Last week the President of the World Bank Group launched at the Spring Meetings the report "Prosperity for All." One of the interesting areas the note reported on was the interrelationship between growth, movements in the income distribution and poverty reduction.
There are various ways of showing the impact of growth on people’s income and its interrelationship with a country’s income distribution. In comparing distributions over time, one of the more useful graphs is a Pen’s Parade (figure 1a), named after another Dutch economist as so many inequality or poverty measures are (other examples are the Theil index and Thorbecke for the Foster-Greer-Thorbecke Poverty Measure).
The Pen’s parade lines up every person from poorest to richest on the horizontal axis, while the vertical axis shows the level of expenditure (or income) per capita. The $1.25 a day line intersects with Pen’s parade for 1990 and 2010 at 43.1 and 20.6 percent respectively, providing the percentage of the population living below the extreme poverty line in the developing world in those years. One can see that growth in developing countries has accrued to a large extent to the middle quintiles, as the difference between the income earned in 1990 and 2010 is the largest at those percentiles.
Another way of depicting an income distribution is to show income on the horizontal axis, count how many people earn that particular level of income, then stack them on top of one another such that the number on the vertical axis represents them (figure 1.b). One can see that in 1990 the largest number of people making the same income (the peak of the distribution graph), made less than $1.25 a day, while in 2010 the peak had come close to $1.65 a day. Note that the full population of the developing world in 1990 and 2010 is captured below each income distributional line respectively.
As such, one can get an informed idea about the implication of shifts in the income distribution often caused by growth. In turn a picture also emerges of the effect of those shifts on the extreme poor.
Figure 1a: Pen’s parade
Figure 1b: Income distribution for developing countries
Another interesting observation from figure 1b is that far fewer people lived on or close to US$1.25 a day in 2010 than in 1990. Hence, shifting the income distribution to the right using the same growth rates as experienced in the recent past will lift fewer people out of poverty than was the case in 1990. This happens not just because there are fewer extremely poor, as we can see from figure 1a, but also because the 2010 income distribution lies well below the 1990 income distribution. Consequently, it will likely become harder and harder to lift people out of poverty through growth alone. While growth remains vital, we need to complement efforts to enhance growth with policies that allocate more resources to the extreme poor. This can be accomplished to some extent by focusing on inclusiveness, particularly with respect to job creation, and/or through government programs, such as public works, and cash transfer programs.