SOURCES OF INCOME INEQUALITY IN RURAL PAKISTAN: A DECOMPOSITION ANALYSIS
| DOI | http://doi.org/10.1111/j.1468-0084.1992.mp54004008.x |
| Date | 01 November 1992 |
| Published date | 01 November 1992 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 54,4(1992)
0305-9049 $3.00
SOURCES OF INCOME INEQUALITY IN RURAL
PAKISTAN: A DECOMPOSITION ANALYSIS
Richard H. Adams, Jr and HaroldAldermanf
Ever since the appearance of Kuznets' seminal works (1955, 1963) on the
relationship between economic development and income inequality, there
has been much interest in the sources of income inequality in the developing
world. Within the past 15 years the development of new methodologies for
decomposing the sources of income inequality has infused this subject area
with new data and insights. Using various techniques, a number of empirical
studies in developing countries have pinpointed the contribution of different
sources of income to total income inequality.' These studies have decom-
posed income inequality by economic sector (e.g., urban vs. rural), income
source (e.g., income from labour vs. capital vs. land) and family characteristics
(including educational and occupational attributes of workers).
Such empirical studies are of considerable potential use to policymakers
because they help identify both the structure of income inequality and how
the character of that inequality changes over time. Equipped with such infor-
mation, govermnent officials can devise specific policy measures to help
improve the distribution of urban and rural incomes.
This paper seeks to add to our knowledge about the sources of income
inequality in the developing world by examining the sources of such
inequality in rural Pakistan. The paper attempts to make two contributions.
First, it uses panel data gathered in a rural area to identify the contribution of
different sources of income - agricultural, livestock, rental, non-farm and
transfer - to total rural income inequality. This is useful because, to date, few
decomposition studies have used time-series data in ungrouped (disaggre-
gated) form to show the contribution of various income sources to rural
tThe authors are grateful to Jane He and Dipa Nag-Chowdhury for valuable computer
assistance. We would also like to thank Marjory-Anne Bromhead, Aly Ercelawn, Gary Fields,
Paul Glewwe, Ashfaque Khan and an anonymous reviewer for very useful comments. An
earlier version of this manuscript was presented at the May 1991 Meeting of the Pakistan
Association of Agricultural Social Scientists.
On Pakistan, see Kruijk (1987), Mohammad and Badar (1985) and Ercelawn (1984); on
other developing countries, see Glewwe (1986), Nugent and Walther (1982) and Pyatt, Chen
and Fei (1980).
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inequality in a developing country.2 Second, after identifying agricultural
incOme as the main source of rural income inequality, this study decomposes
the sources of agricultural income with a view to understanding how much of
this agricultural inequality is due to unequal landownership. While landowner-
ship is quite skewed in rural Pakistan, the study shows that returns to labour
and crop profits make as large a contribution to agricultural income inequal-
ity as unequal landownership.
The paper proceeds in five sections. Section I examines the measurement
of income inequality and presents the decomposition of several inequality
measures. Section II presents the data set. Section III identifies agricultural
income as the leading source of rural income inequality and Section IV
decomposes the sources of agricultural income inequality. Section V
summarizes the conclusions.
I. THE DECOMPOSITION OF INCOME INEQUALITY
At the start of any decomposition exercise, the question arises: what measure
of inequality should be chosen for the analysis? Several different inequality
measures have been proposed in the literature (Fields, 1980; Kakwani,
1980). Following Foster (1985) and others, the chosen measure should have
five basic properties. They are: (1) Pigou-Dalton transfer sensitivity; (2)
symmetry; (3) mean independence; (4) population homogeneity; (5) decom-
posability.
Pigou-Dalton transfer sensitivity holds if the measure of inequality
increases whenever income is transferred from one person to someone richer.
Symmetry holds if the measure of inequality remains unchanged when indi-
viduals switch places in the income order. Mean independence holds if a pro-
portionate change in all incomes leaves the measure of inequality unchanged.
Population homogeneity holds if increasing (or decreasing) the population
size across all income levels has no effect on the measured level of inequality.
The property of decomposability allows inequality to be partitioned either
over sub-populations or sources. It is the latter type of decomposition that is
the subject of this analysis. Ideally, an inequality measure can be regarded as
source decomposable if total inequality can be broken down into a weighted
sum of inequality by various income sources (e.g. agricultural and non-
agricultural income). However, since activities which influence a particular
source of income are likely to have an impact on other activities from which
total income is comprised, any inequality measure which is source decom-
posable must address covariance among the income sources.
There are several measures of inequality which meet the five preceding
properties. These measures include Theil's entropy index T, Theil's second
2the decomposition studies cited in note (1), only Nugent and Walther (1982) use
panel data in ungrouped (disaggregated) form to examine short-run fluctuations iñ the sources
of rural income inequality.
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