INCOME DISTRIBUTION & POVERTY Elif Yeğenoğlu B. Onurcan Güner

How Do We Measure Income Distribution? ■ Gini Coefficient ■ Palma Ratio ■ Decile ■ Vast Majority ■ Coefficient of variation (CV) ■ Entropy measures

Why Do We Measure Income Distribution? ■ To keep the inequality and the poor on the agenda ■ To target interventions, domestically and worldwide ■ To monitor and evaluate projects and policy interventions geared towards the poor ■ To observe which segment is better off and which segment is worse off, more than an overall analysis. ■ An extension of welfare criteria (Atkinson 1970, Sen 1973)

Lorenz Curve

Gini Coefficient ■ A popular measure of inequality which ranges from 0 (perfect equality) to 1 (perfect inequality), ■ Properties: Mean independence: If all incomes were doubled, the measure would not change. Symmetry: If any two people swap incomes, there should be no change in the measure of inequality. Pigou-Dalton Transfer sensitivity: Under this criterion, the transfer of income from rich to poor reduces measured inequality. ■ Not decomposible: Decomposability of a measure implies that inequality may be broken down by population groups or income sources or in other dimensions. The Gini index is not easily decomposable, that is, the total Gini of society is not equal to the sum of the Gini coefficients of its subgroups. ■ That is not capable of differentiating different kinds of inequalities, there may be same Gini coefficient values for differing patterns of income distribution

Gini Coefficient

Lorenz Curve For Turkey The Lorenz curves of equalized household disposable incomes,

Turkey’s Gini Coefficient Ranking RankCountryLate 2000s 1South Korea0,344 2Iceland0,382 3Switzerland0,409 4Norway0,410 5Denmark0,416 6Slovak Republic0,416 7Slovenia0,423 8Chile0,426 9Netherlands0,426 10Sweden0,426 11Greece0,436 12Canada0,441 13Czech Republic0,444 14New Zealand0,455 15United Kingdom0,456 16Estonia0,458 17Spain0,461 18Japan0,462 19Finland0,465 20Hungary0,466 21Australia0,468 22Belgium0,469 23Poland0,470 24Turkey0,470 25Austria0,472 26Luxembourg0,482 27France0,483 28United States0,486 29Mexico0,494 30Israel0,498 31Germany0,504 32Portugal0,521 33Italy0,534

Decile Ratio of top 10% to bottom 10% (again insensitive to middle)

Palma Ratio ■ Ratio of top 10% to bottom 40% (insensitive to middle income changes) ■ Palma mainly considers the changes in the gap between top and bottom of income scale since middle is relatively stable. The critics for Gini is that Gini puts equal weight on all changes of income distribution but it is about the lowest earners left behind in society and the highest people.

Income Growth ( ) Growth of Income for each income quantile of the population QuantileCumulativeCAGR Top 10%100% 9,03% 9th 10% 112% 9,83% 8th 10% 111% 9,79% 7th 10% 115% 10,03% 6th 10% 116% 10,13% 5th 10% 120% 10,35% 4th 10% 121% 10,41% 3rd 10% 124% 10,60% 2nd 10% 134% 11,23% Bottom 10% 147% 11,94%

Vast Majority Income ■ VMI: Average income of bottom 80% ■ VMIR: Ratio of Bottom 80% to GDP per capita ■ VMIR can be also derived from Lorenz curve as the slope of line C

Turkey’s GDP per Capita, VMI and VMIR ■ Although the gap between GDP per capita and VMI increased, the ratio of VMI to GDP per Capita (VMIR) also increased. Since VMI grew faster than GDP per capita, inequality decreased.

Turkey’s GDP per Capita, VMI and VMIR ■ Although the gap between GDP per capita and VMI increased, the ratio of VMI to GDP per Capita (VMIR) also increased. Since VMI grew faster than GDP per capita, inequality decreased.

VMIR in 2000 or closest (World Bank)

Relation between Gini and VMIR (Ragab and Shaikh, 2008) ■ While (1-G) captures the whole shape of the Lorenz curve, the VMIR only samples it at a single point. ■ The empirical ratio of VMIR to (1-G) is extraordinarily stable around an average value of 1.1 across countries, and even across time. This phenomena is called as "1.1 Rule”

Alternative Measures ■ Entropy Measures  They give a sensitivity parameter (α) that varies in the weight given to inequalities in differing parts of the income spectrum. Theil’s Index Generalised entropy (GE) measures Allow to decompose inequality into the parts within areas (for example, urban and rural) and the parts that is due to differences between areas (for example, the rural- urban income gap) ■ Coefficient of variation (CV): ratio of the standard deviation of the income distribution to its mean.

Regional Differences in Production and Income

Types of Poverty ■ Absolute Poverty ■ Relative Poverty ■ Situational Poverty (Transitory) ■ Generational or Chronic Poverty

Sources of Poverty ■ Income inequality ■ Conflicts and unrests ■ Location and adverse ecology ■ Natural disasters ■ Ill health and disability ■ Inheritance of poverty ■ Education, training and skills ■ Gender discrimination

Effects ■ Hunger, Health and Deaths – Malnutrition, starvation, vulnerability and exposure to infectious diseases, higher death rates ■ Social and Political – Drugs, prostitution, petty crimes ■ Economic – Inability to undertake economic activities, lower access to education, migration, labor force deprivation in rural areas, emergence of slums

Solutions against Poverty ■ Education policies ■ Health, food and water ■ Provision of skills and training ■ Income redistribution Progressive taxing, etc.

The Vicious Cycle of Poverty Poverty Low intake of food & nutrition Undernutrition, diseases and infections Stunted development of children and faltering growth Slow skill development, small body size Impaired productivity Low earning capacity

Human Development Index

Global Multidimensional Poverty Index 2015 Alkire, Jindra, Robles Aguilar, Seth and Vaz - June 2015 Oxford Poverty & Human Development Initiative

Poverty in Turkey