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Ethiopia: Poverty & Inequality

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1 Ethiopia: Poverty & Inequality
September 28, 2011

2 Source: World Bank Databank
Measures of Income Figure 1: Ethiopia GDP/capita Gross Domestic Product is a measurement of the value of goods and services produced in a country in a particular year. GDP per capita is the GDP divided by total population, giving us a measurement of individual output. While this is a useful measurement for some purposes, it does not show the distribution of income in the country. Ethiopia, as of 2010 GDP per capita PPP, is ranked 170th out of 183 countries analyzed by the IMF (World Economic Outlook Database). Figure 1 graphs the GDP per capita in current US dollars and GDP per capita in current international dollars. To put it in simple terms, GDP per capita PPP is adjusted to reflect the exchange rate so an identical good in two different countries has the same price (Investopedia). In the early 90s Ethiopia experienced a drastic decline in GDP per capita. This could be the result of a few different things. Dollars Source: World Bank Databank Year Ethiopia’s economy is largely dependent on agriculture, approximately 50 percent, while 85 percent of the labor force works in agriculture. Famines, droughts, and trade barriers can all adversely impact GDP (CIA the World Factbook). Additionally, much of the 90s was spent in conflict with Eritrea, a neighboring country. Also there was much reform in the government at that time, leading to slower economy. At this same time, GDP per capita, PPP is rising fairly consistently. This could be inflation, which is likely when PPP rises, while GDP per capita remains. It essentially says that the price of a basket of goods is much more expensive than it used to be. In the US, we use CPI as a main indicator for inflation, which by definition is the change in the value of a basket of normal goods over time. The better measure of GDP is the GDP per capita (current US$) because it better measures the growth of an economy. In Ethiopia’s case, they continued to decline/stagnate until the 2000s when they received debt relief from the Highly Indebted Poor Countries (HIPC) and in 2005, the International Monetary Fund forgave Ethiopia of their debt (CIA, World Factbook).

3 Income Distribution Table
Figure 2 On the previous page we examined GDP/capita. Now we will look into how the income is distributed among Ethiopia. Figure 2 graphs the income held by different income quintiles. While it might be obvious that the poorest 20 percent of the population hold the least amount of the nation’s income and that the richest hold the most, there is much to be seen from the data. In a perfectly equal country, each 20 percent of the population would hold 20 percent of Ethiopia’s income. From Figure 2, we see that there is a large disparity between the income of the poorest 20 percent and the income of the richest. The richest 20 percent hold close to four times the amount of the poorest. Source: World Bank Databank Interestingly, when we look at the data from different years, we see that in 1995, all but the top 20 percent held far less than all other years, before and after The data leads us to believe that there were some abnormal external factors affecting the results. In August 1995, the government of the Federal Democratic Republic of Ethiopia was formed (US Department of State). From then, the government officials and the richest people in the country held most of the income, while the majority was left with less than before. In 1998 a war broke out, and with all wars, they are very costly. Therefore, much of the income of the rich was probably spent on financing the war. Still in 2004, according to the map, Ethiopia and Eritrea are among the lowest in income in all of Africa.

4 Lorenz Curve & Gini Coefficient
Income Inequality in Ethiopia Figure 3 shows another way to represent the income distribution and inequality in a country. The graph is composed of 2 lines. The straight line at a 45 degree angle is the equality line. If all the income in a country was distributed perfectly, that country would be in a state of perfect equality. The Lorenz curve is the actual income distribution. This graph is similar to the income distribution on the previous page, however the income accumulates, rather than isolating the data for each quintile. The more curvature a Lorenz curve has, the more unequal the country is. For Ethiopia, the Lorenz curve is comparable to its neighboring countries. Within the equality line and the Lorenz curve lies an area shaded in Figure 4. This shaded area represents the Gini Coefficient or the Gini Index. The Gini Coefficient shows the gap between the rich and the poor. A country with perfect equality will have a Gini Coefficient of 0 and a country with perfect inequality will be 1. Also, there is usually a negative relationship between the wealth of a country and the index. Wealthier countries tend to have a lower coefficient and poorer countries tend to have a higher coefficient. The exception, however lies in the Latin American countries. In Ethiopia, the Gini Index is (World databank). This number is relatively low. Of the 136 countries ranked by the CIA Factbook, Ethiopia ranked 113. And as we know, Ethiopia is one of the poorest countries in the world based on GDP per capita. Line of equality Lorenz Curve Figure 4 Source: World Bank Databank Gini Coefficient: Ethiopia Gini Coefficient

5 Headcount Index (as a percent of population)
The next measure of poverty examined is the headcount index. This is a simple calculation of the number of people below the poverty line divided by the total population. In this case, the poverty line is $1.25 PPP. Thus anyone below that would be counted. According to Figure 5, over the past 25 years, the headcount has dramatically decreased to under 40 percent. The high number in 1982 is most likely related to the revolution that started in 1974 that was a result of corruption in the political and economic system combined with a famine. During these times of revolution, poverty rates usually rise substantially. Since then, however, changes have been made and the long-run GDP is growing which is pulling a portion of the population out of poverty. Relative to neighboring countries, it appears that Ethiopia continues to perform sub-par, in terms of the headcount index. However, the results do not show how far below these people are below the poverty line. For this, we look at the poverty gap. Source for graph and table: World Databank Headcount Index (as a percent of population) Ethiopia Kenya Djibouti 1982 66 1992 38 1994 29 1995 61 1996 5 1997 20 2000 56 2002 19 2005 39 Headcount Index = # of people below PL total population

6 Poverty Gap Figure 6 Mean shortfall below PL PL Poverty Gap=
While the headcount index measures the number of people below the poverty line, the poverty gap measures how far they are below the poverty line. In other words, how poor the country actually is. The poverty gap is calculated by dividing the mean shortfall below the poverty line by the poverty line. For example, in figure 6, in 2005, the people below the poverty line were on average around 10 percent below the line. Historically, this is a great improvement. This has dropped more than 50 percent in the past 2 decades. This improvement can also be attributed to the economic and political reforms, as well as global aid and debt forgiveness. Ethiopia’s neighbors, Djibouti and Kenya score more favorably, at 5.29 and 6.10 percent respectively (Povcal Net). Mean shortfall below PL PL Poverty Gap=

7 Calculating HDI Figure 7 Kenya Djibouti Sudan Ethiopia
HDI is a calculation that measures the economic and social development in a specific country. The HDI is comprised of three different measurements: life expectancy rate, education index, and GDP index. By taking all of the proportions and multiplying them by one-third, we come upon a value between 0 and 1 that gives us an idea of where a country lies in terms of development. Countries with very high HDI values are usually mature markets, those with stable economies. Those with low HDIs, like Ethiopia (.4346) are usually unstable economies and are lacking in one or more areas of the calculation. The diagram below calculates the HDI for Ethiopia. All data is from the United Nations Development Programme. In Figure 7, Ethiopia’s HDI is compared with that of its neighboring countries. It is significantly lower than all its neighbors. When isolating the information, Ethiopia has a much lower HDI because their education index and GDP/capita is far inferior. Life expectancy is comparable to the others. Graph reflects nHDI Source: United Nations Development Program Life Expectancy Rate: = Life expectancy – 25 85 – 25 = 56.1 – 25 = .5183 Education Index: = 2/3(adult literacy rate) + 1/3(gross enrolment index) = 2/3(.359) + 1/3(.49) = .4027 GDP/capita Index: = log(991) – log(100) log(40,000) – log(100) = .3828 HDI Value: = 1/3(Life expectancy rate) + 1/3(education index) + 1/3(GDP index) = 1/3(.5183) + 1/3(.4027) + 1/3(.3828) = .4346

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