Carleton University Introduction to Economic Development September 28 and III. POVERTY, INCOME DISTRIBUTION AND DEVELOPMENT (Text, Chapter 5, excluding appendices)

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

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” and Sustainable Development Goals Is Poverty a “bad thing”? Why?  Amartya Sen’s concepts of capabilities and choice  Income and Basic Human Need Fulfillment

Issues regarding Poverty and Income Distribution 1.How can we best measure inequality and poverty? 2.What is so bad about extreme inequality and poverty? 3.What is the extent of relative inequality in developing countries; how is this related to the extent of poverty? 4.Who are the poor, and what are their characteristics? 5.What determines the nature of economic growth—that is, who benefits from economic growth, and why? 6.Are rapid economic growth and more equal income distribution compatible or conflicting objectives?: 7.How can the poor benefit more from economic growth? 8.What kinds of policies are required to reduce absolute poverty?

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, distributional equity may worsen,

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

A.Poverty Concepts and Measures 1, Arbitrary Income “Cut-Offs” or Measures e.g. population with real incomes (PPP) below some threshold such as $US 1.00, 1.25, 1.90, 2.00 or Calculations of real income necessary to meet basic human needs (used in Latin America – ECLA - and national measures) 3. Canada: “LICO” or lower income cut-off, i.e. 50% of median income; (more a measure of distribution than of poverty) 4. Composite measures of Basic Need Fulfillment in real terms (access to water, literacy, child mortality, etc.

A.Poverty Concepts and Measures 5. The United Nations “Human Poverty Index (HPI)” (Used until 2010; now replaced by another measure, a “New HPUI”) Attempts to measure poverty with a composite index including: 1. Probability of not surviving to age 40; (P 1 ) 2. Adult illiteracy rate; (P 2 ) 3. Population without access to improved water source (P 31 ), and Health Services (P 32 ) and Underweight children under age five. (P 33 ) (Calculation of HPI) in class)

6. The New UNDP “Multidimensional Poverty Index” (MPI) MPI focusses on “intensity” and quantity of poverty Focuses on deprivations in health, education, and standard of living; each receives equal (that is one- third of the overall total) weight. –Identification of poverty 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 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

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. Example: If a person already identified as poor becomes deprived in another indicator he or she is measured as even poorer - not the case using a simple headcount ratio.

7. Measuring Poverty, continued 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

Measuring the Total Poverty Gap

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

Global and Regional Poverty Trends, 1981–2010

MPI Rankings and Poverty Headcounts for Selected Countries

Poverty of Indigenous Peoples in Latin America

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

Income Distribution and Well-Being

Vote !!

Income Distribution and Well-Being 1. Income distribution and poverty: the differences 2. The Broad-Based Sense of “Fairness” Justice and income distribution –Religious basis??? –Human nature???? –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

Income Distribution: A more equitable Income Distribution is supportive of both Growth and Poverty Reduction. Why? 1.Super-rich save relatively less (due to capital flight, tax havens, luxury consumption) than the middle classes (saving for retirement) 2.High inequality may weaken social & political stability; 3.High inequality may promote “rent-seek” and excessive lobbying, and political influence of the super-rich who then promote their own interests thereby worsening potential instability 5. Relationship with Poverty is obvious

Income Distribution: Growth generally reduces Poverty; But Growth may not be “Neutral” regarding income distribution (Unless major efforts are made to achieve distributional objectives simultaneously with growth) Incentives and Income Distribution

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

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, pp ; in class) 4. Gini Coefficient (in class)

Estimating the Gini Coefficient B

The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of Inequality

4. Evidence re Income Distribution Some International Comparisons

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

Income and Inequality in Selected Countries

“Who are the ‘Poor’ in Developing Countries”?  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 –Misfortune, alcohol, drugs, mental disability, physical disability

5. The Roots of Income Mal- distribution and Poverty

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; Aztec Empire)

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

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

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”?

Note the Latin American Effect

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;

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 technological change  Uneven access to opportunities Prior Elites; Regional Advantages; Personal Advantages

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

3.Continued: The Nature of the “Modernization” Process: Forces Generating Greater Equalities  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

Empirical Validity of Kuznets” Hypothesis? Which effects predominate?

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

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

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

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”

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.

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

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.

6. Policies for Pro-Poor Growth Possible Approaches and Components of Poverty Reduction and Equity-Oriented Programs Note: Many types of policies are relevant for the achievement of economic growth plus poverty reduction and distributional equity. What are they? The example of South Korea

Emphasis on Human Development South Korea: Causal Factors Shaping Income Distribution and Growth Successful Export Promotion Good Macroeconomic Management Good Private- Public Gov’t 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

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]

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?

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.

4. Increase Demand for the abundant resource of the poor, namely labour, [i.e. rapid job creation] [Now d ifficult due to China’s manufacturing dominance due to cheap labour, mega-economies of large scale, undervalued exchange rate]  Promote labour intensive public works and infrastructure, especially that serving the needs of the poor;  Improve the appropriateness of technology?  At an Appropriate Time, Switch from Import Substituting Industrialization to Job-creating Export Promotion

 Don’t 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

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

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

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

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;

8. 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 neighborhoods]  “Workfare” programs

8. continued; “Workfare” Workfare, such as a Food for Work Program, represents a better policy than welfare when these criteria are met: –The program does not reduce incentives for the poor to acquire human capital and other assets –There are greater net benefits of the program’s work output –It is harder to screen the poor without a workfare requirement Poor workers have lower opportunity cost of time (so the economy loses little output when they work in the program) Non-poor workers have higher opportunity cost of time (so they are unlikely to participate to get the benefits)

8. “Workfare” There is less social stigma of visible workfare participation, so the poor do not suffer humiliation or be deterred from needed work (otherwise, a discreet welfare transfer may be preferable) Workfare can generate valuable infrastructure for the society (rural roads, streets, sidewalks, water sully and sanitation systems, irrigation, flood control etc.)