Presentation on theme: "Carleton University Introduction to Economic Development January 31 and February 5, 2013 Poverty, Income Distribution and Development (Text, Chapter."— Presentation transcript:
1 Carleton University Introduction to Economic Development January 31 and February 5, Poverty, Income Distribution and Development (Text, Chapter 5)
2 Agenda Significance of Topic Concept and Measurement Poverty MeasuresIncome Distribution MeasuresEquity, Poverty and Well-BeingComments on Evidence re Poverty and Income DistributionThe Roots of Poverty and Income Mal-distributionKuznet’s “Inverted U Hypothesis”Policies for Pro-Poor GrowthMillennium Development Goals
3 Significance of TopicCentral development issue in Africa: 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
4 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,
5 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?Market Income + Transfers –Taxes + In-Kind Subsidies + Education + Health + Home-Produced G $ SOther complications: Home-produced G&S;Differing pricesDiffering needs in different circumstances
6 Poverty Concepts and Measures The United Nations “Human Poverty Index”(Used until 2010; now replaced by another measure)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
7 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)
8 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.
9 MPI IndicatorsHealth (1/3rd weight) - 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 weight toward the maximum deprivation in the MPI)2. Education (1/3rd) - two indicators with equal weight (1/6th each) –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).3. Living Standards (1/3rd) : measured as an average of six deprivations (1/18th each): safe water, electricity, sanitation, flooring, improved cooking fuel, and possession of at least two of telephone, bicycle, radio, TV, motorbike or car
10 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.
11 Multi-dimensional Poverty Indices for some Countries CountryMPIHead-count,% of Total PopulationPopulation below Poverty Line$1.25 PPP per person per dayCzech Rep.0.0000.0China0.05612.515.9Kenya0.30260.419.7Ghana0.14030.130.0Nigeria0.58263.543.4Tanzania0.36765.388.5Zambia0.32563.764.3Ethiopia90.939.0Liberia0.48283.983.7Niger0.64292.765.7
12 7. Measuring Poverty Measuring Absolute Poverty Headcount Index: H/N Where H is the number of persons who are poor and N is the total number of people in the economyTotal Poverty Gap:Where Yp is the absolute poverty line; and Yi the income of the ith poor person
14 MPI Rankings and Poverty Headcounts for Selected Countries
15 Other Poverty Measures for Some African Countries, 2005 Country &HDI RankHuman Poverty Index (pre-2009) (UNDP)Per CentGDPpc (PPP)$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
16 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
17 Income Distribution and Well-Being Income distribution and poverty: the differencesThe Broad-Based Sense of “Fairness”Religious BasisDesign of Human InstitutionsThe Law;United NationsWelfare states & income taxationDemocracy and human rightsDevelopment assistanceEconomistic “Games” showing that generally people prefer Fairness
18 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 may be “Neutral” regarding income distribution(Unless major efforts are made to achieve distributional objectives simultaneously with growth)Incentives and Income Distribution
20 Perceptions of Individual Well-Being and Happiness LiberiaKenyaUSACanadaOverall Life SatisfactionMin 0 to 10 Max22.214.171.124.0Satisfaction with Standard of Living (%)46257587Happiness:Purposeful Life100989591Treated with Respect82789493Negative Life Experience171928Source: UNDP Human Development Report 2010
21 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)
22 Figure 5.2 The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of Inequality
24 4. Evidence re Income Distribution Some International Comparisons
25 Income Distribution Measures for Some African Countries CountryGini CoefficientIncome Share of Richest 20%Poorest 20 %Income Share of Poorest 20%S. Africa.57817.03.5%62.2Ghana.4088.45.646.6Kenya.4258,26.049.1Zimbabwe.50112.04.655.7Uganda.3579.25.752.5Nigeria.42126.96.36.199Tanzania.3465.87.342.4Ethiopia.3994.339.4Sierra Leone.629188.8.131.52China.57012.24,351.9Source: UNDP. Human Development Report, 2007/2008
26 “Who are the ‘Poor’ ”? Characteristics of the poor: Domestic Aspects Rural characterRegional dimensionGender & childrenIndigenous dimensionSome may be subject to disabilitiesCharacteristics of the poor:Assets;Human capital (education, health);Income vulnerabilityWeak access to public services,Environmentally hostile environments,Lack of supportive networks
27 5. The Roots of Income Mal-distribution and Poverty
28 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” peoplesHigh inequality in some more complex societies (e.g. caste system in India)
29 Impacts of Colonialism Unequal property rights and institutions imposed by colonial powers: Note Latin America and CaribbeanImperial country living standards for colonizers; traditional levels for AfricansPublic services directed at settler peoples, not indigenous peoplesColonial hierarchies: Social stratification based on Race and Ethnicity
30 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
31 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”?
33 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;
34 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
35 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 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
36 South Korea: Causal Factors Shaping Income Distribution and Growth Emphasis onHumanDevelopmentSuccessfulExportPromotionGoodMacroeconomicManagementGood Private-PublicGov’t Market MixLand ReformCoops;Well QualifiedLabour ForcePrice PolicyRapid Growth ofManufacturingRural UrbanBalancePopulationDecelerationAgriculturalExpansionIncreasing TaxesLower LFGrowth RateRapid JobCreationActivist and ExpandingSocial PoliciesEgalitarian UrbanIncome DistributionRural-UrbanEquityEgalitarianRural Distribution;Income GrowthRapid Growth, Distributional Equity, Poverty Reduction[HDI: # 15 in world; 1970: .707; ; Gini: 0.316; Growth pc, : 6.1% pa]
37 Empirical Validity of Kuznets” Hypothesis? Which effects predominate?
38 Kuznets Curve with Latin American Countries Identified Note theLatin AmericanEffect
39 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
40 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 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
41 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” programswhich often generated “short-term pain” hopefully but not always for “long term gain”
42 6. 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.
43 7. “Market Power” Concentrated ownership patterns Monopoly and oligopoly power of enterprise and individualsThe power of professional associations, unions and organized groupsPolitical power determining income patterns
44 8. 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.
45 6. Policies for Pro-Poor Growth Possible Approaches and Components of Poverty Reduction and Equity-Oriented Programs1. 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]
46 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 groupsFocus sharply on the poorest.HOW?
47 3. Emphasize Public 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 efficient Tax AdministrationPlus effective and incorruptible public administration.]
49 4. Increase Demand for the abundant resource of the poor, namely labour, [i.e. rapid job creation] [Now difficult due to China’s manufacturing dominance due to cheap labour, mega-economies of large scale, undervalued exchange rate]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;
50 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 labourAvoidInvestment incentivesTax credits,Subsidized interest ratesTariff advantages for capital goods importsOvervalued exchange rates for capital goods imports
51 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 peoplesRural roads; water & sanitation; drainage & irrigation; garbage collection, law and order, electrification in time
53 6. Redistributive Taxation Progressive income taxes;Wealth taxesNote the importance of Tax Administration
54 7. 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;
55 8. Construct Safety Nets and Transfers as possible [for middle income countries] Target the neediest groups;“Workfare” programsSupport 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]