ECON October Poverty and Income Distribution by jolinmilioncherie


									ECON 3508                  Spring 2011
       Introduction to Economic
 Poverty, Income Distribution and
      Development (Text, Chapter 5)

A. R. M. Ritter
   May 25, 2011
1.   Significance of Topic
2.   Concept and Measurement
       Poverty Measures
       Income Distribution Measures
3. Equity, Poverty and Well-Being
4. Evidence re Poverty and Income
5. Who are the “Poor”
6. The Roots of Poverty and Income Mal-
       Kuznet’s “Inverted U Hypothesis”
7.   Policies for Pro-Poor Growth
8.   Millennium Development Goals
    Distribution and Development: Seven Critical
               Questions (from Todaro)

•   What is the extent of relative inequality, and
    how is this related to the extent of poverty?
•   Who are the poor?
•   Who benefits from economic growth?
•   Does rapid growth necessarily cause greater
    income inequality?
•   Do the poor benefit from growth?
•   Are high levels of inequality always bad?
•   What policies can reduce poverty?
1. Significance of Topic
   Central development issue : reduce poverty!
        “Make poverty history!”
   Central focus of development efforts and of this
   The focus of the “Millennium Development

 Is Poverty a “bad thing”? Why?
      Amartya Sen’s concepts of capabilities and choice
      Income and Basic Human Need Fulfillment
Income Distribution:
Central to our ideas of fairness and justice
A more equitable income distribution is
 supportive of both Growth and Poverty
Growth generally reduces Poverty; But
 Growth is “Neutral” regarding the
 “fairness” of income distribution ……..
    Unless major efforts are made to achieve
     distributional objectives simultaneously with
2. Concept and Measurement
 Problems of Measuring Real Incomes
      Income or consumption?
      Accurate Information: sources
      Definition of income:
         Market generated Income? Or
         Market generated Income + Transfers Or
         Market generated Income + Transfers – Taxes? Or
         Market Income + Transfers –Taxes + In-Kind Subsidies? Or
         Market Income + Transfers –Taxes + In-Kind Subsidies +
             Publicly-provided Education + Health Services +
             Housing, + etc…, ?
         Market Income + Transfers –Taxes + In-Kind Subsidies +
             Education + Health + Home-Produced G $ S
   Other complications: Home-produced G&S;
         Differing prices
         Differing needs in different circumstances
A. Poverty Concepts and Measures

1. The United Nations “Human Poverty Index”
     Attempts to measure poverty with a composite
    index including:
       1. Probability of not surviving to age 40;
       2. Adult illiteracy rate;
       3. Population without access to improved water source
       4. Underweight children under age five.

2. Arbitrary Income “Cut-Offs” or Measures
         e.g. population with real incomes (PPP) below
           some threshold such as $US 1.00 or $2.00
A.   Poverty Concepts and Measures, cont’d

3. Calculations of real income necessary to meet
  basic human needs (used in Latin America – ECLA -
  and national measures)

4. Canada: “LICO” or lower income cut-off, i.e.
  50% of median income; (more a measure of distribution than
  of poverty)

5. Composite measures of Basic Need Fulfillment in
  real terms (access to water, literacy, child mortality,
  etc. (as in example in text)
      5.1 Measuring Poverty
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:
           TPG   (Yp  Yi )


  – Where Yp is the absolute poverty line; and Yi
    the income of the ith poor person
Measuring the Total Poverty Gap
Measuring Absolute Poverty
  – Average poverty gap (APG):

  – Where N is number of persons in the
  – TPG is total poverty gap
  – Note: normalized poverty gap,
               NPG = APG /Yp
     Measuring Absolute Poverty
     – Average income shortfall (AIS):
              AIS 
     – Where H is number of poor persons
     – TPG is total poverty gap
     – Note: Normalized income shortfall,
                  NIS = AIS/Yp
6.   The New UNDP “Multidimensional
          Poverty Index” (MPI)
     Identification of poverty status through a dual
     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.
 MPI Indicators
1. 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

2. 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).
3. Standard of Living, equal weight on 6

(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
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.
Computing the MPI
 The MPI for the country (or region or group) is then
   A convenient way to express the resulting
   value is H*A, so that            MPI = 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
    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
MPI Rankings and Poverty Headcounts for Selected
      Poverty Measures for Some African Countries, 2005

Country &             Human Poverty      GDPpc (PPP) Population below
HDI Rank               Index (UNDP)         $US      US$1.00 per day,
                         Per Cent                       Per Cent
65. Mauritius              11.4              12.715        11.9
121. South Africa          23.5              11,110        10.5
135. Ghana                 32.3              2,480         44.8
148. Kenya                 30.8              1,240         22.8
151. Zimbabwe              40.3              2.038         56.1
154. Uganda                34.7              1,454         11,9
158. Nigeria               37.3              1.128         70.8
159. Tanzania              32.5               744          57.8
169. Ethiopia              54.9              1,055         23.0
177. Sierra Leone          51.7               806          57.0
81. China                  11,7              7,100          9.9

Source: UNDP. Human Development Report, 2007/2008
 Human Development Indices, Africa,
Country           1974          1985         1995    2005
Mauritius          na           .692          .751   .804
South Africa      .650          .690          .745   .674
Ghana             .442          .482          .542   .553
Kenya             .466          .534          .544   .521
Zimbabwe          .550          .615          .613   .513
Uganda             na           .420          .433   .545
Nigeria           .321          .391          .432   .470
Tanzania           na            na           .419   .467
Ethiopia           na           .311          .347   .406

China             .530          ,595          .691   .777

Source: UNDP. Human Development Report, 2007/2008
3. Equity, Poverty and Well-Being
The Broad-Based Sense of “Fairness”
  – Religious Basis
  – Economistic “Games” showing that
    generally people prefer Fairness
  – Design of Human Institutions
      The law;
      United Nations
      Welfare states & income taxation
      Democracy and human rights
      Development assistance
  – Survey data (see charts)
Income Distribution:
Central to our ideas of fairness and justice
A more equitable income distribution is
 supportive of both Growth and Poverty
Growth generally reduces Poverty; But
 Growth is “Neutral” regarding income
 distribution ……..
     Unless major efforts are made to achieve
      distributional objectives simultaneously with
Incentives and income Distribution
Vote !!
Income Distribution Concepts and
 1. Income shares of groups in the
    population (quintiles or deciles)
 2. Ratios of shares,
    e.g. income share of top 10% / income share of
       poorest 10%
 3. Lorenz Curve (See text, pp37-41)
 4. Gini Coefficient (in class)
The Lorenz Curve and Gini Coefficient

        Explained and derived in class
Figure 5.2 The Greater the Curvature of the Lorenz Line, the
          Greater the Relative Degree of Inequality
Figure 5.3 Estimating the Gini Coefficient
Latin America: Lorenze Curve for Distribution of
   Educational Spending, for Eight Countries
                                (explanation in class)
4. Evidence re Poverty and
 Income Distribution

   Some International Comparisons
    Income Distribution Measures
      for Some African Countries
Country          Gini        Income Share of     Income      Income Share
               Coefficient     Richest 20%       Share of      of Richest
                               Poorest 20 %    Poorest 20%        20%
South Africa      .578            17.0            3.5%           62.2
Ghana             .408             8.4              5.6          46.6
Kenya             .425             8,2              6.0          49.1
Zimbabwe          .501            12.0              4.6          55.7
Uganda            .357             9.2              5.7          52.5
Nigeria           .429             9.1              5.1          48.6
Tanzania          .346             5.8              7.3          42.4
Ethiopia          .399             4.3              9.1          39.4
Sierra Leone      .629            57.6              1.1          63.4
China             .570            12.2              4,3          51.9
Canada            .326             5.5              7.2          39.9

Source: UNDP. Human Development Report, 2007/2008
5. “Who are the “’Poor’”?

 Domestic Aspects
  –   Rural character
  –   Regional dimension
  –   Gender & children
  –   Indigenous dimension
 Characteristics of the poor:
  –   Assets;
  –   Human capital;
  –   Income vulnerability
  –   Weak access to public services,
  –   Environmentally hostile environments,
  –   Lack of supportive networks
            Table 5.8
Indigenous Poverty in Latin America
6. The Roots of Income Mal-distribution
  (and Poverty to a large extent)
1. Historical Inheritance and its
  A.      Pre-Colonial Social Structures
       Significant levels of equality in pre-colonial
       High equality for “hunting and gathering”
       Some cases of severe inequality (e.g. India
       with caste system; feudal structures in
       some other cases)
B. Impacts of Colonialism
   – Unequal property rights and institutions
     imposed by colonial powers
   – Imperial country living standards for
     colonizers; traditional levels for
     indigenous peoples
   – Public services directed at settler peoples,
     not indigenous peoples
   – Colonial hierarchies: Social stratification
     based on Race and Ethnicity
2. Political Factors:
  – Disproportionate power and influence of
    elites and moneyed interests (e.g. property,
    gender, and literacy qualifications to the
    vote until recently)

 – Public Policy has often been shaped in their

  – “Urban bias”
  – “Upper and middle income class bias” and
  – “Modern sector bias” in public policy
3. The Nature of the “Modernization”

 Does a “Rising Tide Lift all Boats”?

 Would you expect that a process of
 modernization / development would improve
 everyone’s living standards simultaneously?

 What forces generate “Inequities”?
   Note the
Latin American
3. The Nature of the “Modernization”
  process: Forces Generating Inequalities
3. The Nature of the “Modernization”
  process: Forces Generating Inequalities

  – “Scarce capital” generates high returns for its

  – Scarce skilled labour generates higher
    incomes for those with crucial skills;

  – Abundant unskilled labour generates low
    wages and incomes;
3. The Nature of the “Modernization” process:
 Forces Generating Inequalities, cont’d

  – International technological transfer:
    Much recent vintage technology is “labour-saving,”
    thereby reducing the demand for labour and thus
    wages and incomes.

  – “Backwash Effects” of “modernization” and
    tech. change

  – Uneven access to opportunities
      Prior Elites;
      Regional Advantages;
3.   continued: The Nature of the “Modernization” Process:
      Forces Generating Greater Equalities
3.   continued: The Nature of the “Modernization” Process:
       Forces Generating Greater Equalities
     The exhaustion of surplus labour in agriculture
     and the informal economy?
     Increasing productivity generally promotes
     rising incomes in supporting service-type
     Broadening Tax Base permits social programs &
     welfare state type programs
     Broadening human development (education
     health etc.) broadens earning capabilities
     Regional and rural-urban spread effects
      •   rising demand for goods and services from elsewhere;
      •   linkage effects
South Korea: Causal Factors Shaping Income Distribution and Growth
 Emphasis on           Successful               Good     Good Private-
                                                                        Land Reform
   Human                 Export            Macroeconomic    Public
 Development           Promotion            Management Gov’t Market Mix

                                                                            Price Policy
 Well Qualified
 Labour Force
                      Rapid Growth of
                       Manufacturing            Rural Urban
 Population                                      Balance
                                     Increasing Taxes

   Lower LF                Rapid Job
                                                 Activist and Expanding
  Growth Rate               Creation                  Social Policies

                                           Rural-Urban               Egalitarian
        Egalitarian Urban
                                             Equity               Rural Distribution;
       Income Distribution
                                                                   Income Growth

   Rapid Growth, Distributional Equity, Poverty Reduction
  [HDI: # 28;     1970: .707; 2005 .901;   Gini: 0.316;   Growth pc, 1975-03: 6.1% pa]
Empirical Validity of Kuznets” Hypothesis?
Which effects predominate?

  – Debatable;
  – Latin American effect in Kuznets “U”
  – Positives and negatives simultaneously;
  – Other factors operate
  – Ultimately “Public Policy” is paramount
4. Nature of Development Strategies
   (and Theorizing):
  Early Theorizing:
       Capital-Centered theories,
       Dualistic Development Models (W.A. Lewis)
       The Soviet Model,
       Prebisch - UN ECLAC)
       Rostow ………….
  All emphasized
  Growth first; income distribution later;
       Investment in the Modern Sector, esp. Industry;
       Import-substituting industrialization;
       Investment in physical capital
       De-emphasize traditional economy and informal
– “Neo-Liberal” or “Washington
  Consensus” approach focused on
  growth first.

   Escape from hyper-inflation, macro-
   economic and external sector
   unsustainability and debt, led to “structural
   adjustment” programs

   which often generated “short-term pain”
   hopefully but not always for “long term
5. Demographic and Sociological Factors:
   – “The Poor Have More Children:” large family
      size among the poor
         reduces family investment per child and
         reduces possible inheritances per child vis-à-vis
         the rich;

  – Labour force participation for poor women is low
      vis-à-vis rich women;
        Higher female labour force participation rates for better-off
        women raise family incomes for better-off groups.

  –   The rural poor sometimes have little alternative to
      damaging their own environment, often resulting in
      worsening future poverty.
6. “Market Power”

 – Concentrated ownership patterns
 – Monopoly and oligopoly power of
   enterprise and individuals
 – The power of professional associations
   and unions
 – Political power determining income
7. International Factors

  – Multinational Enterprise: islands of
    modernity and higher incomes

  – Technological Transfer of modern capital-
    intensive machinery and equipment  higher
    incomes for some

  – Internationally transferable skills help
    generate international income levels for
    some, while the unskilled remain with low
6. Policies for Pro-Poor Growth
 Possible Approaches and Components of Poverty
      Reduction and Equity-Oriented Programs

a. Achieve Sustained Economic Growth
  Exceeding population growth rates;
  • Permitting rising levels of personal or family
    income and tax revenues;
  • Permitting significant levels of domestic &
    national savings

  [Note: this is a necessary but insufficient
    condition for enduring reductions in poverty]
b. Strive for “Equity with Growth”

  – Make the growth process
    compatible with equity, that is
    poverty reduction, improved
    income distribution and human
    development for low income
  – Focus sharply on the poorest.
  – HOW?
c. Emphasize Investment in Human

  – Fairly Allocated
  – Education, Health, Nutrition, Clean Water,
  – Family Planning
  – Build the capabilities of the state to
    provide necessary public goods
      [i.e. effective and efficient
                          Tax Administration
  – Plus effective and incorruptible public
d. Increase Demand for the abundant
   resource of the poor, namely labour, [i.e.
   rapid job creation]

  – Improve the appropriateness of technology;

  – At an Appropriate Time, Switch from Import
    Substituting Industrialization to Job-creating
    Export Promotion

  – Promote labour intensive public works and
    infrastructure, especially that serving the
    needs of the poor;
e. Invest in the Physical Assets of the

  Support the “Informal Sector” [in various ways;]
  –   Note the role of “Micro-credit”
  Support Urban Development for low income
  neighborhoods [water, sanitation, sidewalks,
  streets, electricity, security, etc.]
  Support Agriculture and Rural Development,
  focusing on low income rural peoples
  –   Rural roads; water & sanitation; drainage & irrigation;
      electrification in time
f. Combat “Modern sector bias” in
   public policy;
 [plus “Urban Bias”, “Industrial sector bias,” and
          “Middle class bias”]
     Tax policy
     Government expenditures and social
     benefits and their allocation
     Tariff policy and protectionism
     Infrastructure finance and allocation
     Credit policies
     All types of subsidization of the
     modern urban sector
– Avoid megalo-cephalic urbanization

– Agriculture & Rural Development

– Regional Development;
g. Redistribute Assets

  – Land Reform of various sorts;
  – Democratic ownership patterns;
      Cooperative Property forms
      Taxation towards equity
      Favour small & local enterprise?
      Democratization of private ownership

  – Support Territorial Claims of
    Indigenous Peoples;
h. Construct Safety Nets and Transfers as
   possible [for middle income countries]

  – Target the neediest groups;

  – Support Human development –promoting
    [e.g. as in Brazil under Lula, financial support for the
        poorest families that keep their children in
    or as in Chile, where school lunches programs are
        provided in low income neighbourhoods]

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