poverty, inequality, and development · poverty, inequality, and social welfare •what’s so bad...

Poverty,

Inequality, and

Development

The Growth Controversy:

Seven Critical Questions

• What is the extent of relative inequality, and

how is this related to the extent of poverty?

• Who are the poor?

• Who benefits from economic growth?

• Does rapid growth necessarily cause

greater income inequality?

• Do the poor benefit from growth?

The Growth Controversy:

Seven Critical Questions

• Are high levels of inequality always bad?

• What policies can reduce poverty?

Measuring Inequality and

Poverty

• Measuring Inequality

– Size distributions (quintiles, deciles)

– Lorenz curves

– Gini coefficients

– Functional distributions

Table 5.1 Typical Size Distribution of

Personal Income in a Developing Country by

Income Shares—Quintiles and Deciles

Figure 5.1 The Lorenz Curve

Figure 5.2 The Greater the Curvature of the

Lorenz Line, the Greater the Relative

Degree of Inequality

Figure 5.3 Estimating the Gini

Coefficient

Figure 5.4 Four Possible Lorenz

Curves

Figure 5.5 Functional Income

Distribution in a Market Economy: An

Illustration

Poverty

• Measuring Absolute Poverty

– Headcount Index

– Total poverty gap

– Where Yp is the absolute poverty line

– Yi is income of person I

TPG Y Yp ii

Figure 5.6 Measuring the Total

Poverty Gap

Poverty

– Average poverty gap

– Where H is number of persons

– TPG is total poverty gap

APGTPG

Poverty

– Foster-Greer-Thorbecke measure

Poverty:

– The Human Poverty Index (HPI)

Poverty, Inequality, and Social

Welfare

• What’s so bad about inequality?

• Dualistic development and shifting Lorenz

curves: some stylized typologies

– Traditional sector enrichment (see Figure 5.7)

– Modern sector enrichment (see Figure 5.8)

– Modern sector enlargement (see Figure 5.9)

Figure 5.7 Improved Income

Distribution under the Traditional-

Sector Enrichment Growth Typology

Figure 5.8 Worsened Income

Distribution under the Modern-Sector

Enrichment Growth Typology

Figure 5.9 Crossing Lorenz Curves in

the Modern-Sector Enlargement

Growth Typology

Welfare

• Kuznets’ inverted-U hypothesis

Figure 5.10 The “Inverted-U”

Kuznets Curve

Table 5.2 Selected Income

Distribution Estimate

Table 5.3 Income and Inequality in

Selected Countries

Figure 5.11 Kuznets Curve with

Latin American Countries

Identified

Figure 5.12 Plot of Inequality Data

for Selected Countries

Welfare

• Growth and inequality

Figure 5.13 Long-Term Economic

Growth and Income Inequality, 1965-

Figure 5.14 Change in Inequality in

Selected Countries, with or without

Growth

Absolute Poverty: Extent and

Magnitude

• Extreme Poverty

– $1-a-day headcount shows some progress

– Incidence of extreme poverty is uneven

Table 5.4 Regional Poverty

Incidence, 2004

Table 5.5 Poverty Incidence in

Selected Countries

Table 5.5 Poverty Incidence in

Selected Countries (continued)

Absolute Poverty: Extent and

Magnitude

• Growth and poverty

– Impact on per capita growth

– Limited saving and investment by rich in poor countries

– Impact on productivity

– Lack of home demand

– Incentives for public participation in the development process

Economic Characteristics of

Poverty Groups

• Rural Poverty

• Women and poverty (See chapter 8 for

more detail)

• Ethnic minorities, indigenous populations,

and poverty

Table 5.6 Poverty: Rural versus

Table 5.7 Indigenous Poverty in

Latin America

The Range of Policy Options:

Some Basic Considerations

• Areas of intervention

– Altering the functional distribution

– Mitigating the size distribution

– Moderating (reducing) the size distribution at

upper levels

– Moderating (increasing) the size distribution at

lower levels

The Range of Policy Options:

Some Basic Considerations

• Policy options

– Changing relative factor prices

– Progressive redistribution of asset ownership

– Progressive taxation

– Transfer payments and public provision of

goods and services

Summary and Conclusions: The

Need for a Package of Policies

• Policies to correct factor price distortions

• Policies to change the distribution of assets, power, and access to education and associated employment opportunities

• Policies of progressive taxation and directed transfer payments

• Policies designed to build capabilities and human and social capital of the poor

Case Study: Bangladesh

Concepts for Review

• Absolute poverty

• Asset ownership

• Character of economic

growth

• Deciles

• Disposable income

• Elasticity of factor

substitution

• Factor-price distortions

• Factor share

distribution of income

• Factors of production

• Foster-Greer-

Thorbecke (FGT)

• Functional distribution

of income

Concepts for Review (cont’d)

• Gini coefficient

• Headcount index

• Human Poverty Index

• Income inequality

• Indirect taxes

• Kuznets curve

• Land reform

• Lorenz curve

• Neoclassical price-

incentive model

• Personal distribution of

income

• Poverty gap

• Progressive income

Concepts for Review (cont’d)

• Public consumption

• Quintiles

• Redistribution policies

• Regressive tax

• Size distribution of

income

• Subsidy

• Workfare programs

Appendix 5.1: Appropriate Technology and

Employment Generation: The Price

Incentive Model

• Choice of techniques

• Factor Price distortions and appropriate

technology

• Possibilities of Labor-Capital substitution

Figure A5.1.1 Choice of Techniques:

The Price Incentive Model

Appendix 5.2: The Ahluwalia-

Chenery Welfare Index

• Constructing poverty-weighted index of

social welfare

Table A5.2.1 Income Distribution and

Growth in the Twelve Selected

Countries

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