3Centesimus Annus34. 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.
4Poverty across countries Country (in order of increasing GNP per capita)% of Population below $1 a dayBangladesh29.1Kenya26.5Sri Lanka6.6Indonesia7.7Philippines14.6Jamaica3.2Paraguay19.5Costa Rica6.9Malaysia<2Brazil9.0
5Inequality across countries Country (in order of increasing GNP per capita)The Poorest 40% get … % of incomeRatio of Highest 20% to lowest 20%Bangladesh22.94.0Kenya10.118.3Sri Lanka22.04.4Indonesia20.45.1Philippines15.58.4Jamaica16.08.2Paraguay27.1Costa Rica12.812.9Malaysia11.7Brazil25.7United States16.18.5
6But careful ! In these surveys, both the very poor and the very rich and underrepresented.
7But careful ! In these surveys, both the very poor and the very rich and underrepresented.
8But careful ! In these surveys, both the very poor and the very rich and underrepresented.
9Poverty, 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.
10Poverty, Inequality, and GNP per capita Inequality is probably determined byhistorysocial cleavages,politics and government policiesCareful statistical/econometric analysis is necessary to identify the effect of each factor.
12The 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?
13The Growth Controversy: Seven Critical Questions Inequality and poverty need to be defined carefully if we want toCompare 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?
14Measuring Inequality and Poverty Size distributionsLorenz curves and Gini coefficientsFunctional distributions
15Measuring Inequality and Poverty size distributionsHow 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.
16HouseholdThe Kuznets ratio:the ratio of the share of income of the highest 20% divided by the share of income of the lowest 40%.
17Measuring Inequality and Poverty Lorenz curvesArrange 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.
28The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of Inequality
29Four Possible Lorenz Curves Which is the least unequal country?Which is the most unequal?Can we rank them all?
30Measuring 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.
32The 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.
33Measuring Inequality and Poverty Functional DistributionsWhat 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?
34Functional 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.
38Measuring 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.
39Measuring the Poverty Gap The “poverty gap” is different but H or H/N would be the same.
40Measuring Poverty Measuring Absolute Poverty Total poverty gap where Yp is the absolute poverty lineYi is income of person i
41Measuring Poverty Measuring Absolute Poverty Average poverty gap where H is number of persons underpoverty lineTPG is total poverty gap
42Measuring Poverty Measuring Absolute Poverty The Normalized Poverty Gap is the Total Poverty Gap divided by the product of the poverty line and the population
43Measuring Poverty Measuring Absolute Poverty Foster-Greer-Thorbecke measureIs a very general form of poverty measure that satisfiesanonymity (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) anddistributional sensitivity (taking income away from a poor person makes the poverty index worse).
44Measuring Poverty Measuring Absolute Poverty Foster-Greer-Thorbecke measureIf 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
45Measuring 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)
46Measuring 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.
47Measuring 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.
48Poverty, 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.
49Poverty, 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.
50Poverty, Inequality, and Social Welfare What’s so bad about inequality?Extreme income inequality leads to political and social instabilityThe 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.
51Poverty, Inequality, and Social Welfare What’s so bad about inequality?St. Augustine on the Preferential Option for the PoorGod 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).
52Poverty, 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.
53Poverty, Inequality, and Social Welfare Dualistic development and shifting Lorenz curves: some stylized typologiesmodern sector enlargementmodern sector enrichmenttraditional sector enrichment
54Improved Income Distribution under the Traditional-Sector Enrichment Growth Typology Sri Lanka, Kerala (India).Low growth by great struggle against poverty.
55Worsened Income Distribution under the Modern-Sector Enrichment Growth Typology Latin America, AfricaGrowth only in modern sector: unchanged proportion of traditional sector workers.
56Crossing Lorenz Curves in the Modern-Sector Enlargement Growth Typology OECD, East AsiaThe 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.
57Poverty, Inequality, and Social Welfare So is inequality bad?Kuznets’s inverted-U hypothesisHistorically, 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.
59Kuznets 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.
61Poverty, Inequality, and Social Welfare Growth and inequalityHigh 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.
62Comparison of Gross National Product Growth Rates and Income Growth Rates of the Bottom 40% of the Population in Selected Less Developed Countries
63Long-Term Economic Growth and Income Inequality, 1965-1996
64Absolute 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.
67Poverty in the Developing World Is Shifting toward South Asia and Sub-Saharan Africa
68Absolute 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.”
69Absolute Poverty: Extent and Magnitude Growth and povertyGrowth 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.
70Absolute Poverty: Extent and Magnitude Growth and povertyPoverty 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.
74Is Growth Good for the Poor? No, if it’sJoblessIs growth labor-intensive?RuthlessDoes inequality worsen?VoicelessDoes democracy expand?RootlessAre people able to retain their cultural identity?FuturelessDoes growth squander resources for future generations?Human Development Report, UNDP
75Is Growth Good for the Poor? Yes, if it is accompanied byExpanded opportunityAre the losers compensated by the winners?Is competition open and fair?Are services (education, health, transportation, communication) good and reliable?Macroeconomic stabilityAre the costs of stabilization worth the benefits?Specialization in the country’s comparative advantage
76Growth and the PoorHigher average income levels are associated with higher income for the poor.
77Growth and the Poor cont’d Higher average income growth is associated with higher income growth for the poor.
78Economic Characteristics of Poverty Groups Rural PovertyThere are fewer income, health, education, and insurance possibilities in rural areas than in urban areas.
80Economic Characteristics of Poverty Groups Women and povertyPoor 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
83The Range of Policy Options: Some Basic Considerations Areas of interventionChange the functional distributionGive more income to labor and less to capital.Change asset and skill inequality: the sources of income inequality.Land reform; microcredit; basic educationMake taxes more progressive.Poverty reduction programs: direct transfers or subsidies for food, education, health, etc.
84The Range of Policy Options: Some Basic Considerations Changing relative factor pricesTraditional-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.
85The Range of Policy Options: Some Basic Considerations Changing relative factor pricesMarket-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.
86The Range of Policy Options: Some Basic Considerations Transfer payments and public provision of goods and servicesMake 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.
87The Range of Policy Options: Some Basic Considerations “workfare” is better than welfare if itDoes not undermine incentives for acquiring human capital needed for private sector jobsIncreases net benefits – including externalitiesIs difficult to identify the needy without work requirementThere are relatively few poor peopleThere less social stigma / political resentment from workfare
89The Range of Policy Options: Some Basic Considerations The need for a ‘package’ of policiesEliminate price distortions: more efficiency, more employment and less povertyStructural change in asset ownershipProgressive taxes and transfers; safety net
91Global Inequality Measures Unweighed Population-weighed Lesotho and China get the same weightPopulation-weighedMore populous nations get more weight, but people are assumed to have identical incomes.Global Household surveys.
92Global Inequality Measures Unweighed Population-weighed Global inequality has been getting worse: dominated by lots of countries in Sub-Saharan Africa and Latin America.Population-weighedGlobal inequality has been getting better: dominated by China, India, and East Asia.Global Household surveysInequality seems worse because of US, China, and India.