Poverty and Inequality

How much do you live on per day? Lunch Bus/Train Fare Breakfast/Dinner Phone contract / month / 30 Going out evenings/weekends? Clothes, Birthdays? Housing ….? (Mortgage / rent costs ~ £15/day) Sky/TV, Heating, Landline, Gas, Electricity….. Annual Holiday cost / 365……..still too low? (£40/day for SHS) -> Virtually no-one in the UK exists on income below £10/day ($15/day)

Poverty According to the World Bank, “poverty is pronounced deprivation in wellbeing.” Poverty defined by World Bank as income of $2 per day (2005 prices PPP), and extreme poverty as $1.25 per day. Absolute poverty is defined by the UN as “a condition characterised by severe deprivation of basic human needs”…what are these? ”, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services.”

World Poverty Of the 6.4bn in the world, how many are illiterate? How many of the 6.4bn live without electricity? World bank has 2.4bn people living in low income countries – what % of world exports come from these countries?

Poverty – a big problem Nearly a billion people entered the 21st century unable to read a book or sign their names (Unicef) The world’s low income countries (2.4 billion people) account for just 2.4% of world exports (WB) 1.6 billion people — a quarter of humanity — live without electricity (WEF) BUT its getting better 

Includes India Includes China

Absolute poverty Notes: Extreme poverty has “decreased considerably” in the past 30 years, from 52% of the developing world in 1981 to 21% in 2010 (World Bank) Extreme poverty has fallen in all regions, except Sub-Saharan Africa. SSA has not improved due to: High Pop Growth (Av. 2.6% pa) – Income growth is higher but high pop growth dilutes the effect SSA poverty starts from a lower base than other regions, so many people are well below the $1.25/day and growth won’t get them over the threshold Income inequality is worse in SSA so Income can flow disproportionately to the higher income groups Poverty in China has fallen from 84% to 12% (also of use in questions on globalisation)

Relative Poverty (UK & Developing World) Relative poverty defines income or resources in relation to the average. It is concerned with the absence of the material needs to participate fully in accepted daily life. How is it measured? Relative poverty is generally defined as when household income is less than 60% of median household income (EU definition) https://www.theguardian.com/commentisfree/video/2013/oct/08/inequality-how-wealth-distributed-uk-animated-video

What are the factors driving Absolute and Relative Poverty? Absolute Poverty? Relative Poverty? Changes in the rate of economic growth Y FDI Policies which result in increased trade - Government tax and benefits policies Changes in asset (ie Oil is a national asset) prices

How do we solve Poverty? Factor Absolute (Developing World) Relative Changes in the rate of economic growth Minimise Debt/Corruption which saps growth; Boost education, skills; Discrimination (Gender, Race, Caste) FDI Technology spill overs from MEDCs, assists human capital formation, contributes to international trade integration, helps create a more competitive business environment. Promotion of inward investment in depressed regions to boost local wage income (Ie UK enterprise zones) Policies which result in increased trade Remove Tariffs and Quotas – benefit from comparative advantage in long term, plug into world economic growth N/A Government tax and benefits policies Services to remove poverty (Sanitation, Education, safe water etc.) Redistribution of Income via progressive tax Changes in asset prices National assets such as Oil wealth, Diamonds, Agricultural products are all inelastic (PED) hence large changes in revenue Housing affordability in UK (lower prices in south via higher stamp duty; lower duty in north, removal of tax benefits) A: Debt / Corruption saps growth R: Ed/skill, unemploymt, underempl, discrimination, agric cycles, civil war, nat disasters, environmental degred FDI triggers technology spillovers, assists human capital formation, contributes to international trade integration, helps create a more competitive business environment and enhances enterprise development. Hook up to WE Growth Tax / benefits – relative in UK; absolute challenging in 3W Asset prices – A: Commods in 3W R: Housing in SE Eng

Relative Poverty in the UK   Ways to get around Inheritance Tax (The rich stay richer – Govt has to tax others more) Falling Relative value of State Benefits Inequality in Wages and Earnings Growth Workers with high levels of skills and qualifications will be in demand and therefore will be able to gain higher wages. However those with low skills will find themselves in low paid jobs or even unemployed. In recent years wage differentials have increased due to: De-industrialisation… Public Sector… Growth in part time and temporary jobs… Decline of trades unions … Increased demand for ?? workers => Structural and LT Unemployment amongst the low paid (Higher competition for low paid jobs = lower pay; minimum wage may reduce number of lowest paid jobs?) In recent years wage differentials have increased due to: De-industrialisation leading to more service sector jobs which tend to be lower paid Public Sector jobs have had low increases in wages Growth in part time and temporary jobs which tend to be low paid Decline of trades unions leaving many workers unable to bargain for higher wages. Increased demand for highly skilled workers => Structural and LT Unemployment amongst the low paid (Higher competition for low paid jobs = lower pay; minimum wage may reduce lowest paid jobs?)

It’s a good time to be qualified! (Source Rowntree Foundation) Figures are in percentages ie in 2000 14.2% employed had no qualification; estimates are that by 2020 only 5.7% of UK workforce will have no qualification. Result: the uneducated will find it much harder to get jobs, hence will be more likely to be in Poverty (GCSE A*- C is level 2, A levels are level 3)

Wealth & Inequality Wealth relates to differences in people’s stock of assets. Income is a flow concept; therefore, income inequality relates to differences in people’s income flows from wages, dividends, rents, etc.

Oxfam says wealth of richest 1% equal to other 99% The richest 1% now has as much wealth as the rest of the world combined, according to Oxfam. It uses data from Credit Suisse from October for the report, which urges leaders meeting in Davos this week to take action on inequality. Oxfam also calculated that the richest 62 people in the world had as much wealth as the poorest half of the global population. It criticised the work of lobbyists and the amount of money kept in tax havens. Oxfam predicted that the 1% would overtake the rest of the world this time last year. It takes cash and assets worth $68,800 (£48,300) to get into the top 10%, and $760,000 (£533,000) to be in the 1%. That means that if you own an average house in London without a mortgage, you are probably in the 1%. BBC News: 18 January 2016

Measurement of Income (and sometimes Wealth) distribution Lorenz Curve shows the distribution by percentile (ie the top 1% of population have 20% of the UK’s income) The relative sizes of area within Lorenz curve ratio’d to total area under 45 degree line is the Gini coefficient – may have come across it in Geography? Allows us to compare countries. Gini Coefficient = (area) A --------- A + B

Where is the UK? (Axis is Gini)

Income and Wealth Inequality - Causes Causes of income and wealth inequality within and between countries include: • education, training and skills • wage rate including minimum wage rates • strength of trade unions • degree of employment protection • social benefits • the tax system (e.g. how progressive it is) • pension entitlements • ownership of assets (e.g. houses and shares) and inheritance.

Inequality and Development As a country develops and its GDP grows from a subsistence economy, inequality initially increases and then decreases. (Kuznet’s curve) Industrialisation ->  inequality as workers move from the lower productivity and lower paid agricultural sector into the higher productivity manufacturing sector. However, at some point, inequality starts to decrease. This may be because governments have more ability to redistribute income through a more developed tax and benefit system.

Inequality and Capitalism “an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.” Inequality in a free market economy is inevitable? people with higher skills and abilities will attract higher wages, whereas those with poor skill levels will earn little. (MRP?) private ownership of resources means that some people will acquire considerably more assets than others which, in turn, may generate an income. Some argue that inequality is essential in a capitalist system to provide an incentive for individuals to take risks in the knowledge that they, personally, will benefit from any profits made.

Kuznets Curve The Kuznets curve is a hypothetical curve that graphs economic inequality against income per capita over the course of economic development

Discuss the causes of relative poverty in a developed country of your choice (15) Unemployment, particularly long term Lack of education and skills, which leads to unemployment (see above), particularly with changing structure of the economy from manufacturing to services Lower income than high skilled workers (who have higher MRP, ie produce more) Single parenthood Ageing population People may not have saved enough for a longer retirement

Government policy to alleviate poverty (and inequality) in the UK Remember poverty is defined as relative very difficult to see it being eliminated without a very equal distribution of income. Would this be desirable? Main policies Redistribution of income Progressive taxes (higher top rate, raise personal allowance so fewer pay tax) Means tested benefits – tax credits for poorer households, job seekers allowance for unemployed Universal benefits – education and health free for all, state pensions Minimum wage