Household Income Distribution in Cambodia
Household Income Distribution in Cambodia
Cambodia makes a good process to lead GDP growth, but we’d also like to know who reaps the benefit when it grows—the poor, the middle, the wealthy class or everyone. What was the net effect?
In Cambodia, the recent development makes a good process to lead gross domestic product growth, but we’d also like to know who reaps the benefit when it grows—the poor, the middle, the wealthy class or everyone. What was the net effect?
The evolution in a different sector during nearly three decades since the first national election in July 1993 made Cambodia change a lot with a GDP growth of more than 7% per year and raised its per capita income from $323 in 1995 to $1,621 in 2019. At the same time, people living under the national poverty line fell disproportionately from 53.2% in 2004 to 13.5% in 2014, according to the National Institute of Statistics (NIS).
Due to socioeconomic change, the Ministry of Planning decided to change the poverty line's determination. Starting from 2021, people who received income frequently $2.73 per day were classified as having economic status in the poverty line. Before that changed, people who earned $0.87 for rural regions and $1.58 for Phnom Penh were considered as living below the poverty line. Based on the new determination, 17.8% or 2.8 million Cambodians experienced living under the poverty line in 2020.
We can say that economic growth benefits everyone, more families and people moved out from poverty, however, the unequal distribution of income and wealth, as well as opportunity between different groups in society has a difference.
New evidence from my working paper on “Monetary Policy and Household Income Distribution” shows that Cambodia has declined significantly in household income inequality over the last seven years. By using the Cambodia Socio-Economic Survey between 2014-2019/2020 dataset, I find that the Gini coefficient fell remarkably from 0.58 to 0.49, making a change of around 18% in the period. It should be noted that a low value of the Gini coefficient indicates the low level of household inequality across the total observation involved, which represented the whole Cambodian household.
Generally, all five main economic regions, such as Phnom Penh, Central Plains, Tonle Sap, Coastal, and Plateau and Mountains, have decreased household income inequality. The median family income throughout the nation rose from $5,707 in 2017 to $6,074 in 2019/2020. This figure is disparate from the NIS finding because I removed the bottom and high-income families at the top 1%.
Although the overall household income inequality dropped, the distribution of disposable income between the poorest and wealthiest households climbed sharply in the study waves. As dividing the income of households at the 90th percentile with these of households at the 10th percentile creates the 90/10 radio to demonstrate income inequality trends from 2014-2019/2020, I discovered that the richest families stayed at roughly seventeen times (fourteen times in the baseline year of 2014) the amount earned by poorest households at the 10th percentile across the country.
The poorest households increased disposable income but not much. A Multidimensional Poverty Analysis by Henny Andersen appears that people living just above the poverty line are reminded to face challenges like those below the poverty line. They are still vulnerable and suffering from deprivation. Nevertheless, the poverty assistance programs don't have an inclusive theme because they have a slightly different income.
In economic theory, income inequality can correlate with unemployment and inflation. But the rate of unemployment and inflation is not alarming.
In 2019, for example, the unemployment rate was just 0.31%, while the average rate between 2010 in quarter one to 2021 quarter two is 0.43% based on the data point from the International Labor Organization (ILO). Some people said this statistical data doesn't tell the entire story. Still, it may be a problem with the unemployment rate definition. Based on the ILO, they account for all people who have to work a few hours in a week, both paid and unpaid, looking for another job and other income sources as having a job.
The government doesn't have the policy to set a target for each year's inflation rate, but they act to make a low inflation rate with a stable exchange rate. A result of my finding indicates that the impulse response of GDP growth to inflation has been inadequate, 0.07 percentage point in terms of magnitude from 2011 in quarter 3 to 2021 in quarter 2. This result means that the growth of GDP and board money does not much affect the inflation rate.
Why do we worry about income inequality? Because we care about human welfare.
It is hard to find specific evidence about the effects of income inequality. But it’s never good for society. Professor Joseph Stiglitz says that rising inequality is putting a brake on growth and promoting economic instability. The British epidemiologists Kate Pickett and Richard Wilkinson have probably confidence in the adverse effects. In the book “The Spirit Level: Why More Equal Societies Almost Always Do Better,” they suggest that severe inequality undermines social bonds and dashes the health of millions. It contributes to mental illness and social relations. It increases social distance, intensifies mistrust and competition for status, and feeds feelings of humiliation and status anxiety. It fosters crime and violence. It lowers life expectancy and increases obesity and teenage pregnancy. These ills don’t affect just the poor but they affect everybody.
In a recently published document on the 2021 World Happiness Report, John F. Helliwell, Haifang Huang, Shun Wang, and Max Norton find that Cambodians had a significantly decreased level of happiness in 2020. The Kingdom ranked 91 out of 95 countries in terms of well-being relies on three main components: life evaluations, positive and negative emotions, while a median ranked in 2017-2019 is just 76. The authors analyzed this happiness index based on the Gallup World Poll dataset, and the observations themselves typically have more than 1,000 responses gathered annually for each country which they used weighted averages to construct population to represent national averages.
This statistical analysis shows that the life satisfaction of Cambodia through smiling and laughing was shallow during the pandemic period when the happiness of Thai, Laotian and Burmese have decreased slightly compared to the ranking in 2017-2019. The reality is that lockdowns, school closures, and working from home make many people unhappy, worried about health care, and probably worried about jobs. This can cause sadness and anger or get into distress and depressive symptoms. Why is this result so bad for Cambodia? This report doesn't show happiness through income earning.
There are many ways to end poverty and income inequality, both directly and indirectly. Economists classified the instrument policy into five dimensions: economics, human, political, sociocultural, and protective. For example, the policy action through economics and human dimensions suggest being resilient to technology change, globalization, sustainable economic growth, innovative monetary and fiscal policy, creating the personal income tax system, well-designed labor market, labor protection, health insurance to the poor, cash transfer program, improving education and training program.
Professor Greory Mankiw, the Harvard macroeconomist, suggests that “The best way to address rising inequality is to focus on increasing educational attainment,” he said. Yet increasing education alone isn’t going to do anything to bring high wages and help people who have low-skill levels to generate more income.
The government should consider the trade-off to reduce income inequality and economic growth. It posits, quite reasonably, that making an extra $1 million will improve the well-being of a bottom-class family more than losing $1 million will reduce the well-being of a billionaire. The richest can use $1 million to create another $3 million through business opportunities and create more jobs for people.
In each dimension, we need evidence-based and more information to evaluate the progress of implementing and find the ability to create new policies and actions that are more efficient and effective.