Food Price Heterogeneity and Income Inequality in Malawi: Is Inequality Underestimated?

The paper uses data from the Second and the Third Integrated Household Surveys to examine whether the poor pay more for food in Malawi, and the consequences of the poverty penalty on inequality measurement. The results show that regardless of location and year, poor households pay more for food compared to nonpoor households. It is found that measured inequality based on a new consumption aggregate is much higher than official inequality figures. The paper also finds that nominal inequality underestimates "real" inequality, with the underestimation ranging from 3.9% to 7.1% for the Gini coefficient, 8.4% to 16.2% for the Thiel L, and 0.11% to 24.5% for the Thiel T. The paper therefore finds that official inequality figures understate the inequality problem in Malawi. The high inequality levels may partly explain the puzzle of high economic growth which has led to marginal poverty reduction in Malawi as these high levels of inequality could be impeding the poverty reducing effect of economic growth.