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Todaro12e_PPT_CH05_AS.pptx
1.
Chapter 5 Poverty, Inequality, and Development
2.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-2 Distribution and Development: Eight Critical Questions • How can we best measure inequality and poverty? • What is the extent of relative inequality in developing countries; how is this related to the extent of poverty? • Who are the poor, and what are their economic characteristics? • What determines the nature of economic growth—that is, who benefits from economic growth, and why?
3.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-3 Distribution and Development: Seven Critical Questions • Are rapid economic growth and more equal income distribution compatible or conflicting objectives?: Is rapid growth achievable only at a cost of greater income inequality or can lessening income disparities contribute to higher growth rates? • 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? • What is so bad about extreme inequality? • What kinds of policies are required to reduce the magnitude and extent of absolute poverty?
4.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-4 5.1 Measuring Inequality • Measuring Inequality – Size distributions (quintiles, deciles) – Lorenz curves – Gini coefficients and aggregate measures of inequality – Functional distributions
5.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-5 Desirable Properties for Inequality Measures • Anonymity: measure should not depend on who has higher income; e.g. whether we believe the rich or poor to be good or bad people • Scale independence: inequality measures should not depend on size of the economy – want a measure of income dispersion • Population independence principle: an inequality measure should not be based on the number of income recipients • Transfer principle - all other incomes constant, if transfer income from a richer to a poorer person (not so much that the poorer person is now richer than the originally rich person), resulting new income distribution is more equal. • Gini coefficient satisfies all four properties; so does the coefficient of variation (CV), and some others
6.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-6 Table 5.1 Typical Size Distribution of Personal Income in a Developing Country by Income Shares—Quintiles and Deciles
7.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-7 Figure 5.1 The Lorenz Curve
8.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-8 Figure 5.2 The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of Inequality
9.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-9 Figure 5.3 Estimating the Gini Coefficient
10.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-10 Figure 5.4 Four Possible Lorenz Curves
11.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-11 Figure 5.5 Functional Income Distribution in a Market Economy: An Illustration
12.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-12 5.2 Measuring Absolute 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 • Total poverty gap: – Where Yp is the absolute poverty line; and Yi the income of the ith poor person
13.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-13 Desirable Properties for Inequality Measures • Desirable properties for poverty measures: – Anonymity – Population independence – Monotonicity – Distributional sensitivity • Plus: the Focus Principle • As we will see, P2 has these properties
14.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-14 Figure 5.6 Measuring the Total Poverty Gap
15.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-15 • Average poverty gap (APG): – Where N is number of persons in the economy – TPG is total poverty gap – Note: normalized poverty gap, NPG = APG/Yp APG = TPG N 5.2 Measuring Absolute Poverty
16.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-16 • Measuring Absolute Poverty – Average income shortfall (AIS): – Where H is number of poor persons – TPG is total poverty gap – Note: Normalized income shortfall, NIS = AIS/Yp AIS = TPG H 5.2 Measuring Absolute Poverty
17.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-17 • The Foster-Greer-Thorbecke (FGT) index: – 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 – When α=2, we get the “P2” measure 5.2 Measuring Absolute Poverty
18.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-18 • The Newly Introduced Multidimensional Poverty Index 5.2 Measuring Absolute Poverty
19.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-19 Measuring Poverty: Income or Multidimensional? • Given that we are measuring poverty with income, we have good measures that, like P2, satisfies desirable properties • If must have a single indicator, income has advantages e.g. clarity, flexibility • But in general is measuring income sufficient? • Following Amartya Sen’s capability approach, it is apparent that, in general, poverty needs to be conceptualized – and so measured – in a multidimensional way • We will return to this with the new MPI
20.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-20 5.3 Poverty, Inequality, and Social Welfare • What’s So Bad about Extreme Inequality? • Dualistic Development and Shifting Lorenz Curves: Some Stylized Typologies – Traditional-sector enrichment (see Figure 5.7) – Modern-sector enrichment (see Figure 5.8) – Modern-sector enlargement (see Figure 5.9)
21.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-21 Figure 5.7 Improved Income Distribution under the Traditional-Sector Enrichment Growth Typology
22.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-22 Figure 5.8 Worsened Income Distribution under the Modern-Sector Enrichment Growth Typology
23.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-23 Figure 5.9 Crossing Lorenz Curves in the Modern-Sector Enlargement Growth Typology
24.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-24 5.3 Poverty, Inequality, and Social Welfare • Kuznets’ Inverted-U Hypothesis • The inverted-U is consistent with modern sector enlargement growth, but not traditional or modern sector enrichment growth
25.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-25 Figure 5.10 The “Inverted-U” Kuznets Curve
26.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-26 Table 5.2 Selected Income Distribution Estimates
27.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-27 Figure 5.11 Kuznets Curve with Latin American Countries Identified
28.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-28 Figure 5.12 Plot of Inequality Data for Selected Countries
29.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-29 Table 5.3 Income and Inequality in Selected Countries
30.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-30 5.3 Poverty, Inequality, and Social Welfare • Growth and Inequality
31.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-31 5.4 Absolute Poverty: Extent and Magnitude • Progress on Extreme Poverty – Clear progress on $1.25-a-day headcount – Less clear progress on $2.00-per-day headcount (see Figure 5.14) – Incidence of extreme poverty is uneven • Relationship between Growth and Poverty – Association between growth and poverty reduction – When it is inclusive, growth reduces poverty – Lower extreme poverty may also lead to higher growth
32.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-32 5.4 Absolute Poverty: Extent and Magnitude • Poor health, nutrition, and education lowers economic productivity of people in poverty, leading directly and indirectly to slower growth • Higher income for the poor raises demand for locally produced goods • Often, the poor lack access to credit, which constrains entrepreneurship, children’s education, and fertility reduction • Social exclusion/injustice associated with poverty also leads to bad government policies that can reduce growth
33.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-33 Figure 5.13 Global and Regional Poverty Trends, 1981–2010
34.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-34 Table 5.4 Regional Poverty Incidence, 2010
35.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-35 The Multidimensional Poverty Index (MPI) • Identification of poverty status through a dual cutoff: • First, cutoff levels within each dimension (analogous to falling below a poverty line for example $1.25 per day for income poverty); • Second, cutoff in the number of dimensions in which a person must be deprived (below a line) to be deemed multidimensionally poor. • MPI focuses on deprivations in health, education, and standard of living; and each receives equal (that is one- third of the overall total) weight.
36.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-36 MPI Indicators • Health - two indicators with equal weight - whether any child has died in the family, and whether any adult or child in the family is malnourished –weighted equally (each counts as one-sixth toward the maximum deprivation in the MPI) • Education - two indicators with equal weight - whether no household member completed 5 years of schooling, and whether any school-aged child is out of school for grades 1 through 8 (each counts one-sixth toward the MPI). • Standard of Living, equal weight on 6 deprivations (each counts as 1/18 toward the maximum): lack of electricity; insufficiently safe drinking water; inadequate sanitation; inadequate flooring; unimproved cooking fuel; lack of more than one of 5 assets – telephone, radio, TV, bicycle, and motorbike.
37.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-37 Interaction of the deprivations? • Building the index from household measures up to the aggregate measure (rather than using already- aggregated statistics), MPI approach takes account of multiplied or interactive harm (complementarity) done when multiple deprivations are experienced by the same individual or family • The MPI approach assumes an individual’s lack of capability in one area can only to a degree be made up by other capabilities – capabilities are treated as substitutes up to a point but then as complements.
38.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-38 Computing the MPI • The MPI for the country (or region or group) is then computed • A convenient way to express the resulting value is H*A, i.e., • The product of the headcount ratio H (the percent of people living in multidimensional poverty), and the average intensity of deprivation A (the percent of weighted indicators for which poor households are deprived on average). • The adjusted headcount ratio HA is readily calculated • HA satisfies some desirable properties. Important example - • Dimensional monotonicity: If a person already identified as poor becomes deprived in another indicator she is measured as even poorer - not the case using a simple headcount ratio.
39.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-39 Multidimensional poverty tells a different story than income poverty • The results showed that knowing income poverty is not enough if our concern is with multidimensional poverty. • Multidimensionally, Bangladesh is substantially less poor - but Pakistan substantially poorer - than would be predicted by income poverty • Ethiopia is far more multidimensionally poor, and Tanzania much less so, than predicted by income poverty. • Most Latin American countries e.g. Brazil rank worse on multidimensional poverty than on income poverty; but Colombia’s income and MPI poverty ranks are about same.
40.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-40 Table 5.5 Income Poverty Incidence in Selected Countries
41.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-41 Table 5.5 Income Poverty Incidence in Selected Countries (continued)
42.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-42 Table 5.6 Multidimensional Poverty Index, Data for 2007–2011
43.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-43 5.5 Economic Characteristics of High-Poverty Groups • Rural poverty • Women and poverty • Ethnic minorities, indigenous populations, and poverty
44.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-44 Table 5.7 Poverty: Rural versus Urban
45.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-45 Table 5.8 Indigenous Poverty in Latin America
46.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-46 Workfare • Workfare, such as a Food for Work Program, represents a better policy than welfare when these criteria are met: – The program does not reduce incentives for the poor to acquire human capital and other assets – There are greater net benefits of the program’s work output – It is harder to screen the poor without a workfare requirement • Poor workers have lower opportunity cost of time (so the economy loses little output when they work in the program)
47.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-47 Workfare • Non-poor workers have higher opportunity cost of time (so they are unlikely to participate to get the benefits) • The fraction of the population living in poverty is smaller (so the extra costs of a universal welfare scheme would be high) • There is less social stigma of visible workfare participation, so the poor do not suffer humiliation or be deterred from needed work (otherwise, a discreet welfare transfer may be preferable)
48.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-48 5.6 Policy Options on Income Inequality and Poverty: Some Basic Considerations • Areas of Intervention: – Altering the functional distribution – Mitigating the size distribution – Moderating (reducing) the size distribution at upper levels – Moderating (increasing) the size distribution at lower levels
49.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-49 • Policy options – Changing relative factor prices – Progressive redistribution of asset ownership – Progressive taxation – Transfer payments and public provision of goods and services 5.6 Policy Options on Income Inequality and Poverty: Some Basic Considerations
50.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-50 5.7 Summary and Conclusions: The Need for a Package of Policies • Policies to correct factor price distortions • Policies to change the distribution of assets, power, and access to education and associated employment opportunities • Policies of progressive taxation and directed transfer payments • Policies designed to build capabilities and human and social capital of the poor • Some specific programs covered in later chapters include: conditional cash transfers (Chapter 8); agricultural extension (Chapter 9); and micro- finance (Chapter 15, and Chapter 11 cases)
51.
Copyright ©2015 Pearson
Education, Inc. All rights reserved. 5-51 Concepts for Review • Absolute poverty • Asset ownership • Character of economic growth • Decile • Disposable income • Factor share distribution of income • Factors of production • Foster-Greer-Thorbecke (FGT) index • Functional distribution of income • Gini coefficient • Headcount index • Income inequality • Indirect taxes • Kuznets curve • Land reform
52.
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Education, Inc. All rights reserved. 5-52 Concepts for Review (cont’d) • Lorenz curve • Multidimensional poverty index (MPI) • Personal distribution of income • Progressive income tax • Public consumption • Quintiles • Redistribution policies • Regressive tax • Size distribution of income • Subsidy • Total poverty gap (TPG) • Workfare programs
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Education, Inc. All rights reserved. 5-53 Appendix 5.1: Appropriate Technology and Employment Generation: The Price Incentive Model • Choice of techniques • Factor Price distortions and appropriate technology • Possibilities of Labor-Capital substitution
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Education, Inc. All rights reserved. 5-54 Figure A5.1.1 Choice of Techniques: The Price Incentive Model
55.
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Education, Inc. All rights reserved. 5-55 Appendix 5.2: The Ahluwalia-Chenery Welfare Index • Constructing poverty-weighted index of social welfare
56.
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Education, Inc. All rights reserved. 5-56 Table A5.2.1 Income Distribution and Growth in 12 Selected Countries
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