Executive summary

Table 1.3: Inequality Measures of Per Capita Consumption by Area

Note 1: Inequality figures are calculated for individuals. Note 2: (i)=consumption ratio between deciles 10 and 1; (ii)=consumption ratio between percentiles 90 and 10; (iii)=consumption ratio between percentiles 95 and 80; (iv, v and vi) Atkinson() refers to the Atkinson index with parameter ; (vii, viii and ix) Entropy() refers to the Generalized Entropy index with parameter . Entropy(1)=Theil index. Source: Own estimate based on ENV 1997 and 2003 data.

Changes in Poverty and Inequality: Decomposition Analysis

1.18In this section, we examine the nature of changes in poverty, decomposing the changes by various components. Because the changes in overall poverty are small, we focus our analysis on the more substantial drop in extreme poverty.

Decomposition Analysis of Growth and Inequality

1.19A useful way to examine the impact of growth on poverty is to decompose the change in the headcount rate into changes due to consumption growth and changes in inequality.¹⁰ We report the results from these decompositions for extreme poverty in Panama are shown in Table 1.4.

1.20

Table 1.4: Growth and Inequality Extreme Poverty Decomposition by Area

Note: Decompositions were calculated using the approach of Datt and Ravallion (1992) Source: Own estimate based on ENV 1997 and 2003 data

As it can be seen, at the national level, the small drop in extreme poverty is due almost entirely to changes in the distribution. That is, despite negative average consumption growth, the distribution of consumption per capita shifted in favor of the poorest resulting in a slight drop in extreme poverty.

Box 1.2: Understanding the Evolution of Rural Poverty in Panama There is a considerable duality between the indigenous and the non-indigenous areas in rural Panama. With a fourth of the per capita income of the non-indigenous, poverty is twice as high in indigenous areas. Levels of malnutrition and illnesses are also substantially higher in indigenous areas, and schooling levels are significantly lower. A study prepared by the United Nations Development Program (UNDP) and the Brazilian National Institute for research in Applied Economics (IPEA) examined the main sources of this duality^11. The main findings of the study are the following. Between 1997 and 2003, poverty increased in indigenous and decreased in non-indigenous areas. Inequality, however, decreased significantly in both areas. This drop in inequality contributed to the reduction in extreme poverty in non-indigenous areas, but did not improve poverty in indigenous areas. The drop in inequality was so strong in both areas, that even with the increased disparities between both areas, overall rural inequality decreased. The factors behind the changes in poverty in both indigenous and non-indigenous areas were the same: non-labor income, and non-agricultural labor income. However, these factors affected the indigenous and non-indigenous in opposite ways. The analysis indicates that the increase in poverty in indigenous areas was mostly caused by a sharp drop in both non-labor and non-agricultural labor income. Both dropped by approximately 20 percent between 1997 and 2003. For non-indigenous areas, however, the same two factors were responsible three fourths of the drop in extreme poverty. Non-labor and non-agricultural labor income increase by more than 20 percent in the non-indigenous rural areas. While agricultural labor income cannot explain the changes in rural poverty, it does explain most of the changes in inequality within indigenous and non-indigenous rural areas. It seems that the productivity of the high wage agricultural jobs has declined, while the productivity of the low wage jobs has increased. While more research is needed, anecdotal evidence suggest that some large agribusiness have left the sector, which could explain the drop in productivity of the higher wage jobs in rural areas. Also, the increase in rural to urban migration may be a sign that those earning low wages in rural areas have decided to leave to the city, which could explain some of the increase in the productivity of the low wage jobs in rural areas.

1.21For urban areas, one the other hand, the small increase in extreme poverty can be equally attributed to distributional changes against the poor and negative consumption. In rural areas, however, the large drop in poverty can be mostly attributed to consumption growth.

1.22For the indigenous comarcas, the decomposition tells a different and puzzling story. Despite the fact that average consumption dropped between 1997 and 2003 in the comarcas, our results indicates that most of the observed increase in extreme poverty was due to the drop in inequality. That is, there has been a drop in the dispersion and a shift downwards of the consumption distribution of the indigenous. This is likely a result of migration of the few top earners out of the comarcas.

Regional Decomposition of Changes in Poverty

1.23Another way of breaking down the overall change in national extreme poverty rates over time is by considering the contribution of changes in poverty in each region. Such a decomposition attributes the national level change to 1) changes in poverty within the urban/rural/indigenous regions, 2) changes in poverty due to changes in the population shares of the regions, or population-shift effects, and 3) and an interaction effect.¹² Results from this decomposition are shown in Table 1.5. They show that most of the drop at the national extreme poverty was caused by a decline in poverty in rural areas.

Table 1.5: Regional Decomposition of the Change in Extreme Poverty by Area
Source: Own estimate based on ENV 1997 and 2003 data

1.24

Figure 1.4: Urban and Rural Migration Population Aged 10 and Older

Source: Own estimate based on ENV 1997 and 2003 data. Note: The definition used for migrant is by place of residency 5 years ago.

The results above suggest that rural-urban migration may have been a major factor in bringing down extreme poverty in rural areas and up in urban areas. We explore the plausibility of this hypothesis further by looking at migration data in both the 1997 and 2003 ENV surveys. Indeed, as shown in Figure 1.4, the flow of rural-urban migrants seems to have increased. As it can be seen, the fraction of urban residents that had lived in rural areas five years before the survey increased by 66 percent between 1997 and 2003, from 1.3 to 2.2 percent of all urban residents. On the other hand, the fraction of rural residents that were living in urban areas 5 years before the survey stayed the same at 1.7 percent. This suggests a significant increase in the flow of rural residents to urban areas.