Poverty and Income Distribution

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Letitia Sullivan
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MPU 3212- Malaysian Economy Week # 9 Poverty and Income Distribution Professor Dr.

1 MPU Malaysian Economy Week # 9 Poverty and Income Distribution Professor Dr. Ahmad Bin Othman School of Business and Management University College of Technology Sarawak Sibu, Sarawak, MALAYSIA ahmadbo@ucts.edu.my

2 Poverty and Income Distribution Today s Agenda Key issues concerning income distribution Government policy on poverty and distribution Poverty and distribution trends and their causes

3 Issues concerning income distribution Distribution of what? distribution of current monetary (private) incomenormally pre tax, sometimes post tax and subsidy Distribution among whom? household vs individual gender implications Distribution within which unit? -society or nation 3

4 Why income distribution is important? Income distribution is important for development as it influences cohesion of society determines the extent of poverty for any given average per capita income affects the poverty reducing effects of growth Impacts people s health 4

5 Issues concerning inequality Intra household income distributiongender implications Post tax income Impact of state transfers Include social incomes (ie goods and services provided by the state 5

6 Issues concerning inequality cont Distribution of capabilities or functioning of basic needs goods and services or of human achievements. Examine distribution of more direct measures of well being health nutrition and happiness A broader approach to distribution is needed-eg access to education is a major influence on future household incomes may also affect the rate of growth 6

7 Issues concerning inequality cont Inequality to health services can be more important than inequality in incomes as life may depend on it. Also Question of functional income ie distribution between profits, wages, rents. Relevant distribution is that among groups not individuals such as the distribution between groups of different ethnicities, religions, regions or races. 7

8 Issues concerning inequality cont Vertical Inequality measures of distribution among households or individuals. Horizontal Inequality between culturally defined groups. causes of conflict, multi dimensional with political social and economic elements affects individual well being and social stability 8

9 What are some arguments against income inequality? Wealthy can influence politics Wealthy have more opportunities Wealthy can afford better health care Income inequality gives people an incentive to become more productive 9

10 Issues concerning poverty What is the Poverty Line? The level of income below which a person or a family is considered to be poor 10

11 Why poverty eradication and income distribution is important? Long term objective of poverty eradication contingent upon reducing income inequalities Positive correlation between high income inequality and poverty levels Higher income inequality may reduce growth rates and make it more difficult to reduce poverty 11

12 Why poverty eradication and income distribution is important? Sensitivity of poverty to growth is depends on a country s income distribution Distribution of income has a significant impact on rates of growth with more equal societies growing faster than less equal ones Even if benefits of growth are spread in society higher income inequality would result in the poor having a smaller share of the benefits thus slowing down poverty reduction. 12

13 Why poverty eradication and income distribution is important? Average health status of a society depends on its income distribution status Societies with more unequal distributions have lower life expectancies An equitable distribution of income as well as the achievement of social goals are essential aspects of development over and above economic growth 13

14 Why poverty eradication and income distribution is important? Income distribution pertinent in addressing poverty challenges. In 1999 Malaysia had the highest income disparity in the Asia Pacific region with income disparity ratios of 11.7% between the richest 20% and the poorest 20% of the population. 14

15 Incidence Of Poverty by State (%) State More Developed Johor Melaka Negeri Sembilan Perak Pulau Pinang Selangor Wilayah Persekutuan Kuala Lumpur Less Developed Kedah Kelantan Pahang Perlis Sabah Sarawak Terengganu Malaysia Notes: 2 Includes Wilayah Persekutuan Labuan. 1 Includes Wilayah Persekutuan Putrajaya. 15

16 Incidence of Poverty (%) Total Urban Rural

17 Mean monthly gross household income by ethnic group, 1999 and 2002 Ethnic Group Bumiputera 1,984 2,376 Chinese 3,456 4,279 Indians 2,702 3,044 Others 1,371 2,165 Malaysia 2,472 3,011 17

18 Mean Monthly Gross Household Income by Sector, 1999 and 2002 (Ringgit Malaysia) Urban 3,103 3,652 Rural 1,718 1,729 18

19 What is the Lorenz Curve? A graph of the actual cumulative distribution of income compared to a perfectly equal distribution of income 19

20 What is the Lorenz Curve? The most widely used single measure of inequality is the Gini coefficient. The Gini coefficient (G) is based on the Lorenz Curve, a cumulative frequency curve that compares the distribution of income with the uniform distribution. 20

21 % of income 100% 80% Hypothetical Lorenz Curve Perfect Equality 60% 40% A B 20% % of families Actual Income 20% 40% 60% 80% 100% 21

22 What is the Lorenz Curve? Area A G = (Area A + Area B) G can take the value between 0 and 1, the higher the value the greater is inequality. 22

23 % of income 100% 80% Lorenz Curve for Nations Perfect Equality 60% Russia 40% 20% % of families 20% 40% 60% 80% Brazil U.S. 100% 23

24 Malaysia: Gini Coefficient By Region, Region Peninsular Malaysia Sabah Sarawak Malaysia

25 Government Policy on Poverty and Distribution The New Economic Policy (NEP) was introduced, and hailed as a successful model of distributing income without sacrificing growth. The objective to eradicate poverty among Malaysians and to restructure the society so that the identification of race with economy functions and geographical location is reduced and eventually eliminated. NEP was succeeded by NDP. 25

26 END 26

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