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

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Presentation on theme: "Poverty, Income Distribution and Development (Text, Chapter 5) ECON 3508 Spring 2011 Introduction to Economic Development Poverty, Income Distribution."— Presentation transcript:

1 Poverty, Income Distribution and Development (Text, Chapter 5) ECON 3508 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 Kuznets 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 1. 1. 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 Sens 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 A. 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

8 A. 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)

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

10 Measuring the Total Poverty Gap

11 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 /Y p

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/Y p

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 individuals 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 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.

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, Per Cent 65. Mauritius 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

20 Human Development Indices, Africa, Country Mauritiusna South Africa Ghana Kenya Zimbabwe Ugandana Nigeria Tanzaniana Ethiopiana China.530, 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)

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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 CountryGini Coefficient Income Share of Richest 20% Poorest 20 % Income Share of Poorest 20% Income Share of Richest 20% South Africa %62.2 Ghana Kenya.4258, Zimbabwe Uganda Nigeria Tanzania Ethiopia Sierra Leone China ,351.9 Canada Source: UNDP. Human Development Report, 2007/2008

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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 6. 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 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

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 –policy –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 everyones 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 – –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, 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

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

45 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; rising demand for goods and services from elsewhere; linkage effects linkage effects

46 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: # 28; 1970:.707; ; Gini: 0.316; Growth pc, : 6.1% pa] Price Policy Activist and Expanding Social Policies Increasing Taxes

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; 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 rising levels of personal or family income and tax revenues; Permitting significant levels of domestic & national savingsPermitting 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. 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.]

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57 d. Increase Demand for the abundant resource of the poor, namely labour, [i.e. rapid creation] 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]


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