Presentation on theme: "ECON 3508 Spring 2011 Introduction to Economic Development Poverty, Income Distribution and Development (Text, Chapter 5) A. R. M."— Presentation transcript:
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 MeasuresIncome Distribution MeasuresEquity, Poverty and Well-BeingEvidence re Poverty and Income DistributionWho are the “Poor”The Roots of Poverty and Income Mal-distributionKuznet’s “Inverted U Hypothesis”Policies for Pro-Poor GrowthMillennium 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 courseThe focus of the “Millennium Development Goals”Is Poverty a “bad thing”? Why?Amartya Sen’s concepts of capabilities and choiceIncome 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 ReductionGrowth 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 IncomesIncome or consumption?Accurate Information: sourcesDefinition of income:Market generated Income? OrMarket generated Income + Transfers OrMarket generated Income + Transfers – Taxes? OrMarket Income + Transfers –Taxes + In-Kind Subsidies? OrMarket 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 $ SOther complications: Home-produced G&S;Differing pricesDiffering 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 source4. Underweight children under age five.2. Arbitrary Income “Cut-Offs” or Measurese.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 economyTotal poverty gap:Where Yp is the absolute poverty line; and Yi the income of the ith poor person
11 TPG is total poverty gap Measuring Absolute PovertyAverage poverty gap (APG):Where N is number of persons in the economyTPG is total poverty gapNote: normalized poverty gap,NPG = APG /Yp
12 Measuring Absolute Poverty Average income shortfall (AIS): Where H is number of poor personsTPG is total poverty gapNote: 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, andwhether 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, andwhether 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 familyThe 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 MPIThe MPI for the country (or region or group) is then computedA convenient way to express the resulting value is H*A, so that MPI = H*Ai.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 calculatedHA 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 RankHuman Poverty Index (UNDP)Per CentGDPpc (PPP)$USPopulation below US$1.00 per day,65. Mauritius11.412.71511.9121. South Africa23.511,11010.5135. Ghana32.32,48044.8148. Kenya30.81,24022.8151. Zimbabwe40.32.03856.1154. Uganda34.71,45411,9158. Nigeria37.31.12870.8159. Tanzania32.574457.8169. Ethiopia54.91,05523.0177. Sierra Leone51.780657.081. China11,77,1009.9Source: UNDP. Human Development Report, 2007/2008
20 Human Development Indices, Africa, 1975-2005 Country1974198519952005Mauritiusna.692.751.804South Africa.650.690.745.674Ghana.442.482.542.553Kenya.466.534.544.521Zimbabwe.550.615.613.513Uganda.420.433.545Nigeria.321.391.432.470Tanzania.419.467Ethiopia.311.347.406China.530,595.691.777Source: UNDP. Human Development Report, 2007/2008
21 3. Equity, Poverty and Well-Being The Broad-Based Sense of “Fairness”Religious BasisEconomistic “Games” showing that generally people prefer FairnessDesign of Human InstitutionsThe law;United NationsWelfare states & income taxationDemocracy and human rightsDevelopment assistanceSurvey 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 ReductionGrowth 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
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
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 CoefficientIncome Share of Richest 20%Poorest 20 %Income Share of Poorest 20%South Africa.57817.03.5%62.2Ghana.4088.45.646.6Kenya.4258,26.049.1Zimbabwe.50112.04.655.7Uganda.3579.25.752.5Nigeria.4218.104.22.168Tanzania.3465.87.342.4Ethiopia.3994.339.4Sierra Leone.62922.214.171.124China.57012.24,351.9Canada.32126.96.36.199Source: UNDP. Human Development Report, 2007/2008
34 5. “Who are the “’Poor’”? Domestic Aspects Rural characterRegional dimensionGender & childrenIndigenous dimensionCharacteristics of the poor:Assets;Human capital;Income vulnerabilityWeak access to public services,Environmentally hostile environments,Lack of supportive networks
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 StructuresSignificant levels of equality in pre-colonial eras;High equality for “hunting and gathering” peoplesSome 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 powersImperial country living standards for colonizers; traditional levels for indigenous peoplesPublic services directed at settler peoples, not indigenous peoplesColonial 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 interestsThus:“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”?
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. changeUneven access to opportunitiesPrior 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 EqualitiesThe exhaustion of surplus labour in agriculture and the informal economy?Increasing productivity generally promotes rising incomes in supporting service-type activitiesBroadening Tax Base permits social programs & welfare state type programsBroadening human development (education health etc.) broadens earning capabilitiesRegional and rural-urban spread effectsrising demand for goods and services from elsewhere;linkage effects
46 South Korea: Causal Factors Shaping Income Distribution and Growth Emphasis onHumanDevelopmentSuccessfulExportPromotionGoodMacroeconomicManagementGood Private-PublicGov’t Market MixLand ReformCoops;Price PolicyWell QualifiedLabour ForceRapid Growth ofManufacturingRural UrbanBalancePopulationDecelerationAgriculturalExpansionIncreasing TaxesLower LFGrowth RateRapid JobCreationActivist and ExpandingSocial PoliciesEgalitarian UrbanIncome DistributionRural-UrbanEquityEgalitarianRural Distribution;Income GrowthRapid 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 operateUltimately “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 emphasizedGrowth first; income distribution later;Investment in the Modern Sector, esp. Industry;Import-substituting industrialization;Investment in physical capitalDe-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” programswhich 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 poorreduces family investment per child andreduces 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 individualsThe power of professional associations and unionsPolitical power determining income patterns
52 7. International Factors Multinational Enterprise: islands of modernity and higher incomesTechnological Transfer of modern capital-intensive machinery and equipment higher incomes for someInternationally 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 Programsa. Achieve Sustained Economic GrowthExceeding 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 groupsFocus sharply on the poorest.HOW?
55 c. Emphasize Investment in Human Development Fairly AllocatedEducation, Health, Nutrition, Clean Water, Sanitation,Family PlanningBuild the capabilities of the state to provide necessary public goods[i.e. effective and efficientTax AdministrationPlus 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 PromotionPromote 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 peoplesRural 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”]ReconsiderTax policyGovernment expenditures and social benefits and their allocationTariff policy and protectionismInfrastructure finance and allocationCredit policiesAll types of subsidization of the modern urban sector
61 g. Redistribute Assets Land Reform of various sorts; Democratic ownership patterns;Cooperative Property formsTaxation towards equityFavour small & local enterprise?Democratization of private ownershipSupport 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]