1. Poverty, Inequality, and Development
Chapter 6

2. Voices of the Poor

3. Centesimus Annus
34. It would appear that, on the level of individual nations and of international relations, the free market is the most efficient instrument for utilizing resources and effectively responding to needs. But this is true only for those needs which are "solvent", insofar as they are endowed with purchasing power, and for those resources which are "marketable", insofar as they are capable of obtaining a satisfactory price. But there are many human needs which find no place on the market. It is a strict duty of justice and truth not to allow fundamental human needs to remain unsatisfied, and not to allow those burdened by such needs to perish. It is also necessary to help these needy people to acquire expertise, to enter the circle of exchange, and to develop their skills in order to make the best use of their capacities and resources. Even prior to the logic of a fair exchange of goods and the forms of justice appropriate to it, there exists something which is due to man because he is man, by reason of his lofty dignity. Inseparable from that required "something" is the possibility to survive and, at the same time, to make an active contribution to the common good of humanity.

4. Poverty across countries
Country (in order of increasing GNP per capita)
% of Population below $1 a day
Bangladesh
29.1
Kenya
26.5
Sri Lanka
6.6
Indonesia
7.7
Philippines
14.6
Jamaica
3.2
Paraguay
19.5
Costa Rica
6.9
Malaysia
<2
Brazil
9.0

5. Inequality across countries
Country (in order of increasing GNP per capita)
The Poorest 40% get … % of income
Ratio of Highest 20% to lowest 20%
Bangladesh
22.9
4.0
Kenya
10.1
18.3
Sri Lanka
22.0
4.4
Indonesia
20.4
5.1
Philippines
15.5
8.4
Jamaica
16.0
8.2
Paraguay
27.1
Costa Rica
12.8
12.9
Malaysia
11.7
Brazil
25.7
United States
16.1
8.5

6. But careful ! In these surveys, both the very poor and the very rich and underrepresented.

7. But careful ! In these surveys, both the very poor and the very rich and underrepresented.

8. But careful ! In these surveys, both the very poor and the very rich and underrepresented.

9. Poverty, Inequality, and GNP per capita
There’s no simple relation between poverty/inequality and per capita income.
Inequality (high or low) seems to be very persistent; but it typically changes (up or down) when output per capita changes.
There might be a complicated relation, involving the interaction of many factors.

10. Poverty, Inequality, and GNP per capita
Inequality is probably determined by
history
social cleavages,
politics and government policies
Careful statistical/econometric analysis is necessary to identify the effect of each factor.

12. The Growth Controversy: Seven Critical Questions
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/require greater income inequality?
Do the poor benefit from growth?
Are high levels of inequality always bad?
What policies can reduce poverty?

13. The Growth Controversy: Seven Critical Questions
Inequality and poverty need to be defined carefully if we want to
Compare countries to each other;
Assess progress in fighting them;
What kind of policies/incentives need to be designed.
What kinds of growth improve welfare?
What are the main things to be done?

14. Measuring Inequality and Poverty
Size distributions
Lorenz curves and Gini coefficients
Functional distributions

15. Measuring Inequality and Poverty
size distributions
How much income does household X earn?
Sort people according to income and put them in major groups.
Ignore differences in the source of income (or capabilities, for example)
A quartile is a fourth (25%) of the population; a decile is a tenth; a quintile is a fifth.

16. Household
The Kuznets ratio:
the ratio of the share of income of the highest 20% divided by the share of income of the lowest 40%.

17. Measuring Inequality and Poverty
Lorenz curves
Arrange population according to the share of income they receive, from lowest to highest.
Calculate cumulative percentages (the lowest 5%, the lowest 45%, etc.)
Plot the cumulative percentage of households against the cumulative percentage of the income they earn.

18. Cumulative
Percentage of
income earned
Cumulative
Cummulative
Percentage of
income earned
Cumulative
Percentage of
income earned

20. Cumulative
Percentage of
income earned
Households
Income
Percentage of
Households 1
0.80 5%
0.8% 2
1.00
10%
1.8% 3
1.40
15%
3.2% 4
1.80
20%
5.0% 5
1.90
25%
6.9% 6
2.00
30%
8.9% 7
2.40
35%
11.3% 8
2.70
40%
14.0% 9
2.80
45%
16.8% 10
3.00
50%
19.8% 11
3.40
55%
23.2% 12
3.80
60%
27.0% 13
4.20
65%
31.2% 14
4.80
70%
36.0% 15
5.90
75%
41.9% 16
7.10
80%
49.0% 17
10.50
85%
59.5% 18
12.00
90%
71.5% 19
13.50
95%
85.0% 20
15.00
100%
100.0%

22. rescaled so that H1’s income is 0.8
Cumulative
Percentage of
income earned
I=1.4^H
rescaled so that H1’s income is 0.8
(Divide all incomes by H1’s income, 1.4, and multiply them all by 0.8)

27. The Lorenz Curve

28. The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of Inequality

29. Four Possible Lorenz Curves
Which is the least unequal country?
Which is the most unequal?
Can we rank them all?

30. Measuring Inequality and Poverty
Gini coefficients (an aggregate measure of inequality)
It’s a quantitative measure of how far a society is from being perfectly equal.
Calculate the area between the perfect-equality curve and the actual curve.
Divide that area by the total area under the perfect-equality curve.

31. Estimating the Gini Coefficient

32. The Gini Coefficient The Gini coefficient is interesting because
It’s anonymous: it doesn’t treat some people as better than others, it just reports their income.
It’s scale-independent: measuring income in dollars or in rupees doesn’t change it.
It’s population-independent: changing the amount of people but keeping income distribution constant doesn’t change it.
It follows the transfer principle: transferring income from a richer to a poorer person (without changing their order) improves it.
The coefficient of variation (stdev/mean) also follows these principles.

33. Measuring Inequality and Poverty
Functional Distributions
What is the income that goes to each kind of factor of production? That is, what is the labor share in income? What is the profit-rent-interest share in income?

34. Functional Income Distribution in a Market Economy: An Illustration
According to this theory, incomes are determined by demand for the input (and therefore by it’s marginal productivity) and by its supply.
Non-market influences (or market imperfections) are ignored.

35. Measuring Poverty

36. Measuring Poverty Poverty is Lack of income; Lack of drinking water
Lack of access to health care
Lack of protection against adverse shocks

38. Measuring Poverty Measuring Absolute Poverty
The Absolute Poverty Headcount H simply adds the number of people whose income is below an agreed upon poverty line.
The Headcount index H/N divides this number by the population.
The international poverty line is $1 a day, but adjustment to local conditions can lead to a different number.

39. Measuring the Poverty Gap
The “poverty gap” is different but H or H/N would be the same.

40. Measuring Poverty Measuring Absolute Poverty Total poverty gap
where Yp is the absolute poverty line
Yi is income of person i

41. Measuring Poverty Measuring Absolute Poverty Average poverty gap
where H is number of persons under
poverty line
TPG is total poverty gap

42. Measuring Poverty Measuring Absolute Poverty
The Normalized Poverty Gap is the Total Poverty Gap divided by the product of the poverty line and the population

43. Measuring Poverty Measuring Absolute Poverty
Foster-Greer-Thorbecke measure
Is a very general form of poverty measure that satisfies
anonymity (no person is worth more than another),
population independence (a larger population doesn’t change it, ceteris paribus),
monotonicity (making a person richer won’t decrease the index) and
distributional sensitivity (taking income away from a poor person makes the poverty index worse).

44. Measuring Poverty Measuring Absolute Poverty
Foster-Greer-Thorbecke measure
If a=2, you get a measure that is extremely sensitive to the depth and severity of poverty.
Coefficient of variation of incomes of the poor

45. Measuring Poverty Measuring Absolute Poverty
The Human Poverty Index (UNDP)
Deprivation of life (percentage whose life expectancy is below 40%)
Deprivation of education (percentage of illiterate people)
Deprivation of economic provisioning (percentage without access to health care and safe water plus percentage of underweight under-5 children)

46. Measuring Poverty Measuring Absolute Poverty Is “$1 a day” too low?
Lots of people live between “$1 a day” and “$2 a day”, and although there are fewer people below “$1 a day”, the proportion of people living under “$2 a day” hasn’t fallen much.

47. Measuring Poverty Measuring Absolute Poverty
How about “$15 a day” as the standard to say that someone is poor?
If “$15 a day” makes your poor in the US, why should you be non-poor if you make “$10 a day” in Zambia?
How about using income rather than consumption, and national accounts rather than surveys?
The number of poor people seem to be much fewer.

48. Poverty, Inequality, and Social Welfare
What’s so bad about inequality?
Extreme income inequality leads to inefficiency.
Lack of access to credit leads to underfinancing of good productive opportunities.
Since the middle-class has the highest average and marginal saving rates, income inequality leads to lower saving and investment.

49. Poverty, Inequality, and Social Welfare
What’s so bad about inequality?
Extreme income inequality leads to inefficient allocation of assets.
Overemphasis on higher education to the detriment of basic education.
Inefficiently large farms next to inefficiently small farms.

50. Poverty, Inequality, and Social Welfare
What’s so bad about inequality?
Extreme income inequality leads to political and social instability
The poor try revolution while the rich try corruption and rent-seeking to retain power.
Most people think it’s unfair.
Rawls’s “veil of ignorance.”
A sense of unfairness lowers welfare.

51. Poverty, Inequality, and Social Welfare
What’s so bad about inequality?
St. Augustine on the Preferential Option for the Poor
God does not demand much of you. He asks back what he gave you, and from him you take what is enough for you. The superfluities of the rich are the necessities of the poor. When you possess superfluities, you possess what belongs to others. (Exposition on Psalm 147, 12).

52. Poverty, Inequality, and Social Welfare
What’s so bad about inequality?
CIC: 2444 "The Church's love for the poor . . . is a part of her constant tradition." This love is inspired by the Gospel of the Beatitudes, of the poverty of Jesus, and of his concern for the poor. Love for the poor is even one of the motives for the duty of working so as to "be able to give to those in need.” It extends not only to material poverty but also to the many forms of cultural and religious poverty.

53. Poverty, Inequality, and Social Welfare
Dualistic development and shifting Lorenz curves: some stylized typologies
modern sector enlargement
modern sector enrichment
traditional sector enrichment

54. Improved Income Distribution under the Traditional-Sector Enrichment Growth Typology
Sri Lanka, Kerala (India).
Low growth by great struggle against poverty.

55. Worsened Income Distribution under the Modern-Sector Enrichment Growth Typology
Latin America, Africa
Growth only in modern sector: unchanged proportion of traditional sector workers.

56. Crossing Lorenz Curves in the Modern-Sector Enlargement Growth Typology
OECD, East Asia
The poor get richer as they become modern-sector workers, increasing the share of the middle class.
Those who are left in the traditional sector get a smaller share of income.
With careful math, one can show that the Gini coefficient will first worsen and then improve.

57. Poverty, Inequality, and Social Welfare
So is inequality bad?
Kuznets’s inverted-U hypothesis
Historically, he found that inequality falls and then rises as countries develop.
The reasons may be complicated…
…and the validity of the hypothesis is an empirical question.

58. The “Inverted-U” Kuznets Curve

59. Kuznets Curve with Latin American Countries Identified
Circles represent Latin America: without them there’s no inverted-U pattern.
The evolution of inequality over time is most often due to sociopolitical factors.

60. Plot of Inequality data for selected countries

61. Poverty, Inequality, and Social Welfare
Growth and inequality
High overall growth may or may not be accompanied by improved income for the poorest 40%.
Low growth may or many not lead to low growth of the incomes of the poor.
The poor almost always share in (some of) the benefits of growth.
But whether growth leads to less inequality depends on who does the growing.

62. Comparison of Gross National Product Growth Rates and Income Growth Rates of the Bottom 40% of the Population in Selected Less Developed Countries

63. Long-Term Economic Growth and Income Inequality, 1965-1996

64. Absolute Poverty: Extent and Magnitude
Poverty: some progress ( )
The share of people living under $1 a day fell in most regions of the world; remained the same in some; and only rose in the ex-communist countries.
This is in spite of population growing from 5 billion to 6 billion, with pop. growth concentrated in poor countries.

66. Where Poverty Has Fallen, and Where It Has Not

67. Poverty in the Developing World Is Shifting toward South Asia and Sub-Saharan Africa

68. Absolute Poverty: Extent and Magnitude
Growth and poverty
“Growth is bad for the poor. They are marginalized from modernization, so inequality rises and even absolute poverty may rise as jobs disappear.”
“Poverty/Inequality-reduction programs are bad for growth. Redistribution curtails incentive for saving and work.”
“The poor save a surprisingly large proportion of their income. And extra income for the poor is invested into better nutrition, education, health.”

69. Absolute Poverty: Extent and Magnitude
Growth and poverty
Growth comes from taking advantage of profitable opportunities. If the poor can’t invest because they don’t have access to credit, fewer profitable opportunities will be taken. Then poverty/inequality-reduction is good for growth.
Unlike the elites of the Industrial Revolution, today’s Third-World elites are not high savers and do not devote large resources to improving the productivity of their business concerns.

70. Absolute Poverty: Extent and Magnitude
Growth and poverty
Poverty and destitution lead to unproductive workers.
Higher incomes for the poor create a strong domestic market.
Poverty/Inequality reduction generates support for development policies and programs.

73. Is Growth Good for the Poor?

74. Is Growth Good for the Poor?
No, if it’s
Jobless
Is growth labor-intensive?
Ruthless
Does inequality worsen?
Voiceless
Does democracy expand?
Rootless
Are people able to retain their cultural identity?
Futureless
Does growth squander resources for future generations?
Human Development Report, UNDP

75. Is Growth Good for the Poor?
Yes, if it is accompanied by
Expanded opportunity
Are the losers compensated by the winners?
Is competition open and fair?
Are services (education, health, transportation, communication) good and reliable?
Macroeconomic stability
Are the costs of stabilization worth the benefits?
Specialization in the country’s comparative advantage

76. Growth and the Poor
Higher average income levels are associated with higher income for the poor.

77. Growth and the Poor cont’d
Higher average income growth is associated with higher income growth for the poor.

78. Economic Characteristics of Poverty Groups
Rural Poverty
There are fewer income, health, education, and insurance possibilities in rural areas than in urban areas.

80. Economic Characteristics of Poverty Groups
Women and poverty
Poor households are usually female-headed. But females have less access to education, credit, jobs, etc., and often live in more deprived areas.
Within families, females often get fewer resources.
Often, nutrition-improvement programs work better if targeted at women.
Ethnic minorities, indigenous populations, and poverty

82. Policy Options

83. The Range of Policy Options: Some Basic Considerations
Areas of intervention
Change the functional distribution
Give more income to labor and less to capital.
Change asset and skill inequality: the sources of income inequality.
Land reform; microcredit; basic education
Make taxes more progressive.
Poverty reduction programs: direct transfers or subsidies for food, education, health, etc.

84. The Range of Policy Options: Some Basic Considerations
Changing relative factor prices
Traditional-sector workers have very low incomes and minimum-wage laws are seldom enforced.
Artificially high modern-sector wages (due to unions or laws) reduce the growth of the modern sector, condemning more people to poverty and exclusion.

85. The Range of Policy Options: Some Basic Considerations
Changing relative factor prices
Market-determined wages (which would be lower) in the modern sector would increase employment and incomes for the poor.
Market-determined cost of capital (which would be higher) would encourage firms to hire workers rather than buy capital.

86. The Range of Policy Options: Some Basic Considerations
Transfer payments and public provision of goods and services
Make sure it’s targeted to the poor.
Prevent the poor from becoming dependent on it … but encourage appropriate risk taking.
Discourage switching from work to program.
Avoid resentment by nearly-poor-but-not-enough who are working.

87. The Range of Policy Options: Some Basic Considerations
“workfare” is better than welfare if it
Does not undermine incentives for acquiring human capital needed for private sector jobs
Increases net benefits – including externalities
Is difficult to identify the needy without work requirement
There are relatively few poor people
There less social stigma / political resentment from workfare

88. Poverty Declines as National Income Rises

89. The Range of Policy Options: Some Basic Considerations
The need for a ‘package’ of policies
Eliminate price distortions: more efficiency, more employment and less poverty
Structural change in asset ownership
Progressive taxes and transfers; safety net

90. Global Inequality

91. Global Inequality Measures Unweighed Population-weighed
Lesotho and China get the same weight
Population-weighed
More populous nations get more weight, but people are assumed to have identical incomes.
Global Household surveys.

92. Global Inequality Measures Unweighed Population-weighed
Global inequality has been getting worse: dominated by lots of countries in Sub-Saharan Africa and Latin America.
Population-weighed
Global inequality has been getting better: dominated by China, India, and East Asia.
Global Household surveys
Inequality seems worse because of US, China, and India.