ECONOMY OF GHANA II POVERTY AND INCOME INEQUALITY

References University of Ghana, “Economics: Introduction to the Economy of Ghana II,” Centre for Distance Education, Institute of Adult Education, Ghana Statistical Service, “Poverty Profile in Ghana , Accra, April Various series of the ISSER State of the Ghanaian Economy.

POVERTY DEFINITION: A person is poor if he/she lacks or has low level of the basic essentials of life, food, shelter and clothing. Extreme Poverty  The World Bank defines extreme poverty as individuals living on less than US$1.25 per day in PPP terms Moderate poverty  as less than $2 a day

POVERTY Incidence of extreme poverty is uneven  According to the most recent estimates, in 2012, 12.7 percent of the world’s population lived at or below $1.90 a day. That’s down from 37 percent in 1990 and 44 percent in  This means that, in 2012, 896 million people lived on less than $1.90 a day, compared with 1.95 billion in 1990, and 1.99 billion in Poverty rates have declined in all regions however, progress has been uneven  East Asia saw the most dramatic reduction in extreme poverty, from 80 percent in 1981 to 7.2 percent in  China alone accounted for most of the decline in extreme poverty over the past three decades.  In 2012, just over 77.8 percent of the extremely poor lived in South Asia (309 million) and Sub-Saharan Africa (388.7 million). In addition, 147 million lived in East Asia and Pacific.

POVERTY CONT’D CHARACTERISTICS OF POVERTY Lack of education Lack of food Lack of housing Lack of access to health facilities Lack of access to portable water Lack of land or clear title to land Lack of income generating skills Low production and productivity

Definition of Income inequality Income is defined as household disposable income in a particular year. It consists of earnings, self-employment and capital income and public cash transfers; income taxes and social security contributions paid by households are deducted. The income of the household is attributed to each of its members, with an adjustment to reflect differences in needs for households of different sizes.

Income Inequality DEFINITION: Inequality can refer to economic inequality which is the difference in how assets, wealth, or income are distributed among individuals and/or populations. It is also described as the gap between rich and poor, income inequality, wealth disparity, wealth and income differences, or the wealth gap. Inequality can also refer to gender discrimination in social institutions and other gender issues such as the violence against women. Poverty is mainly determined by the size of one’s income. If one has adequate income, the one will be able to have access to the basic essentials of life. So the extent of poverty and inequality in a country can be measured through the size of income.

Measurement of Poverty and Inequality. Measurement of Poverty and Inequality deals with measurement of income. Table 1 shows the hypothetical distribution of the size of income of 20 people. The income is arranged in ascending order from the poorest person receiving GHC0.8 to the highest person getting GHC 100 a day.

Measurement of Poverty and Inequality CONT’D Table 1: Typical Size Distribution of Personal Income in a Developing Country by Income Shares— Quintiles and Deciles.

Quintiles and Deciles The distribution of the incomes can be grouped into five called quintiles or into ten called deciles. This will assist in knowing what proportion of income is received by each group. In Table 1, the first column shows the 20 persons, col. 2 shows their incomes, col 3 shows incomes grouped into 5 cumulatively while the last shows incomes groups into 10 cumulatively. If incomes of 20 persons are grouped into 5, it means we group 4 people separately. If the 20 incomes are grouped into 10, it means we group 2 persons’ incomes. From Table 1 the sum of the first 4 poorest persons make 5. This group is called the 5th quintile. The next sum 9 is the 4th quartile.

Quintiles and Deciles CONT’D In terms of Deciles, the poorest two persons with their income being 1.8 is the 10th decile. The second group with their income 3.2 is the 9th decile.

Inequality Measures These deciles and quintiles are used to measure income inequality. The measures include Absolute Inequality Relative Inequality Lorenz Curve Gini Coefficient

Inequality Measures CONT’D Absolute Inequality Measure The absolute inequality measure compares the aggregate income of the lowest quintile with those in the highest quintile. Sometimes the income of the lowest 40% (4th and 5th quintiles) is compared with the highest quintile (1st quintile). From Table 1, the poorest 40%of the population have about 14% (5 + 9)/100 * 100 = 14 of the income of the 20 people. Also the richest 20% of the population have about 51% (51/100 *100=51) of the income of the 20 people. These income comparisons of the poor and the rich give an idea on income inequality of the country.

Inequality Measures CONT’D Relative Inequality Measure This is the ratio of the bottom 40% of the population to the top 20%. This is a measure of the degree of inequality between the two extremes of the very poor and the very rich in society. From Table 1, this is (14/51) = 0.27 If the top 20% is divided by the bottom 40%, we get 3.62 = 51/14. This is the same. The first ratio, 0.27 implies that every GHc 1 that a rich person in the first quintile gets, a poor person in the bottom 40% gets GHc The second ratio, 3.62 implies that every GHc 1 a poor person in the bottom 40% gets, a rich person in the 1st quintile gets GHc The two interpretations are equivalent.

Inequality Measures CONT’D The Lorenz Curve The Lorenz Curve is the graphical measurement of inequality in an economy. This is shown in Fig. 1. The vertical axis measures the percentage of income while the horizontal measures the percentage of income recipients. Fig 1 is the representation of Table 2.

Inequality Measures CONT’D fig 1

Inequality Measures CONT’D Interpretation of the Lorenz Curve The Lorenz curve, Fig. 1, depicts the level of inequality in the economy. As the Lorenz curve moves away from the diagonal perfect equality, the degree of inequality increases and vice versa. If the Lorenz curve coincides with the diagonal then there is perfect equality in the economy or every person has the same amount of income. In the situation where one person receives all the income with all the others receiving nothing, perfect inequality, the Lorenz curve coincides with the lower and right-hand borders of the diagram.

Inequality Measures CONT’D INCREASING EQUALITY (DECREASING INEQUALITY) fig 2INCREASING INEQUALITY. Fig 3

Inequality Measures CONT’D Gini Coefficient It is the quantitative measurement of income inequality. It is the ratio of the area between the diagonal and the Lorenz curve divided by the total area of the triangle in which the curve lies shown in Fig 4. In Fig 4, it is the area A divided by the triangle BCD. It varies from 0 to perfect equality, to 1 perfect inequality. The higher the value of the Gini coefficient, the higher the curve sags away from the diagonal and the higher the level of inequality. Table 3 shows the Gini coefficient for some African countries in 2004.

Inequality Measures CONT’D fig 4

MEASURE OF POVERTY HEADCOUNT RATIO The poverty headcount ration (H) is the ratio of the population who are poor. H is determined by knowing the poverty line, the level of income below which an individual is considered to be poor. H = q/n where 0<=H=<1 q = the number of people whose income falls below the poverty line, say 50 n = is the total number of people in the economy, say 100 H = 50/100 = ½ While H is easy to measure it does not tell us the depth of poverty, that is, the extent of poverty

MEASURE OF POVERTY. CONT’D POVERTY GAP This addresses the problem of Headcount ratio. For instance, if many of the poor people are close to the poverty line, then the poor are not too poor but if many of the poor are far below the poverty line, then they are very poor. The gap index measures the total income necessary to raise everyone who is below the poverty line up to that line. The indicator measures the average income shortfall of all the poor as a proportion of the poverty line.

MEASURE OF POVERTY. CONT’D GP = 1/N (Z - Yi), where Yi = income of the individual i. Z = the poverty line N = total number of people

Poverty Trends in Ghana, 1991 – 2006 To calculate the poverty line, a survey is undertaken of people’s income to calculate the poverty line. In Ghana, two poverty lines have been established. These are: Upper Poverty Line = GHc371 Lower Poverty Line = GHc28 Individuals whose income falls below the upper poverty line are classified as poor and those that fall below the lower poverty line are classified as extremely poor.

Poverty Trends in Ghana. CONT’D The Ghana Living Standard Survey (GLSS) The Ghana Statistical Service from (1991/ /06) has conducted 5 GLSS GLSS I in 1982 GLSS II in 1989 GLSS III in 1991/92 GLSS IV in 1998/99 GLSS V in 2005/2006

Poverty Trends in Ghana. CONT’D The last three surveys are comparable and make it possible to examine the changes in poverty in Ghana over the fifteen-year period (1991/92 to 2005/06).

Poverty and Extreme Poverty Trends Incidence of poverty is the number of people classified as poor. This is headcount poverty ratio. The proportion of Ghanaians classified as poor was about 51.7% in 1991/92 but decreased to 39.5% in 1998/99 and further to about 28.5% in 2005/06.

Rural Poverty Poverty in Ghana as in other SSA is a rural phenomenon. About 86% of the total population below the poverty line were in the rural areas. This figure reduced slightly to 85% in 1998/99 but increased to 88% in 2005/06. Rural communities also benefited from poverty reduction. The proportion of rural people living below the poverty line declined from about 64% in 1991/92 to 50% and 39% in 1998/99 and 2005/06 respectively.

Uneven Decline of Poverty Poverty decline was unevenly distributed geographically from 1991/92 to 1998/99. Poverty reduction was observed mainly in Accra and the forest areas of Ghana. Apart from the urban savannah areas where there was an increase in poverty, poverty reduction was moderate in all other areas. Between 1998/99 and 2005/06, poverty reduced significantly in all localities apart from Accra and Upper West. The Accra situation is likely to be migration from poorer regions.

Extreme Poverty Extreme poverty is those whose standard of living is insufficient to meet their basic nutritional requirements even if they devoted their entire consumption budget to food. In Ghana, these are people whose incomes are below GHc288. The incidence of extreme poverty fell from 36% in 1991/92 to about 27% in 1998/99 and further to 18% in 2005/06.

Depth of Poverty This is analyzed using the income gap ratio. It is the proportion by which the average consumption level of the poor households fell below the poverty line. This was on average, about 35% below the upper poverty line in 1998/99 but slightly improved to about 34% in 2005/06. With respect to the extreme poor, the depth marginally improved from about 31% in 1998/99 to about 30% in 2005/06.

Poverty by Region Since 1998/99, the incidence of poverty has declined in all regions except Greater Accra and the Upper West region. The poverty reduced from 26% in 1991/92 to 5% in 1998/99 but increased to about 11% in 2005/06. In the Upper West region, poverty increased from 84% in 1998/99 to about 88% in 2005/06. This is where the highest incidence of poverty occurred in Ghana. The Eastern and Central regions were the two regions with the highest poverty incidence in southern Ghana in 1998/99 but were considered the regions with the 2nd and 4th lowest incidence of poverty as at 2005/06

Poverty by Main Economic Activity Fig. 5 shows the incidence of poverty by economic activities of the household. Poverty was highest among food crop farmers for all the years. Food crop farmers constituted the only group with a higher than average poverty rate of the nation. The implication is that any poverty reduction programme should target food crop farmers. Poverty was still high among export crop farmers, private informal and non-farm self-employment. There was reduction in poverty for all workers over the period, but to varying degrees. Public sector employees and export farmers experienced the largest reductions in poverty.

Poverty by gender of household On average, female-headed households are less poor than male- headed households.

Inequality Available information shows that income inequality has been increasing for the period. Rural inequality measured by the Gini coefficient in 1992 was 36%, while that of urban was 34%. However, inequality rose to about 40%. Preliminary results from the GLSS V show that inequality worsened since 1998.

Summary In sum, poverty has reduced consistently during the three periods, both in terms of extreme and normal poverty. Normal poverty has reduced more than extreme one. However, there has been extreme variation of poverty by region, gender, type of employment and for ecological zones.