Household Expenditure Components and the Poverty and Inequality Relationship in Malawi

The paper looks at how inequality in household expenditure components affects total inequality and poverty in Malawi. Total household expenditure is disaggregated into four mutually exclusive and exhaustive expenditure items, namely expenditure on food, expenditure on health, expenditure on education, and expenditure on non-food and non-human capital items. Using data from the second integrated household survey (IHS2), we find that the elasticities of poverty with respect to within-component and between-component inequality are positive, suggesting that an increase within-component and between-component inequality increases overall poverty in Malawi. The results also show that the elasticities of poverty, as measured by the poverty gap and poverty indices, with respect to inequalities in expenditure on food and health are positive and are about the same in magnitude. The results vindicate the exemptions and zero rating of some food, health, and education related goods and services under the Value Added Tax (VAT) system. More importantly, they also suggest that expanding the coverage of zero rating and exemption would have a poverty reducing effect. These findings hold at the national level, as well as when rural and urban areas are treated separately. Additionally, the results are insensitive to choice of poverty line.