Can reducing inequality reduce the disutility of the poor?

ABSTRACT

Using World Bank (2020), this paper estimates microeconomic utility-based elasticity measure of poverty-loss and provides better understanding of the distress of poverty and possible policy directions in rural and urban areas for India and the People’s Republic of China (PRC). This paper deviates from the conventional use of overly simple head counting. Utility-based welfare point elasticity estimates show substantial welfare gains for both countries, dominated by growth contributing 90%, relative to inequality reductions contributing 10%. Rural India deviates, showing a welfare gain with balanced growth-inequality promotion. Subsequent poverty-loss estimates show potentially declining disutility of poverty in both countries and sectors, with reducing inequality contributing 70%, relative to growth’s 30%. The elasticity estimates presented here show that reducing rural and urban inequality can best reduce the distress of the poor. By realigning priorities from promoting future urban growth to reducing urban and rural inequality can lead to substantial reductions in poverty-induced disutility.

KEYWORDS:

• Poverty and inequality
• urban and rural
• India and PRC
• welfare

JEL CLASSIFICATION:

• I32
• I31
• P25

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Vide Deaton (1997).

² This can also be considered as a reaction function of the authorities in terms of the weighted deviations of consumption and inequality from their target levels.

³ The lower rate of $1.45 for the Indian rural sector is used because the $1.90 poverty line gives a relatively high headcount ratio of 25.5%. These poverty lines are calculated per person per day in 2011 PPP terms.

⁴ Details about PRC’s planners’ loss functions are generally not available, although it is known the People’s Bank of China formalizes monetary policy using sophisticated time-varying, state-dependent reaction functions.