The structure and determinants of inequality and poverty reduction in Ghana, 1988-92

Using three rounds of the Ghana Living Standard Survey, conducted between 1988 and 1992, the authors present findings that shed light on the structure of inequality among different socioeconomic groups in different geographic areas, in the context of poverty reduction. First, poverty reduction can be attributed mainly to improvements in both average levels of income and the pattern of its distribution in the informal and nonfarm sectors in other cities and rural areas outside the capital city, Accra. Second, an analysis of different measures of inequality reveals that the most important changes in the degree of inequality took place at the lower end of the distribution. But the direction of change was different in Accra compared with the localities outside Accra. In Accra, while inequality increased overall, the inequality in the lower part of the distribution increased much more. In other cities, there was a more or less uniform improvement all along the distribution. But in the rural areas, there was a significant improvement at the lower end, but a deterioration at the upper end. Third, structural adjustment - which aimed to cut back public sector employment and stimulate activities in the private sector - raised living standards in rural areas and other cities, but not in Accra. The public sector is much larger in Accra than in other cities and rural areas. Contraction of the public sector in other cities and rural areas was compensated for by income growth in the informal and nonfarm sectors. But contraction of Accra's large public sector dominated the local economy, so living standards declined in both formal and informal sectors. Accra's economy will probably grow as its private and informal sectors grow. Fourth, major shifts in the population occurred in all localities from the formal to the informal sector, but the magnitude of the shift was largest in Accra - in fact, several times more than in the other localities. The deterioration of the income at the lower part of the distribution in both the formal and the informal sectors is mainly responsible for the decline in the welfare of the low income households in Accra. These findings suggest that an integrated regional strategy, taking into account the local socioeconomic structure, is necessary for achieving economic growth and poverty reduction in all regions. Another important finding: The poor do not benefit as much from education as the nonpoor do because there is very low return (in income) to primary education, the highest level most poor Ghanaians can hope for. Education helps increase, rather than decrease, inequality, so primary education for the poor should be designed to provide them with income-earning skills. Developing economic strategies for sustainable poverty reduction will require further research on activities in the informal sector. Another issue that requires investigation is the role of different administrative regions in the determination of household welfare that seems to have changed over the period under study. Findings from such an analysis will facilitate the design of appropriate regional strategies for poverty reduction in Ghana.