AISHA KHAN SUMMER 2009 SECTION G & I LECTURE FOURTEEN & FIFTEEN ECO 102 Development Economics

Poverty and Inequality Chapter Six

Measuring inequality Size distributions of income  Individual households income received  Split into deciles Lorenz curves  Cumulative percentages Gini coefficients  “lorenz criterion” Functional distributions  Explains what fraction of income is being received by FOP’s

Gini coefficient Satisfies 4 properties  Anonymity principle  inequality should not be based on personal judgments about the rich and poor  Scale independence principle  inequality measurement should not vary with sizes of economies and scales such as dollars etc.  Population independence principle  population sizes should not alter inequality measurements  Transfer principle  holding all else constant, if we transfer money from rich to poor, the distribution of income should be equal.

Measuring absolute poverty Absolute poverty   Headcount of those whose incomes falls below absolute poverty line  Headcount index = Headcount (H)/ Total pop’n (N)  * does not satisfy population independence principle

Measuring absolute poverty Poverty gap  to determine the total amount of income necessary to raise everyone up to the poverty line (not below it) Total poverty gap (TPG) = Average poverty gap (APG) = TPG/H * these measures do not satisfy the distribution sensitivity between poor

Foster-Greer-Thorbecke measure Need to include coefficient of variation of incomes among poor Satisfies all four principles

Human poverty index Similar to the HDI Measured in terms of three deprivations  Deprivation of life  Deprivation of basic education  Deprivation of economic provisioning

What’s so bad about inequality? Important to measure welfare W = W( Y, I, P )

Dualistic development typologies How does economic growth affect inequality? 1. Modern sector enlargement growth typology  Modern sector is enlarged, wages constant 2. Modern sector enrichment growth typology  Growth is limited to a certain set of people in the modern sector 3. Traditional sector enrichment growth typology  All benefits of growth are divided amongst traditional sector workers with little growth in the modern sector

* Lorenz curves for each can be shown to prove that 1. Traditional sector enrichment growth typology  Growth results in higher income  more equal relative distribution of income and less poverty 2. Modern sector enrichment growth typology  Growth results in higher income  less equal relative distribution of income and no change in poverty 3. Modern sector enlargement growth typology  Absolute incomes rise, absolute poverty is reduced, lorenz curves cross (ambiguous)

Kuznets’ Inverted U-Hypothesis Early stages of economic growth  inequality will worsen Later stages of economics growth  inequality will become better

Growth and Inequality High rates of growth do not necessarily worsen the distribution of income Character of economic growth is important

Absolute Poverty

Economics Characteristics of Poverty Groups 1. Rural poverty 2. Women and poverty 3. Ethnic minorities, Indigenous populations and poverty

Range of Policy Options Areas of intervention  Altering the functional distribution  Mitigating the size distribution  Moderating (reducing) the size distribution at the upper levels  Moderating (increasing) the size distribution at the lower levels

Range of Policy Options Altering the functional distribution of income through policies designed to change relative factor prices 1. Remove factor price distortions  that lower wages in certain jobs Modifying the size distribution through progressive redistribution of asset ownership 1. Redistribution policies, land reform 2. Educational opportunities

Range of Policy Options Reducing the size distribution at the upper levels through progressive Income and Wealth Taxes Direct transfer payments and the public provision of goods and services 1. Subsidies, workfare programs