0. Lecture 6: Income Inequality and Growth
Economic Development
Lecture 6: Income Inequality
and Growth

1. Overview Measuring Inequality Measuring Absolute Poverty
Why is high inequality bad?
Fields’ Typologies
Kuznets Curve
Policy options

2. Measuring Inequality Inequality of what? Income Sen’s approach
Size distribution of income (quintiles, deciles)
Kuznets ratio

3. Lorenz Curve

4. Lorenz Curve

5. Gini Coefficient

6. Global Income Inequality
Source: UN Human Development Report, 2009

7. Gini v Growth by Region

8. Factor Share Distribution of Income

9. Measuring Absolute Poverty
One possible definition (World Summit on Social Development in Copenhagen, 1995)
“a condition characterised by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services.”
Definition relative to what you consider to be the minimal acceptable standard of living

10. Measuring Absolute Poverty
One attempt at definition: David Gordon
Absolute poverty as absence of 2 of the following
Food: Body Mass Index above 16
Safe drinking water: Not come solely from rivers and ponds, and available nearby (less than a 15 minute walk each way)
Sanitation facilities: Toilets or latrines accessible in or near home
Health: Treatment for serious illnesses and pregnancy
Shelter: Fewer than four people living in each room, floors not made of dirt, mud, or clay
Education: Attend school or otherwise learn to read
Information: Access to newspapers, radios, televisions, computers, or telephones at home
Access to services: Education, health, legal, social, and financial (credit) services

11. Measuring Absolute Poverty
International poverty lines
USD 1 / day
World Bank from 2008 uses USD 1.25 / day using PPP
National poverty lines
Headcount, or % of population
Human Poverty Index
Life expectancy
Education
Safe water access / proportion of underweight children

12. Total Poverty Gap

13. Measuring Absolute Poverty
Average poverty gap (TPG / N)
Average income shortfall (TPG / headcount of the impoverished)
Forster-Greer-Thorbecke Index
A Gini Coefficient of the Total Poverty Gap!

14. Distribution of poverty: USD 1.25 / day
Source: UN Human Development Report, 2009

15. Distribution of poverty: USD 2 / day
Source: UN Human Development Indices, 2008

16. People living in poverty: ‘81-’02

17. Why is high inequality bad?
Economic Inefficiency
Lower savings rate
Human capital
Social stability
Conflict
Rent-seeking
Moral imperative
Meritocracy v entrenched disadvantage

18. Fields’ Typologies:
Modern Sector Enrichment

19. Fields’ Typologies:
Traditional Sector Enrichment

20. Fields’ Typologies:
Modern Sector Enlargement

21. Kuznets Curve

22. Policy Options
4 approaches:
Factor share distribution
Asset ownership
Land reform
Access to education

23. Policy Options Relative factor prices Minimum wages?
Restrict wage increases, at least until agricultural surplus exhausted
Minimum wages?
Capital subsidies?
Pro-labour intensive industrial policy
Protectionism?
Otherwise, remove price distortions

24. Policy Options Reducing the distribution to the rich
Progressive tax system
Increasing the distribution to the poor
Welfare
Direct provision of goods and services
Subsidies / fiscal support with pro-poor focus
Public insurance schemes
Microfinance