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Carleton University Introduction to Economic Development January 31 and February 5, 2013 Poverty, Income Distribution and Development (Text, Chapter 5)

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Presentation on theme: "Carleton University Introduction to Economic Development January 31 and February 5, 2013 Poverty, Income Distribution and Development (Text, Chapter 5)"— Presentation transcript:

1 Carleton University Introduction to Economic Development January 31 and February 5, 2013 Poverty, Income Distribution and Development (Text, Chapter 5)

2 Agenda 1.Significance of Topic 2.Concept and Measurement Poverty Measures Income Distribution Measures 3.Equity, Poverty and Well-Being 4.Comments on Evidence re Poverty and Income Distribution 5.The Roots of Poverty and Income Mal- distribution Kuznets Inverted U Hypothesis 6.Policies for Pro-Poor Growth 7.Millennium Development Goals

3 1.Significance of Topic Central development issue in Africa: 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 Sens concepts of capabilities and choice Income and Basic Human Need Fulfillment

4 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,

5 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? 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

6 A.Poverty Concepts and Measures 1.The United Nations Human Poverty Index (Used until 2010; now replaced by another measure) 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

7 A.Poverty Concepts and Measures, contd 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)

8 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.

9 MPI Indicators 1.Health (1/3 rd weight) - 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 weight toward the maximum deprivation in the MPI) 2. Education (1/3 rd ) - two indicators with equal weight (1/6 th each) – 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. Living Standards (1/3 rd ) : measured as an average of six deprivations (1/18 th each): safe water, electricity, sanitation, flooring, improved cooking fuel, and possession of at least two of telephone, bicycle, radio, TV, motor bike or car

10 Computing the MPI The MPI for the country (or region or group) is then computed A convenient way to express the resulting valu e 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.

11 Multi-dimensional Poverty Indices for some Countries Country MPI MPI Head-count, % of Total Population Population below Poverty Line $1.25 PPP per person per day Czech Rep China Kenya Ghana Nigeria Tanzania Zambia Ethiopia Liberia Niger

12 7. 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 Y p is the absolute poverty line; and Y i the income of the ith poor person

13 Measuring the Total Poverty Gap

14 MPI Rankings and Poverty Headcounts for Selected Countries

15 Other Poverty Measures for Some African Countries, 2005 Country & HDI Rank Human Poverty Index (pre-2009) (UNDP) Per Cent GDPpc (PPP) $US Population below US$1.00 per day, Per Cent 65. Mauritius11.412, South Africa23.511, Ghana32.32, Kenya30.81, Zimbabwe Uganda34.71,45411, Nigeria Tanzania Ethiopia54.91, Sierra Leone China11,77, Source: UNDP. Human Development Report, 2007/2008

16 Human Development Indices, Africa, Country Mauritiusna South Africa Ghana Kenya Zimbabwe Ugandana Nigeria Tanzaniana Ethiopiana China.530, Source: UNDP. Human Development Report, 2007/2008

17 Income Distribution and Well-Being Income distribution and poverty: the differences The Broad-Based Sense of Fairness –Religious Basis –Design of Human Institutions The Law; United Nations Welfare states & income taxation Democracy and human rights Development assistance – Economistic Games showing that generally people prefer Fairness

18 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 may be Neutral regarding income distribution (Unless major efforts are made to achieve distributional objectives simultaneously with growth) Incentives and Income Distribution

19 Vote !!

20 Perceptions of Individual Well-Being and Happiness LiberiaKenyaUSACanada Overall Life Satisfaction Min 0 to 10 Max Satisfaction with Standard of Living (%) Happiness: Purposeful Life Happiness: Treated with Respect Negative Life Experience Source: UNDP Human Development Report 2010

21 Income Distribution Concepts and Measures 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)

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

23 Figure 5.3 Estimating the Gini Coefficient

24 4. Evidence re Income Distribution Some International Comparisons

25 Income Distribution Measures for Some African Countries CountryGini Coefficient Income Share of Richest 20% Poorest 20 % Income Share of Poorest 20% Income Share of Richest 20% S. Africa %62.2 Ghana Kenya.4258, Zimbabwe Uganda Nigeria Tanzania Ethiopia Sierra Leone China ,351.9 Source: UNDP. Human Development Report, 2007/2008

26 Who are the Poor ? Domestic Aspects –Rural character –Regional dimension –Gender & children –Indigenous dimension –Some may be subject to disabilities Characteristics of the poor: –Assets; –Human capital (education, health); –Income vulnerability –Weak access to public services, –Environmentally hostile environments, –Lack of supportive networks

27 5. The Roots of Income Mal- distribution and Poverty

28 1. Historical Inheritance and its Momentum: Pre-Colonial Social Structures: Significant levels of equality in some pre-colonial eras; High equality for hunting and gathering peoples High inequality in some more complex societies (e.g. caste system in India)

29 B.Impacts of Colonialism Unequal property rights and institutions imposed by colonial powers: Note Latin America and Caribbean Imperial country living standards for colonizers; traditional levels for Africans Public services directed at settler peoples, not indigenous peoples Colonial hierarchies: Social stratification based on Race and Ethnicity

30 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

31 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 everyones living standards simultaneously? What forces generate Inequities? Equities?

32 Note the Latin American Effect

33 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;

34 3. The Nature of the Modernization process: Forces Generating Inequalities, contd 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

35 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 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

36 Emphasis on Human Development South Korea: Causal Factors Shaping Income Distribution and Growth Successful Export Promotion Good Macroeconomic Management Good Private- Public Govt Market Mix Land Reform Coops; Well Qualified Labour Force Population Deceleration Lower LF Growth Rate Rapid Job Creation Egalitarian Urban Income Distribution Rural-Urban Equity Egalitarian Rural Distribution; Income Growth Rural Urban Balance Agricultural Expansion Rapid Growth of Manufacturing Rapid Growth, Distributional Equity, Poverty Reduction [ HDI: # 15 in world; 1970:.707; ; Gini: 0.316; Growth pc, : 6.1% pa] Price Policy Activist and Expanding Social Policies Increasing Taxes

37 Empirical Validity of Kuznets Hypothesis? Which effects predominate?

38 Kuznets Curve with Latin American Countries Identified Note the Latin American Effect

39 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

40 4. Nature of Development Strategies (and Theorizing): Early Theorizing: Capital-Centered theories, Dualistic Development Models (W.A. Lewis) The Soviet Model, Prebisch - UN ECLAC) W. W. 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

41 5. 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

42 6. 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.

43 7. Market Power –Concentrated ownership patterns –Monopoly and oligopoly power of enterprise and individuals –The power of professional associations, unions and organized groups –Political power determining income patterns

44 8. 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.

45 6. Policies for Pro-Poor Growth Possible Approaches and Components of Poverty Reduction and Equity-Oriented Programs 1. 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]

46 2. 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?

47 3. Emphasize Public 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.]


49 4. Increase Demand for the abundant resource of the poor, namely labour, [i.e. rapid job creation] [Now d ifficult due to Chinas manufacturing dominance due to cheap labour, mega-economies of large scale, undervalued exchange rate] 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;

50 Dont subsidize the use of capital Making capital artificially cheap increases the use of capital and the capital intensity of production processes at the expense of labour Avoid –Investment incentives –Tax credits, –Subsidized interest rates –Tariff advantages for capital goods imports –Overvalued exchange rates for capital goods imports

51 5. 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 neighbourhoods [water, sanitation, sidewalks, streets, electricity, security, etc.] Support Agriculture and Rural Development, focusing on low income rural peoples –Rural roads; water & sanitation; drainage & irrigation; garbage collection, law and order, electrification in time

52 Avoid hyper-concentrated urbanization and First City Bias Promote Agriculture & Rural Development Regional Development;

53 6. Redistributive Taxation Progressive income taxes; Wealth taxes Note the importance of Tax Administration

54 7. 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;

55 8. Construct Safety Nets and Transfers as possible [for middle income countries] Target the neediest groups; Workfare programs 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]

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