Polarization: Its Determinants and Decomposition Overtime In Pakistan

Polarization: Its Determinants and Decomposition Overtime In Pakistan

Muhammad Faraz Riaz (Department of Economics, Government College University, Faisalabad, Pakistan), Sofia Anwar (Department of Economics, Government College University, Faisalabad, Pakistan) and Samia Nasreen (Department of Economics, Government College Women University, Faisalabad, Pakistan)
DOI: 10.4018/IJSESD.2015100106
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Abstract

Polarization is an interesting additional social indicator for analyzing income inequality and poverty across countries, as it captures the phenomenon of ‘clustering around extreme poles'. Rising income polarization can be harmful since it is closely linked to poverty, social exclusion, social tension and social unrest. Present study emphasizes on the measurement of income polarization in Pakistan to determine the degree of this social conflict. Polarization is measured by the index provided in Bossert and Schwor (2006). Results are further decomposed over time to identify the major factors contributing to polarization in Pakistan. Pakistan Integrated Household Survey (PIHS) and Pakistan Social and Living Standards Measurement Survey (PSLM) surveys for the years 2001-02, 2004-05 and 2007-08 are utilized for the sake of empirical analysis. The results reveal that the polarization increased from 2001-02 to 2004-05 and then it decreased from 2004-05 to 2007-08.
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1. Introduction

Polarization describes the degree to which a population is segregated into groups in a society (Gradín, 2000). Polarization is an important issue but has largely been neglected in ‘mainstream’ economics until recently. This is remarkable since the income distribution has polarized and the middle class has shrunk in a number of countries (Atkinson and Brandolini, 2013). Polarization detects the presence or disappearance of groups in a distribution and captures the phenomena of diminishing middle class ‘or ‘a divided society’ (Zhang & Kanbur, 2001). High polarization may lead to less social mobility. In a highly polarized society, individuals in each cluster feel closer to each other but distant to other groups, causing barriers for mobility between groups. Consequently, the relatively poor face difficulties in moving up the income ladder (Motiram & Sarma, 2014).

The concept of polarization stresses in fact two notions. The first one, “increasing spread”, implies that moving from the middle position (the median) to the tails of the income distribution makes an income distribution more polarized (Deutsch et al., 2013). More precisely a rank preserving increment in incomes above the median or a rank preserving reduction in income below the median will widen the distribution, that is, extend the distance between the two groups (those above and below the median) and hence increase the degree of bi-polarization (the rich become richer and the poor poorer). The second concept, “increased bipolarity”, refers to the case where the incomes below the median or those above the median get closer to each other. What is happening here is a “bunching” of the two groups in the sense that the gaps between the incomes below the median (or those above the median) have been reduced and such a “bunching” is assumed to increase polarization (Deutsch et al., 2013).

The concept of polarization is clearly related to that of the middle class (Wolfson, 1994) and there have been quite a few attempts at measuring the importance of the middle class, since a sizable middle class is supposed to be an important factor in economic development (Thurow, 1984, Foster and Wolfson, 1992 and 2010, Landes, 1998, Easterly, 2001, Birdsall, 2007, and Pressman, 2007). There is however no agreement on how the relative importance of the middle class should be measured. Thurow (1984), for example, defined the middle class as including those households whose income ranges from 75% to 125% of the median household income. Blackburn and Bloom (1985) used a wider interval (60% to 225% of the median). Other ranges were also proposed (e.g., Davis and Huston, 1992, Lawrence, 1984). Birdsall et al. (2000) adopted Thurow's approach but for Birdsall (2007) the middle class should include people at or above the equivalent of $10 day in 2005, and at or below the 90th percentile of the income distribution in their own country. Bossert and Schworm (2006) constructed a measure of polarization which follows both ‘increased spread’ and ‘increased Bi-polarity’ criterions and is considered a better polarization measurement index, so present study has employed this measure.

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