure based on those three deprivations which is termed human poverty
index. In the construction of human development index these three variables
are considered. In this sense, the human poverty index is said to be the other
side of the human development index.
In developing countries, poor people are vulnerable to death at a relatively
early age. Deprivation of a long and healthy life is thus measured by the
probability at birth of not surviving up to age forty.
Deprivation of knowledge means exclusion from the world of reading and
communications. Thisdeprivation is thus measured by the adult illiteracy rate.
Deprivation of a decent standard of living is defined as lack of access to
overall economic provisioning. Originally, when the UNDP started calculating
HPIfor diffrent countries, this deprivation was measured by three indicators
namely the percentage of the population without sustainable access to an
improved water source, the percentage ofthe population without access to health
services. However, owing to want of reliable data, from the year 2003 the UNDP
started calculating this deprivation measure on the basis of the first two
indicators. An unweighted average of these two indicators gives a measure of
deprivation in a decent standard of living.
Thus the HPI is constructed with three variables P,, P, and P, P,, P, and P,
are based on concepts of three types of deprivations and are defined as :
P, = Probability at birth of not surviving up to age 40 (times 100)
P, =Adult illiteracy rate.
=Unweighted average of population without sustainable access to an
improved water source and children underweight for age.
Now HPI is calculated on the basis of the following formula :
HPI =(/3 (P,"+P, + P,"
wherea is a constant such that higher value of a means more acute deprivation
and vice versa. If a= 1, the HPI will be the simple average of various
deprivations. On the other hand, as a inereases towards infinity, the HPI will
tend towards the highest possible values of its three dimensions.

6.3. Distributional Inequality of Income

All over theworld, income is distributed unequally unequally among the
nations, unequally within a nation. Distributional inequality of income is one of
the root causes of poverty, As a result of unequal distribution of total world
income, some parts of the world economy became underdeveloped once upon a
time and as a result of unequal distribution of gross national income of an
economy, some segments of population there are becoming impoverished
everyday. Income inequality is thus always a living issue in the discussion of
economic development. Quite naturally also economists always try to measure
150

this inequality and tostudy whether there is really any relation between income
inequality and economic development.
Distributional inequalities of income are generally measured in two ways.
One is known as personal distribution (or size distribution) of income and the
other is known as functional distribution (or factor share distribution) of income.
In personal distribution, incomes of individuals irrespective of their participation
in the production process are measured. But in functional distribution of income
only factor incomes are measured. Then, in both the measures, distribution of
total income of the economy among various segments of her population is
considered. Different measures of distributional inequality of income are
discussed in the following.
6.3.1. Size Distribution of Income
By size distribution of income we mean distribution of total income of the
economy among various groups of population.This means that the groups in the
size distribution of income are, in essence, income groups. Total population of
the economy is, at first,subdivided intovarious groupsaccording to ascending
income levels. The number of groups is arbitrarily settled. Generally total
population is subdivided into five toten classes. Then proportion of total income
of the economy received by each group gives us an idea of the degree of income
inequality in that country. The following table gives ahypothetical construction
of this distribution.
Table 6.1.Size Distribution of Personal Income
Individual Personal Income Percentage share of the
(In per cent of total income) group in total income
1 1.4, 4.0
2.6]
4
3.71
5.3/
9.0

5 6.51 14.0
6 7.5/
7 9.3 21.0
11.7)
9 24.2
10
52,0
27.8 !
Total 100.0 100.0
In this hypothetical example it is seen that
group, earn only 4 per cent of total income. Sincefirst two individuals, the poores
in the economy tWo of them are 20 per there are only ten individuals
cent of total population. Thus we can Sy
that the poorest 20 per cent of total
income. The above example also shows population receives only 4 per cent of tota
that the richest 20 per cent of total
population receives 52 per cent of total income. This means that there is sevelo
distributional
In this inequality income in
of our hypothetical country.
context we
by the richest 20 per are generally speaking of a ratio, ratio of incomes earned
of cent and the poorest 40 per cent,
distributional inequality. This which gives us a measure
the value of this ratio, the ratio is
higher is the known Kuznets ratio. The
as higher
degree of income inequality.
 POVERTY AND INEQUALITY 151

6.3.1.A. Lorenz Curve

Lorenz Curve is constructed on the concept of personal distribution of income
to measure income inequality within a nation. It is, in fact,a graphical expression
of distributional inequality of income.
The graph of a Lorenz curve is enclosed in a square, the diagonal of which
depicts the line of equality. The curve which expresses the deviation from this
line is called the Lorenz curve. In Fig.6.1 we have shown the graph of a Lorenz
curve. Along the vertical axis of this squarewe measure percentage share of
income received by a group of population. On the other hand, on the horizontal
axis percentage of population is plotted. Thus each co-ordinate of the graph
indicates the percentage share of income received by a certain percentile group
of population. It should also be noted here that the percentage share of income
and the percentage of population are arranged in ascending order of income
and population respectively. Then a point, say A, on the Lorenz curve in Fig.
6.1, indicates that the poorest 20 per cent of the population receives only 4 per
cent of total income.
In drawing the Lorenz curve the percentile accounts of both the variables,
income and population, are plotted on the axes. Thus both the variables are
cumulated upto 100per cent on their respective axes and both the axes are,
therefore, of equal length. Now once we close the domain of these two variables
by two more axes, the enclosed area takes the shape of a square, as shown in
Fig. 6.1.
In Fig.6.1 we have plotted our hypothetical distribution of income shown in
Table 6.1. On the basis of this the Lorenz curve drawn is OABCDO". At pointA
the poorest 20 per cent Income
of total population earn 100
4 per cent of total
90
income, at point B 40 of
per cent of the low Share 80
income group receive 13 70
per cent of total incomme Percentage
60
and so on. The Lorenz Line of equality,
curve OABCDO* thus 50
exihibits severe income 40+
inequality. This
30
inequality will vanish
altogether once the 20
Lorenz curv coincides Lorenz Curve
10
with the line O0. In X
that case the percentage 10 20 30 40 50 60 70 80 90 100
of population at each
point of the curve Percentage of Population
corresponds to the sanme
percentage share of Fig. 6.1
income. Thismeans that on the line O0 any 10per cent population will receive
exactly 10 per cent share of total income. The line 00' hence is termed the line
of equality. The Lorenz curve starts falling from this line as soon as the
distributional inequality appears in the economy. The greater the degree of
152
ineguality the greater will be the distance between the line of equality and the
individual receives
Lorenz curve. In case of extreme inequality, when a single
thewhole of the total income of the economy and the remaining others receive
right hand
none, theLorenz curve coincides with the bottom horizontal and
vertical axes.
6.3.1.B. GiniCoefficient
distribution of income
Gini coefficient, a popular measure of unequal size
using
andnamed after an Italian statistician C. Gini, can be derived directly by
Lorenz
Lorenz curve. It is simply a ratio of the two areas under the graph of
curve. The ratio of the area between
the line of equality and the Lorenz curve
Gini
and the total area rightward to the line of equality is termed the
Concetration Ratio or the GiniCoeficient (G), i.e.,
Area between 00 and OABCDO'
G=
Area OXO»
The area between the line of equality and the Lorenz curve (i.e., the area
OABCD0) widens with the increase in distributiónal inequality in the economy.
Hence the more unequal the distribution of income the higher is the Gini
coefficient.
The Gini coefficient can assume any value between zero (case of perfect
equality) and unity (case of perfect inequality). But generally it is seen that it
lies anywhere between 0.7 (in case of accute inequality) and 0.2 (in case of
relatively equal distribution).
6.3.2.Functional Distribution of Income
Functional distribution of income refers to the distribution of income among
various individuals according to their role as participants in the production
process. It ignores the personal aspect of income, i.e., the importance of income
received by one as an individual. Rather it takes into consideration the income
of a particular factor of production as a whole to total national income. This
means that by functional distribution of income we measure distributional
inequality among various groups of people, not among various individuals. For
example, generally it is seen that total income in an economy is distributed in
favour of the capitalist class and against the wage-earner class. This type of
distributional inequality among different funetionaries of the economy can be
understood from functional distribution. But this isnot the end of the story of
unequal distribution of income. For example, all wáge-earners do not get the
same wage, all the capitalists do not get the same profit. Hence intra group
inequality in the distribution of income also exists and this measure fails to
take into account of this. But unequal distribution among various individuals
within a single class is no less important in an economy. Hence functional
distribution of income measure is of little use in inequality measurement.
6.4. Inequality and Development :The Kuznets' Hypothesis
Development is generally defined in terms of per capita income. Per capita
income rises with every development of an economy and vice versa. According
to Simon Kuznets, as per capita income rises inequality of incomewidens initially
 POVERTY AND INEQUALITY 153

development
but improves afterwords. In other words, in the early stages of only after a
income distribution becomes more unequal, and equality comes
certain stage of development is achieved.
whether any
In 1955 Kuznets conducted a study in which he tried to observe
inequality exists
relation between the level of development and the magnitude of
substitute measure of
or not. Gross national product per capita was taken as a cent to
the level of development and the ratio of the income of the richest 20per
the income of the poorest 60 per cent of total population wastaken as a measure
time series
of degree of inequality. Such a relation would be better observed if
data of these two variables could be had of a single country. But owing to lack of
such data Kuznets used data of these two variables for three developing (India,
Sri Lanka& PuertoRico) and two developed countries (USA & UK). The data
relating to percentage shares of income and the ratio obtained thereof for the
five countries are shown in Table 6.2. On the basis of informations obtained
from this Table it can be concluded that inequality is, in general, greater in
developing countries than in developed countries. This conclusion is the basis of
Kuznets' argument that in the
initial stages of development Degree 4
income inequality increases and of Income
then it decreases. Inequality
The graphical representation
of this hypothesis of Kuznets
gives us a curve which looks like
an inverted U as showin in Fig.
6.2. In Fig. 6.2 we have
measured per capita income
along the horizontal and the X Per Capita GNP
degree of income inequality
along the vertical axis. The Fig. 6.2
curve indicates that degree of inequality increases along with per capita GNP
upto the point Xand then it starts decreasing.
Table 6.2
Percentage Share in Total Income
The Richest The Poorest Ratio of
Country 20 Per cent 60 Per cent (3) to (2)
(1) (2) (3)
India (1949-50) 28 55 1.96
Sri Lanka (1950) 30 50 1.67
Pureto Rico (1948) 24 56 2.33
USA (1950) 34 44 1.29
UK (1947) 36 45 1.25

Kuznets himself, however, did not provide any explanation of the inverted U
shape of this inequality-income curve. Later on some probable explanations
were mentioned by Montek Singh Ahluwalia. In 1976, Ahluwalia tried to
empirically observe the relationship between the level of development and the
magnitude of income-inequality. In this attempt almost the same kind of
 154
by Kuznets. In this contevt
relationship was observed by Ahluwalia as it was inverted U shape of the
Ahluwalia provided some plausible explanations of the stages
Ahluwalia, in the initial
inequality-income curve. First of all, according tonon-agricultural sector transfer
of development owing to higher wage rate in the
non-agricultural sector takes place. As a
of labour from agricultural sector todistribution crops up. Thereafter, in course
result of this, inequality in income
brings equality in the wage rates of
of time, when supply-demand mechanism degree of income inequality softens.
agricultural and non-agricultural sectors, supply of educated, skilled
Secondly, in the initial stages of developmentdistribution of income between
labour starts increasing. An inequality in the result of it. Thereafter as the
skilled and unskilled labour takes place as a
more easily available. With
economy develops further, skilled labour becomes unskilled labour, the difference
fast growth of skilled labour and steady decline of
unskilled labour and hence the
between the wage rates of skilled and
distributional inequality of income decreases. true that
Nevertheless, whatever may be the explanation, it is more or less
isas it was described by
the relationship between inequality and development
later years have supported
Kuznets. Empirical studies by some economistsin
Kuznets' argument.