Ethiopia: Poverty &
Inequality
September 28, 2011
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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
Measures of Income
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).
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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 1995. 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.
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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 .2976 (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.
Figure 4
Source: World Bank Databank
Gini Coefficient: Ethiopia
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Headcount Index
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.
# of people below PL
Headcount Index = total population
Percent
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.
Headcount Index
80
60
40
20
0
1980
1985
1990
1995
2000
2005
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
20
5
Figure 6
25
of
While the headcount index measures the number
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.
Poverty Gap
20
Percent
Poverty Gap
15
10
5
Source: World Databank
0
1980
1985
1990
1995
Year
2000
2005
Ethiopia’s neighbors, Djibouti and Kenya score more
favorably, at 5.29 and 6.10 percent respectively (Povcal
Net).
Poverty Gap=
Mean shortfall below PL
PL
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Figure 7
0.5
Calculating HDI
HDI is a calculation that measures the economic and social
development in a specific country. The HDI is comprised of three 0.45
different measurements: life expectancy rate, education index,
and GDP index. By taking all of the proportions and multiplying 0.4
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. 0.35
Countries with very high HDI values are usually mature markets,
those with stable economies. Those with low HDIs, like Ethiopia 0.3
(.4346) are usually unstable economies and are lacking in one or
0.25
more areas of the calculation. The diagram below calculates the
HDI for Ethiopia. All data is from the United Nations
0.2
Development Programme.
HDI Value
Kenya
Djibouti
Sudan
Ethiopia
2005
Graph reflects nHDI
Source: United Nations Development Program
2006
2007
2008
2009
2010
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.
Life Expectancy Rate:
= Life expectancy – 25
85 – 25
= 56.1 – 25
85 – 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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