Absolute and Relative Poverty OCR Year 2 Macro

Difference between Absolute and Relative Poverty Absolute poverty: When a household does not have sufficient income to sustain even a basic acceptable standard of living / meet basic needs Absolute poverty thresholds will vary between developed and developing countries The extreme poverty measure now used by the World Bank is the percentage of the population living on less than $1.90 a day (PPP) Relative poverty A level of household income that is considerably lower than the median level of income within a country The official UK relative poverty line is household disposable income (adjusted for household size) of less than 60% of median income The official poverty line: An income level that is considered minimally sufficient to sustain a family in terms of food, housing, clothing, medical needs, and so on.

Where do the Extreme Poor Live? Data is for 2014, source World Bank Population living on less than $1.90 per day PPP India 33% China 13% Nigeria 7% Bangladesh 6% DR Congo 5%

Global Progress in Reducing Extreme Poverty In 2015 the World Bank updated the accepted international extreme poverty line to US $1.90 a day, which incorporates new information on differences in the cost of living across countries (using PPP exchange rates) The World Bank projects that global extreme poverty will have fallen from 902 million people or 12.8 per cent of the global population in 2012 to 702 million people This was 9.6 per cent of the global population in 2015 Extreme poverty in East Asia and the Pacific has fallen to 4.1 per cent of its population, down from 7.2 per cent in 2012; Latin America and the Caribbean is at 5.6 per cent; South Asia 13.5 per cent in 2015 Sub-Saharan Africa extreme poverty was estimated at 35.2 per cent in 2015, compared to 42.6 per cent in 2012. Reliable current poverty data is not available for the Middle East and North Africa because of conflict and fragility in key countries in the region

Global Progress in Reducing Extreme Poverty Poverty Reduction – A Major Benefit of Globalisation in the Long Run The percentage of people living in extreme poverty has fallen across all regions but progress in Sub-Saharan Africa has (until recently) been slower

Focus of Policy to Reduce Extreme Poverty Poor Health and Nutrition Lack of Education Depleted Environment Corruption and Conflict Poor Government

Measuring Relative Poverty A household in the UK is in relative poverty (also called relative low income) if its income is below 60% of the median household income The median income is the middle value in a set According to recent data, the proportion of individuals in relative poverty in the UK before housing costs in 2013/14 was at its lowest level since the 1980's.

Population at Risk of Poverty in the European Union Persistent poverty is defined as being in relative income poverty both in the current year and at least two out of the three preceding years.

Measures of Inequality in the UK Economy

Main Causes of Absolute Poverty Absolute or extreme poverty is an inability to meet basic needs In many countries, significant progress has been made in reducin absolute poverty but each year the Human Development Report makes clear how much progress remains to be made Population growing faster than GDP in low income countries Severe savings gap - families unable to save,living on less than $1.25 per day Absence of basic government / public services Effects of endemic corruption in government and business High levels of debt and high interest rates Damaging effects of civil wars and natural disasters Low employment rates, vulernable jobs and poverty wages Absence of basic property rights

Consequences of Extreme Poverty for Development It is widely believed that persistent deep poverty is a major barrier to economic growth and development. Hence the importance attached by many countries to introducing effective poverty-reduction strategies Low life expectancy and fewer years of healthy life expectancy Low school enrolment rates as families cannot afford education - widens the gender opportunity gap Low access to basic health care Vulernability to loan sharks for families mired in debt Limited access to technology Threats to democracy and stable institutions Low real spending power limits the size of domestic markets for consumer goods and services

Consequences of high relative poverty for growth Causes a self-perpetuating poverty cycle Limited access to health care and education Volatile incomes, high debts + low savings Misallocation of scarce resources Capital investment in society is skewed towards the preferences of the rich Low collateral – limits growth of entrepreneurship Social and political unrest / tensions Increased pressure on state welfare systems Rise of the informal economy + high interest rate loans (e.g. doorstep lenders)

The cost of poverty for the UK economy / government The Joseph Rowntree foundation recently released data showing how much poverty costs the UK every year. Spending on poverty amounts to an estimated £78 billion

Can inequality drive economic growth? To encourage competition and effort among workforce – consider rewards in sports tournaments! Incentivizes risk- taking behaviour by entrepreneurs + incentives to invest in education – both good for innovative / competitiveness In poor economies, inequality also helps to build up market demand for certain consumer goods that require a minimum purchasing power (e.g. cars, household appliances).

How Government Spending can affect Incomes Welfare state transfers Universal child benefits / unemployment benefit Public (state) pensions Conditional welfare transfers e.g. Conditional on attending unemployment programmes Targeted welfare payments- linked to income State-provided services (in-kind benefits) Education - reduces inequality of market incomes Health care – state provided health services Social housing e.g. Provided by local authorities Employment training

Role of taxation in promoting equity Taxes can promote greater equity through direct and indirect effects on household incomes, savings & incentives: Progressive taxes take a higher % of income from richer households e.g. higher marginal tax rates on high incomes Tax-free allowances can help lower-income families to keep more earned income before they start to pay tax Progressive taxes on wealth can also help to limit the gap between original and final wealth Most indirect taxes have a regressive impact on equity although there is the possibility of levying progress consumption taxes e.g. having higher duties on luxury products – although the definition of luxury is subjective

Impact of taxes and benefits on inequality in the UK Average income per household (£ per week)   Poorest 20% of households 2nd Quintile 3rd Quintile 4th Quintile Richest 20% of households All Households Original income 105.8 263.2 476.1 783.5 1548.6 635.4 Final income 297.1 444.1 543.5 697.6 1150.4 626.6 Original income is income before government intervention e.g. from wages and salaries and investment incomes including rent and interest. Final income is after taxes and benefits. The table shows average income per household across the range of incomes in the UK. Final income includes the effects of taxes and welfare benefits and also the value of benefits in kind e.g. from the NHS. Source: Office for National Statistics