1. ECON Spring 2011 Introduction to Economic Development Poverty, Income Distribution and Development (Text, Chapter 5)
A. R. M. Ritter May 25, 2011

2. Agenda Significance of Topic Concept and Measurement
Poverty Measures
Income Distribution Measures
Equity, Poverty and Well-Being
Evidence re Poverty and Income Distribution
Who are the “Poor”
The Roots of Poverty and Income Mal-distribution
Kuznet’s “Inverted U Hypothesis”
Policies for Pro-Poor Growth
Millennium Development Goals

3. 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?

4. Significance of Topic Central development issue : reduce poverty!
“Make poverty history!”
Central focus of development efforts and of this course
The focus of the “Millennium Development Goals”
Is Poverty a “bad thing”? Why?
Amartya Sen’s concepts of capabilities and choice
Income and Basic Human Need Fulfillment

5. Income Distribution: Central to our ideas of fairness and justice
A more equitable income distribution is supportive of both Growth and Poverty Reduction
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 growth,

6. 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

7. 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

8. 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)

9. 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:
Where Yp is the absolute poverty line; and Yi the income of the ith poor person

10. Measuring the Total Poverty Gap

11. TPG is total poverty gap
Measuring Absolute Poverty
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

12. 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

13. 6. The New UNDP “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.

14. 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)
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).

15. 3. 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.

16. 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.

17. 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, 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 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.

18. MPI Rankings and Poverty Headcounts for Selected Countries

19. Poverty Measures for Some African Countries, 2005
Country &
HDI Rank
Human Poverty Index (UNDP)
Per Cent
GDPpc (PPP)
$US
Population below US$1.00 per day,
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

20. Human Development Indices, Africa, 1975-2005
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
.420
.433
.545
Nigeria
.321
.391
.432
.470
Tanzania
.419
.467
Ethiopia
.311
.347
.406
China
.530
,595
.691
.777
Source: UNDP. Human Development Report, 2007/2008

21. 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)

23. Income Distribution: Central to our ideas of fairness and justice
A more equitable income distribution is supportive of both Growth and Poverty Reduction
Growth generally reduces Poverty; But Growth is “Neutral” regarding income distribution ……..
Unless major efforts are made to achieve distributional objectives simultaneously with growth,
Incentives and income Distribution

24. Vote !!

25. Income Distribution Concepts and Measures
Income shares of groups in the population (quintiles or deciles)
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)

26. The Lorenz Curve and Gini Coefficient
Explained and derived in class

27. Figure 5.2 The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of Inequality

28. Figure 5.3 Estimating the Gini Coefficient

29. Latin America: Lorenze Curve for Distribution of Educational Spending, for Eight Countries
(explanation in class)

30. 4. Evidence re Poverty and Income Distribution
Some International Comparisons

31. Income Distribution Measures for Some African Countries
Country
Gini Coefficient
Income Share of Richest 20%
Poorest 20 %
Income Share of Poorest 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
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

34. 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

35. Table 5.8 Indigenous Poverty in Latin America

36. 1. Historical Inheritance and its Momentum:
6. The Roots of Income Mal-distribution (and Poverty to a large extent)
1. Historical Inheritance and its Momentum:
A. Pre-Colonial Social Structures
Significant levels of equality in pre-colonial eras;
High equality for “hunting and gathering” peoples
Some cases of severe inequality (e.g. India with caste system; feudal structures in some other cases)

37. 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

38. 2. Political Factors:
Disproportionate power and influence of elites and moneyed interests (e.g. property, gender, and literacy qualifications to the vote until recently)
Result:
Public Policy has often been shaped in their interests
Thus:
“Urban bias”
“Upper and middle income class bias” and
“Modern sector bias” in public policy

39. 3. The Nature of the “Modernization” Process:
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”? “Equities”?

40. Note the
Latin American
Effect

41. 3. The Nature of the “Modernization” process: Forces Generating Inequalities

42. 3. The Nature of the “Modernization” process: Forces Generating Inequalities
“Scarce capital” generates high returns for its owners;
Scarce skilled labour generates higher incomes for those with crucial skills;
Abundant unskilled labour generates low wages and incomes;

43. 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;
Personal Advantages

44. continued: The Nature of the “Modernization” Process:
Forces Generating Greater Equalities

45. 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 activities
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

46. South Korea: Causal Factors Shaping Income Distribution and Growth
Emphasis on
Human
Development
Successful
Export
Promotion
Good
Macroeconomic
Management
Good Private-
Public
Gov’t Market Mix
Land Reform
Coops;
Price Policy
Well Qualified
Labour Force
Rapid Growth of
Manufacturing
Rural Urban
Balance
Population
Deceleration
Agricultural
Expansion
Increasing Taxes
Lower LF
Growth Rate
Rapid Job
Creation
Activist and Expanding
Social Policies
Egalitarian Urban
Income Distribution
Rural-Urban
Equity
Egalitarian
Rural Distribution;
Income Growth
Rapid Growth, Distributional Equity, Poverty Reduction
[HDI: # 28; : .707; ; Gini: 0.316; Growth pc, : 6.1% pa]

47. 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

48. 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 sector

49. “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 gain”

50. 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.

51. 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 patterns

52. 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 incomes.

53. 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]

54. 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 groups
Focus sharply on the poorest.
HOW?

55. c. Emphasize Investment in Human Development
Fairly Allocated
Education, Health, Nutrition, Clean Water, Sanitation,
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 administration.]

57. 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;

58. e. Invest in the Physical Assets of the Poor
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

59. f. Combat “Modern sector bias” in public policy;
[plus “Urban Bias”, “Industrial sector bias,” and “Middle class bias”]
Reconsider
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

60. Avoid megalo-cephalic urbanization
Agriculture & Rural Development
Regional Development;

61. 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;

62. h. Construct Safety Nets and Transfers as possible [for middle income countries]
Target the neediest groups;
Support Human development –promoting activities
[e.g. as in Brazil under Lula, financial support for the poorest families that keep their children in school;
or as in Chile, where school lunches programs are provided in low income neighbourhoods]