PVRTY EQLTY rev. 2.pptx

POVERTY AND INEQUALITY
Reported by:
LEEJOEDEL CRUZ
JYRUSS NESTOR REGALADO

1. What is the extent of relative inequality, and how is this
related to the extent of poverty?
2. Who are the poor?
3. Who benefits from economic growth?
4. Does rapid growth necessarily cause greater income
inequality?
5. Do the poor benefit from growth?
6. Are high levels of inequality always bad?
7. What policies can reduce poverty?
2
Distribution and Development: 7 Critical Questions

Economic Poverty and Inequalities focuses on distribution
of income:
• inequalities of power • Prestige
• Status • gender
• job satisfaction • conditions of work
• degree of participation • freedom of choice
• self-esteem, and many other dimensions of capabilities to
function.
• As in most social relationships, we cannot really separate the
economic from the noneconomic manifestations of inequality
3

POVERTY
“Poverty is hunger. Poverty is lack of shelter. Poverty is being sick and not
being able to see a doctor. Poverty is not having access to school and not knowing
how to read. Poverty is not having a job, is fear for the future, living one day at a
time.”
“Poverty has many faces, changing from place to place and across time, and
has been described in many ways. Most often, poverty is a situation people want to
escape. So poverty is a call to action -- for the poor and the wealthy alike -- a call to
change the world so that many more may have enough to eat, adequate shelter,
access to education and health, protection from violence, and a voice in what
happens in their communities.”
- The World Bank Organization

POVERTY
• Under nutrition and poor health
• Little or no literacy
• Lives in environmentally degraded areas
 Living on a small marginal farms or in a dilapidated
urban slums
• Have little political voice, are socially excluded
• Day laborers

Despite significant improvements over the past half century, extreme
poverty remains widespread in the developing world
• In 2015, almost 750M people live on less than $1.90
per day at 2011 U.S. PPP (2018 World Bank estimate).
• some 2B more than 25% of the world’s population
- live on less than $3.2 a day

• Development requires a higher gross national income (GNI), and
hence sustained growth, is clear.
• Once a country reach the average income to $10,000 to $20,000 (per
year) per capita ($27.4 to $54.79 per day)
• most citizens have usually escaped extreme poverty.
• At these levels, despite substantial variations across countries, if
inequality is not extreme, a majority of citizens are usually relatively
well nourished, healthy, and educated.

INEQUALITY
• “the quality of being unequal or uneven” (dictionary)
• social disparity
• disparity of distribution or opportunity
• lack of evenness
• the condition of being variable : CHANGEABLENESS

ECONOMIC INEQUALITY
• Economic inequalities are most obviously shown by
people’s different positions within the economic
distribution - income, pay, wealth.
• People’s economic positions are also related to other
characteristics, such as whether or not they have a
disability, their ethnic background, or whether they are a
man or a woman.

• In this chapter, we will examine the following critical questions about
the relationship among economic growth, income distribution, and
poverty:
1. How can we best measure inequality and poverty?
2. What is the extent of relative inequality in developing countries,
and how is this related to the extent of absolute poverty?
3. Who are the poor, and what are their economic characteristics?
4. What determines the nature of economic growth—that is, who
benefits from economic growth, and why?

poverty:
5. Are rapid economic growth and more equal distributions of income
compatible or conflicting objectives for low-income countries? To
put it another way, is rapid growth achievable only at the cost of
greater inequalities in the distribution of income, or can a lessening
of income disparities contribute to higher growth rates?
6. Do the poor benefit from growth, and does this depend on the
type of growth a developing country experiences? What might be
done to help the poor benefit more?

poverty:
7. What is it about extreme inequality that is so harmful to economic
development?
8. What kinds of policies are required to reduce the magnitude and
extent of absolute poverty?
9. What has been learned about the psychological dimensions of
poverty, and how can this research help us design and implement
more effective poverty programmes?

MEASURING INEQUALITY
Size Distribution
• Economists and statisticians therefore like to arrange all
individuals by ascending personal incomes and then divide
the total population into distinct groups, or sizes
• quintiles (fifths)
• deciles (tenths)

Kuznets Ratio
• Nobel laureate Simon Kuznets
• Measure of degree of inequality between high and low
income group
• income inequality that can be derived from column 3 is
the ratio of the incomes received by the top 20% and
bottom 40% of the population and approximately 3.64.

Bottom 40%
Top 20%
Kuznets Ratio (income inequality) = 20% of population / 40% population
= 51 / 14
= 3.64

Top 5%
Bottom 40%

Lorenz Curve
Lorenz Curve
• Another common way to analyze personal income statistics
• The more the Lorenz line curves away from the diagonal (line of
perfect equality), the greater the degree of inequality
represented.

• Lorenz Curve The greater the
degree of
inequality, the
greater the
bend and the
closer to the
bottom
horizontal axis
the Lorenz
curve will be.

Gini Coefficients
Gini Coefficients and Aggregate Measures of Inequality
• Gini coefficients are aggregate inequality measures and can vary anywhere
from 0 (perfect equality) to 1 (perfect inequality).

5.1.3 Gini Coefficients and Aggregate Measures of Inequality

• Sample Gini Coefficients
• Low
- Mauritius, China, Vietnam, Hungary
• High
- Botswana, Turkey, Iran, Malaysia, Brazil

The Gini has 4 desirable properties:
1. Anonymity
2. Scale dependence
3. Population independence
4. Transfer principles (Pigou-Dalton)

The Gini has 4 desirable properties:
1. Anonymity: Should not depend on who is rich and who is poor and judgements
about whether good or bad people
2. Scale dependence: Should not depend on size of country or currency
3. Population independence: Should not depend on pop. Size
4. Transfer principles (Pigou-Dalton): If we transfer income form a rich person to
a poor person, the resulting new distance is more equal (assuming the poor
don’t become richer than the rich)

MEASURING ABSOLUTE POVERTY
• the number of people who are unable to command sufficient
resources to satisfy basic need
• They are counted as the total number living below a specified
minimum level of real income an international poverty line.
• less than $1.9 per day in PPP dollars

Headcount Index
Income Poverty
• Headcount Index: H/N
• Where H is the number of persons who are poor, and N is
the total number of people in the economy
• We defined the Headcount Index as the proportion of
country’s population living below the poverty line

Total Poverty Gap
Income Poverty
• Total Poverty Gap:
• Where Yp is the absolute poverty line; and Yi is the income
of the poor person
• Measures the total amount of income necessary to raise
everyone who is below line up to that line.

Total Poverty Gap
Income Poverty
TPG = (Yp - Yi )
𝛴

Average Poverty Gap
APG
• On a per capita basis, the average poverty gap (APG) is
found by dividing the TPG by the total population:
• Where N is number of persons in the economy
• TPG is total poverty gap

Normalized Poverty Gap
NPG, Normalized Income Shortfall Measure
• This measure lies between 0 and 1 and so can be useful
when we want a unitless measure of the gap for easier
comparisons.
NPG = APG
Yp

Average Income Shortfall
AIS
• AIS tells us the average amount by which the income of a
poor person falls below the poverty line.
AIS = TPG
H

Foster Greer Thorbecke (FGT) Index
FGT
• A well-known poverty index that in certain forms satisfies all four
criteria.
• Anonymity (should not depend who is the poor).
• Population Independence (should not depend on whether the country
has a large or small population).
• Monotonicity (if you add income to someone below the poverty line, all
other incomes held constant, poverty can be no greater than it was.
• Distributional sensitivity principle (other things being equal, if you
transfer income from a poor person to a richer person, the resulting
economy should be deemed strictly poorer).

Foster Greer Thorbecke (FGT) Index
• Where Yi is the income of the ith poor person, Yp is the
poverty line, and N is the population.
• N is the number of persons, H is the number of poor
persons, and α≥0 is a parameter
• When α=0,we get the headcount index measure
• we get the normalised (per capita) poverty gap
• When α=2,we get the “P2” measure
• we account for poverty severity

Multidimensional Poverty Measurement
• Poverty cannot be adequately measured with income
alone.
• A poor person is identified through what is called the “dual
cutoff method”
• First, the cutoff levels within each of the dimensions (analogous to
falling below a poverty line such as $1.90 per day if income poverty
were being addressed)
• Second, the cutoff of the number of dimensions in which a person must
be deprived (below the line) to be deemed multidimensionally poor.

37
Poverty, Inequality, and Social Welfare
• What’s So Bad about Extreme Inequality?
• Dualistic Development and Shifting Lorenz Curves: Some
Stylized Typologies
• Traditional sector enrichment
• Modern sector enrichment
• Modern sector enlargement
• Kuznet’s Inverted U-Hypothesis
• Growth and Inequality

38
◦ Income equality usually leads to economic inefficiency.
◦ Unable to have adequate education or start and expand
business.
◦ Relative Poverty leads to low credit ratings: savings lower, less
investment.
◦ The rich tend to invest abroad, buy imported luxury, and
sometime seek. safe havens abroad for their savings or
investment.

39
1. Traditional Sector Enrichment growth typology.
- in which all of the benefits of growth are divided
among traditional-sector workers, with little or no
growth occurring in the modern sector.
Dualistic Development and Shifting Lorenz Curves

40
2. Modern-sector enrichment growth typology.
- Limited to a fixed number of people in the modern
sector, with both the numbers of workers and their
wages held constant in the traditional sect

41
3. Modern-sector enlargement growth typology.
-Enlarging the size of its modern sector while
maintaining constant wages in both sectors

42
The Inverted-U Kuznet Curve
• Early growth may, in accordance with the
Lewis model, be concentrated in the
modern industrial sector, where
employment is limited but wages and
productivity are high
• Modern sector demands skills and then
may fall as the supply of educated
workers increases and the supply of
unskilled workers falls. So, while Kuznets
did not specify the mechanism by which
his inverted-U hypothesis was supposed
to occur, it could in principle be
consistent with a sequential process of
economic development.

43
The Inverted-U Kuznet Curve

44
• Observations on Latin American countries are circled: all
the highest-inequality countries in their data come from
that region. Statistically, when the Latin American
identity of the country is controlled for, the inverted-U
drawn in Figure 5.10 tends to disappear in this data set
and others as well.
Kuznets Curve with Latin American Countries Identified

45
Kuznets Curve with Latin American Countries Identified

46
Growth and Inequality
• Consider now the relationship,
between levels of per capita
income and degree of inequality.
Are higher incomes associated with
greater or lesser inequality, or can
no definitive statement be made?

47
Absolute Poverty and Extent of Magnitude
• The data show that in 2010 some 1.22
billion people lived below $1.90 per day,
and some 2.36 billion below $3.80 per day
• The $3.80 per day income poverty fell
from about 1.94 billion from 1981 to 2010 a
37% reduction in the headcount.
• The drop in the number living on less than
$2 per day was much smaller under 8%

48
Absolute Poverty and Extent of Magnitude
• The incidence of extreme poverty is very
uneven around the developing world.
Household survey-based estimates are
regarded as the most accurate ways to
estimate poverty incidence.
• For example, it can be seen that about 15%
of Bangladesh’s population lived below
the $1.90-a-day poverty line, while about
65% lived on less than $3.80 per day. In
Brazil, these figures are about 5% and 12%,
respectively.

35
Multi Dimensional Poverty Index
▶ The MPI incorporates 3 dimensions at the household level: health, education and wealth
• The health dimension has two parts:
• Nutrition and child mortality. First, a household is designated as deprived
in nutrition if there is a child who is either stunted or underweight; for
family members aged 15 and older, body mass index (BMI) cutoffs are the
indicators for the nutrition dimension.
• Second, a household is considered deprived if any child has died in the.
• The education dimension also has two parts:
• First, regarding school attainment, a household is designated as deprived
if no member at least 10 years old has completed 6 years of schooling.
• Second, regarding attendance, a household is deprived if any child is not
attending school up to the age at which students finish eighth grade (class
8).
• Finally, in terms of standard of living (Wealth)
• lack of electricity; insufficiently safe drinking water; inadequate sanitation;
inadequate housing; unimproved cooking fuel; and lacking ownership

Multi Dimensional Poverty Index

51
Economic Characteristics of High Poverty Groups
• Children and Poverty
• The level of poverty is greater among children than among adults.
• Women and Poverty
• Women and children experience the harshest deprivation Children
and Poverty
• Ethnic Minorities, Indigenous Populations, and Poverty
• limited resources and job opportunities

52
Economic Characteristics of High Poverty Groups

53
Growth and Poverty
• A rapid growth is bad for the poor because they would be bypassed and
marginalized by the structural changes of modern growth.
• There are at least five reasons why policies focused toward reducing poverty levels
need not lead to a slower rate of growth and indeed could help to accelerate
growth.
• First, widespread poverty creates conditions in which the poor have no access
to credit, are unable to finance their children’s education, and, in the absence
of physical or monetary investment opportunities, have many children as a
source of old-age financial security
• Second, a wealth of empirical data bears witness to the fact that, unlike the
historical experience of the now-developed countries, the rich in many
contemporary poor countries are generally not noted for their frugality or for
their desire to save and invest substantial proportions of their incomes in the
local economy.
• Third, the low incomes and low levels of living for the poor, which are
manifested in poor health, nutrition, and education, can lower their economic
productivity and thereby lead directly and indirectly to a slower -growing
economy.

54
Growth and Poverty
• Fourth, raising the income levels of the poor will stimulate an overall increase
in the demand for locally produced necessity products such as food and
clothing, whereas the rich tend to spend more of their additional incomes on
imported luxury goods.
• Fifth, a reduction of mass poverty can stimulate healthy economic expansion by
acting as a powerful material and psychological incentive to widespread public
participation in the development process.

55
Labour, the Functional Distribution of Income, and
Inclusive Development
• The functional or factor share distribution of income, is based on the share of
total national income that each of the factors of production (land, labor, and
capital) receives.
• Functional income distribution = Wages as a percentage of Profits

Policy Options on Income Inequality and Poverty: Some Basic
Consideration
• Altering the functional distribution
• Traditional economic approach
• Institutional constraints and faulty government policies resulted to a higher relative
price of labor in the formal, modern and urban sector than what would be determined by
the free interplay of the forces of supply and demand.
• Correctingfactorprices
• Modifying the size distribution through increasing assets of the poor
• The ultimate cause of unequal distribution of personal income in developing countries
is the unequal and highly concentrated patterns of asset ownership(wealth).
• Reducing the concentrated control of assets, the unequal distribution of power and the
unequal access to educational and income-earning opportunities.

Policy Options on Income Inequality and Poverty: Some Basic
Consideration
• Progressive Income and Wealth Taxes
• To improve the living standards of the bottom 40%, any national policy must secure
sufficient financial resources to transform paper plans to program realities.
• The major source of such development finance is the direct and progressive taxation
of both income and wealth.
• Direct Transfer Payments and the Public of Goods and Services
• Resources are limited.
• Beneficiaries become unduly dependent on the poverty programs.
• Beneficiaries become diver : people who are productively engaged in alternative economic activities
to participate in the poverty program instead.
• Poverty policies are often limited by resentment from the nonpoor.

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