| Villa Borsig Workshop Series
1999 |
Inclusion, Justice, and Poverty Reduction |
Absolute poverty, relative deprivation
and social exclusion(1)
by François Bourgignon(2)
The title of this session, “Inclusion, Structural Inequality
and Poverty: Interplay of Economic and Social Forces”, clearly is an invitation
to establish a bridge between a somewhat standard economic approach to
poverty and inequality and a more sociological view at the relationship
between these concepts and the notion of social inclusion. I am not
sure that a hardcore economist is the best person to build such a bridge.
But, we must start somewhere and a strict economic perspective may be as
efficient a point of departure as a more multidisciplinary approach.
Starting from the general concept of poverty, I would like to develop
here three basic ideas which I believe permit identifying some of the links
between poverty and inequality on the economic side, and the concept of
social inclusion, on the sociological side. They also point to research
directions which have not yet been fully explored with enough care
by economists as well as a new way of looking at policy issues in the field
of poverty. The first idea refers to the distinction to be
made between the concepts of ‘absolute’ and ‘relative’ poverty, which I
will also often refer to in what follows as ‘physical’ and ‘social’ poverty
or still ‘relative deprivation’. The second has to do with the inter-temporal
and possibly intergenerational aspects of poverty and its relationship
with social mobility – or the lack of such a mobility. The last point is
concerned with the direct and indirect cost of relative poverty and the
lack of social mobility and the way they may be responsible for absolute
poverty in developing countries.
1. Absolute poverty or social deprivation: food vs. linen shirt
There has been a long debate in economics about whether income or consumption
poverty lines should be defined in absolute or relative terms. Most international
organizations define the poverty line in an absolute way as the level of
income necessary for people to buy the goods necessary to their survival.
For instance the ‘1 dollar a day ‘ line - at 1985 purchasing power
parity- has been extensively used ever since the 1990 World Development
Report as the ‘extreme’ poverty line in studies of the extent of poverty,
its socio-demographic profile and its evolution in the world and in specific
countries. Other analysts prefer defining the poverty line in relative
terms as some proportion of the mean or the median income in the country
under analysis. With such a definition some authors prefer then to
refer to ‘relative deprivation’ rather than poverty. However, no
such semantic precaution is taken when the European Commission defines
the European poor as all people whose consumption expenditures or income
falls below 50 per cent of the mean in the country where they live.
These two concepts are far from equivalent. Even though they may well
coincide at some point of time in a particular country, there is no reason
they should continuously do so. Should we prefer one to the other?
The debate on this issue has been going on for very long among economists
– see for instance Atkisnon (1998) or Ravallion (1992). It is not settled.
However, there does not seem to be any strong reason why it should be settled
in favor of one or the other alternative. Absolute and relative poverty
concepts are simply aimed at describing and analyzing different issues.
Physical poverty is about mere survival, that is the capacity to buy food
and all the goods necessary for the fulfillment of basic physical needs.
Relative poverty, or social deprivation is about not being like others.
This is the ‘linen shirt’ argument that Sen (1983) borrowed from
Adam Smith. In 18th century England, a peasant unable to afford
wearing a linen shirt would not participate to social events in his village,
even though he and his family might not be undernourished. In this
sense, poverty arises any time an individual cannot afford doing,
or ‘functioning’ in the words of Sen as ‘most’ people do in the society
he/she is living in. Social poverty or relative deprivation thus describes
a social phenomenon which may be considered as very close to the
more modern concept of ‘social exclusion’. By contrast, somebody who is
physically or ‘absolutely’ poor may not be socially excluded if most of
the people he/she knows share the same condition.
The two concepts are not exclusive. They simply describe different
conditions and may in some instances call for different policies. If physical
poverty is very widespread in a country, as it is the case in the poorest
developing countries, growth-enhancing policies must probably be given
high priority. If physical poverty is less important but if social
poverty and therefore ‘social exclusion’ is found to be excessive, then
redistribution policies, or possibly growth-cum-redistribution policies
are called for.
The development literature generally takes either one or the other
point of view but rarely both. In particular, relative poverty is often
found to be related to or synonymous of ‘inequality’ and therefore of no
primary relevance for ‘actual’, that is ‘absolute’ poverty issues and policy.
I do not see any reason why both concepts should not be considered simultaneously.
There are countries in Africa and Asia where the dominant problem
is absolute poverty and where social exclusion or relative deprivation
is presently of lesser importance. But there are countries where
both physical and social poverty are of concern, as in many parts of Latin
America. Too much priority given in the past to absolute poverty over relative
deprivation, or equivalently social exclusion, may have contributed in
some cases to inadequate policies. It is important to reestablish some
parity between both points of view in all cases where this is justified.(3)
2. The dynamics of poverty: social exclusion as permanent poverty
Poverty, absolute or relative, would not be a problem if it were known
to be purely transitory, that is limited for all poor to very short periods
of time. This means that the previous definition of physical poverty
and social deprivation are insufficient. They must be made dynamic. In
such a perspective, the link between poverty analysis and the concept of
social exclusion appears still more clearly.
With an inter-temporal definition absolute poverty would correspond
to a situation where an individual would remain permanently, or at least
for a very long time below some physical poverty line. This might be for
two reasons: limited income mobility and slow economic growth making more
distant the prospect for poor people to cross the poverty line. It
may be shown that such an inter-temporal definition of absolute poverty
- i.e. how many people are below the poverty line and for how long - is
not independent from the initial importance of relative deprivation, or
more generally of inequality. Kakwani (1993) and Chen and Ravallion
(1998) noted that under the assumption of a constant distribution of relative
incomes and a constant rate of growth it would take more time to eradicate
absolute poverty in a more inegalitarian economy than in an economy with
less relative deprivation.
Taking an inter-temporal point of view has more far-reaching consequences
for social poverty. Permanent relative poverty is a situation where some
individuals in society have simply no chance of ever having an income larger
than some limited proportion of the mean or median income of society. They
are trapped in a low relative income position. The word ‘chance’ used here
may be given different meanings. It is unlikely that somebody may be structurally
unlucky by drawing systematically bad numbers in a lottery. In other words,
the point is not that some people in society are systematically affected
by negative productivity shocks. The lack of chance behind the relative
poverty trap may be due to less efforts being made to obtain what would
be socially considered a more or less decent level of income. More importantly,
however, it may result from a structural lack of opportunities. Even if
individuals caught in a low relative income trap were making all possible
efforts they would be unable to reduce the distance from typical living
standard – median or mean – in the society they live in. In the terms
of Sen, their capability set is simply not broad enough to permit them
catching up. In that sense they truly are ‘socially excluded’. They are
not excluded because they cannot do today what other people usually do.
They are excluded because there is no way they will ever be above the corresponding
relative income poverty line no matter how much work or efforts they put
into it. This will generally be because they inherited an unfavorable
combination of skills. In some cases, this will be because they belong
to some specific social group defined by race or ethnic origin that
is discriminated against. But it will more often be because they were simply
born from poor parents and due to several market imperfections, most
noticeably credit-market imperfections, they did not have the same opportunities
as children born in other social classes. The economic reasons for such
a persistence of relative poverty, or more generally for the reproduction
of inequalities, have received very much attention by economists over the
last 10 years or so.(4)
Policy issues related to this dynamic definition of poverty and/or social
exclusion are not necessarily the same as those alluded to above in connection
with instantaneous absolute or relative poverty, that is economic growth
and redistribution of current income. The problem is first to identify
why getting out of relative poverty is dynamically so difficult. Is it
because of discrimination in the labor market, imperfections of the credit
market, residential segregation, …? It is also conceivable that these
traps act as a strong disincentive for more efforts to be made to increase
one’s income in formal activities. Overall, policies to be considered in
this context should be aimed at correcting the way factor markets work
– especially the imperfections of the credit market and possible discrimination
on the labor market. They could also be aimed at facilitating social inclusion
through the formal labor market.
3. Two-way causality: relative poverty is inefficient and may cause absolute
poverty
An important contribution of the recent economic literature has been to
show that poverty and distribution issues were not pure distributional
problems, that is the problem of how to divide a cake of given size. There
are many reasons to believe that, on the contrary, the size of the cake
depends precisely on the way it is divided in society. This
implies that a society with little relative poverty and social exclusion
could be more efficient and therefore more able to avoid absolute poverty
than a more inegalitarian society. I shall give in what follows three
examples of economic mechanisms which may lie behind such a relationship.
Two of them also provide illustrations of dynamic poverty traps of the
type discussed above.
The mechanism which received most attention to date is linked with the
imperfection of the capital market – see for instance Bardhan, Bowles and
Gintis (1999) and Piketty (1999). Because of asymmetric information poor
people cannot borrow from formal financial intermediaries even though they
may have investment projects with expected rates of return higher than
in the rest of the economy. As the cost of these projects as well
as the collateral requirements on the credit market are likely to increase
with the level of development of the economy, too much inequality in the
relative distribution of wealth is thus responsible for socially
profitable projects not being undertaken and consequently relatively deprived
people remaining poor possibly both in absolute and relative terms. The
initial distribution of wealth is creating permanent poverty and social
exclusion. As very well illustrated in a model by Galor and Zeira (1993),
it may be the case that that poor people facing such a credit market imperfection
will never be able to accumulate enough collateral to get beyond it or
will simply find it too hard to do so.
A second mechanism is provided by the theory of self-fulfilling expectational
equilibria in the theory of labor-market discrimination. In a world
where it is held that members of a given class make little efforts at work
and where individual performances are not observable, there is no incentive
for these people to make more efforts and to be more productive than what
is expected. They would not get any reward for such efforts since
they are paid on the basis of their class origin – assuming of course that
it is observable. This certainly is quite an inefficient outcome.
It would clearly be in the interest of discriminated workers to make more
efforts and to receive a higher wage.(5)
If relative poverty or social exclusion is taken as some kind of stigma
by potential employers and if it is readily observable then the same argument
would apply to the poor as to racial or gender discrimination. Social
exclusion and long-run unemployment in some European countries might be
analyzed very well in the same way – see Atkinson (1998).
A third illustration of the efficiency cost of relative poverty and
the self-reinforcing effects of social exclusion is provided by the economic
theory of crime. An almost zero probability of getting out of relative
poverty through legal activities may make it rational for some individuals
to get into illegal activities. If this criminal behavior has negative
consequences on the welfare of the rest of the population, for instance
through robberies, then the direct efficiency cost of excessive relative
poverty is pretty clear. It is not less so when this behavior leads to
more public expenditures on police and security rather than on hospitals
and schools which could precisely help alleviating permanently absolute
poverty.
This possible complementarity of economic efficiency and equity illustrated
by the preceding examples open new grounds for economic analysis and economic
policy. These examples also provide interesting links between economics
and a more sociological approach to poverty issues. The same is true of
the argument in favor of apprehending poverty issues in a relative and
inter-temporal context. Most of these questions are of importance in both
developed and developing countries. However, the pressure of absolute
poverty makes the preceding arguments more relevant in the context of economic
development.
______________
Notes
1) Paper prepared for the Workshop on the World
Development Report organized by the DES, Berlin, villa Borsig, Februray
2-3, 1999.
2) Delta and Ehess, Paris
3) A systematic attempt at taking into account
simultaneous both concepts may be found in Atkinson and Bourguignon (1999).
4) See below, section 3.
5) See Coate and Loury (1993) for an analysis of
the role of policy in such a situation.
______________
References
Atkinson, A. (1998), Poverty in Europe, Blackwell
Atkinson, A. and F. Bourguignon (1999), Poverty and Inclusion
from a World Perspective, Paper presented at the World Bank Conference
on Development, June, Paris.
Bardhan, P., S. Bowles and H. Gintis (1999), Wealth Inequality,
Wealth Constraints and Economic Performances, in A. Atkinson and F. Bourguignon
(eds), Handbook of Income Distribution, Elsevier, forthcoming
Coate, S. and G. Loury (1993), Will Affirmative Action
Policy Eliminate Negative Stereotypes, American Economic Review, 43(5),
1220-1240
Galor, O. and J. Zeira (1993), Income Distribution and
Macroeconomics, Review of Economic Studies, 60, 35-52
Kakwani, N. (1993), Poverty and Economic Growth with
an Application to Cote d’Ivoire, Review of Income and Wealth, 39(2), 121-139.
Piketty, T. (1999) Theories of Persistent Inequality
and Intergenerational Mobility, in A. Atkinson and F. Bourguignon (eds),
Handbook of Income Distribution, Elsevier, forthcoming
Ravallion, M. (1992), Poverty Comparisons: a Guide to
Concepts and Methods, Fundamentals of Pure and Applied Economics, 56, Harwood
Academic Publishers
Sen, A. (1983), Poor, relatively speaking, Oxford Economic
Papers, 35, 153-69
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