Sources of Income Inequality in Pakistan

Hans De Kruijk


In a paper presented at the 1985 Conference of this Society
[Kruijk and Leeuwen (1985)] we described some structural changes in
poverty and income inequality in Pakistan during the 1970s. All
inequality measures and poverty indicators pointed to the conclusion
that poverty has declined while at the same time inequality has
increased. However, the paper did not go deep enough into the reasons
why inequality has increased. It did appear that neither the urban/rural
distinction nor interprovincial income differences are important
determinants of overall income inequality in Pakistan 1 so that these
elements cannot contribute much to explaining changes in inequality. In
his comments, Kernal, (1986) suggests to extend the applied
decomposition technique by decomposing income also into its sources.
This is precisely the purpose of the present paper. In fact, total
income of a household (or any other unit) is the sum of income derived
from various sources like labour, property, remittances, etc.
Accordingly, income inequality is the aggregate of inequalities of these
sources and changes in overall inequality are made up of changes in its
components. Decomposition analysis is a clear and consistent framework
to investigate these issues. It provides a sense of proportion and
avoids to suggest - as some authors do - that overall inequality may
have decreased because inequality of one single component has decreased.
This kind of speculation is not possible within a decomposition
framework because the relative importance of that particular component
is taken into account and related to the importance of other components
together with their development over time.

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