PART TWO: Distribution and Human Resources Chapter 6: Inequality and Poverty

Bangladesh: one of the world’s most heavily populated low-income nations average income (2003:1770$PPP, 2011: 1900, 2012:$2100) population: 158+ million (est. 2011) Average income? what income level is earned by those who fall below the average? 36% of Bangladeshis (50 million) survive on “$1 a day” or less.... this is the definition of absolute poverty

At global level, 1 out of 6 people lives below the “$1 a day” Half the world’s population survive on less than “$2 a day” This is related to the question of: is income distributed equally?

Mexico: $9,168 per capita GDP in 2003, 15,300 in 2012 Richest 20% receive over 50% of total income, 15 times as much as the poorest 20% 10 million mexicans (10% of population) living below “$1 a day” poverty line.

raising people out of poverty requires economic growth need to attain and reach sustained economic growth distribution of national income plays a vital role

measuring inequality economist are interested in the distribution of income among households within a nation. development economists look at the distribution of household consumption, measured by household expenditure this is because in poor countries, income can be hard to measure (farmers consume rather than market most of what they produce)

consumption is a good indicator of welfare than income since C tends not to fluctuate as much as income other distributions: distribution of wealth, distribution of assets (land, education, ...) these measures can be used within one nation or among nations (global inequality) we use frequency distribution: tells us how many (or %) families or individuals receive different amounts of income.

Fig. 6.1 top: Distribution of Income/consumption in Bangladesh 9

Fig. 6.1 Distribution of Income/Consumption in Mexico 10

Fig. 6.1 Distribution of Income/Consumption in the USA 11

all 3 figures have the same shaped frequency distribution but are NOT identical this means that the degree of inequality in 3 nations varies we use size distribution to know the share of total C or M received by different groups of households ranked according to their C or M level

Table 6.1: Size distribution with quintiles for the 3 countries 13

we can use “Lorenz curve”: its shape indicates the degree of inequality in the income distribution

Fig. 6.2: Lorenz Curve & Gini Coefficient Ratio (GCR) =(A)/(A+B) 100% of recipients must receive 100% of income 0% of recipients must receive 0% of income 15

Fig. 6.2: Lorenz Curve & Gini Coefficient Ratio (GCR) =(A)/(A+B) lower inequality higher inequality 16

patterns of inequality The Gini coefficient measures the inequality among values of a frequency distribution (i.e. levels of income). Gini Coefficient relates cumulative % of income recipients (persons) to cumulative % of consumption or income received

GCR= (A) /(A+B) where A= area of inequality 0<GCR<1.0, if GCR=0 (Perfect equality) If GCR = 1 ( Perfect inequality) See Figure 6.2 on the Lorenz Curve

Rank Country Gini Index Year 1 Namibia 70.7 2003 2 S. Africa 65 2005 4 Botswana 63 1993 7 Haiti 59.2 2001 10 Colombia 56 2010 18 Mexico 51 2008 25 Sri Lanka 49 27 China 48 2009 41 USA 45 2007 126 Germany 2006 136 Sweeden 23 CIA

When everyone is working in agriculture, income is distributed equally Growth and Inequality Kuznets: inequality may first increase in the process of transition from agriculture to industry. When everyone is working in agriculture, income is distributed equally with industrialization, inequality rises recall: differences in the returns to factors of production between the 2 sectors as more workers make the transition, inequality falls

What else might cause inequality? history politics Land ownership Resource endowment T & G

Why Inequality matters? Q: what is the relationship between economic growth, income inequality, and poverty economy grows and inequality remains? income per capita unchanged and inequality rises? Do nations with more inequality tend to have slower growth?

Measuring Poverty Poverty Lines ($1/day) Methods of measuring Poverty Headcount Index: # of people below poverty line Poverty Gap: How many people fall below poverty line and how far they are from the line

Measuring Poverty The Poverty Gap (PG)= (PL-MC)/PL)xHI PL=Poverty line, MC=mean consumption per capita for individuals below poverty line HI= Head Count Index The PG measures how much income is needed to get the poor from poverty line.. It shows the severity of poverty 24

How much Poverty is there? Dissenting Opinions on the Extent of Absolute Poverty Who Are the Poor? Are Women Poorer than Men?

Fig. 6.4: Absolute Poverty in Bangladesh 26

How much poverty is there The number of people living below $1 a day or $365 per year See figure 6.5 for poverty levels for various regions of the world. The number of people below $1 in the world declined by 400 million between 1981-2001. This is good news? But what are bad news?

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Fig. 6.5: Number of people below Poverty Line ($1 per day) 30

China Leads in reducing poverty China Head Count Index in 1981 was 64% it fell to 17% in 2001. Africa’s population growth led to doubling the number of people living below poverty line. China lowered poverty gap from 23% to 4%. A remarkable human achievement.

Table 6.3: Absolute Poverty by region 32

Fig. 6.6: Global Distribution of People leaving in Poverty (below$2 /day 33

Who are the poor? almost 80% of african live below the $2-a- day what about who loves well below poverty? poverty and: regions racial and ethnical men vs. women

Strategies for Reduce Poverty Two elements of strategy: 1.Promote market oriented economic growth.2. DI on basic health, education of the poor Recommendation of Washington Consensus Macroeconomic stability, more openness to trade and investment, increase public investment on infrastructure, and credit, etc Combine this with labor-intensive demand growth that would benefit the poor.

is growth enough? Next: Chapter 7

Fig. 6.7: How Good is Growth for the Poor? 37