EconomicsDevelopmentM05TodaroSmith01393411EconC05

Copyright 2012 Pearson Addison-Wesley.All rights reserved.Chapter 5Poverty,Inequality,and DevelopmentCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-2Distribution and Development: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?Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-3Distribution and Development:Seven Critical Questions Are high levels of inequality always bad?What policies can reduce poverty?Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-45.1 Measuring Inequality and Poverty Measuring Inequality Size distributions(quintiles,deciles)Lorenz curves Gini coefficients and aggregate measures of inequality Functional distributionsCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-5Table 5.1 Typical Size Distribution of Personal Income in a Developing Country by Income SharesQuintiles and DecilesCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-6Figure 5.1 The Lorenz CurveCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-7Figure 5.2 The Greater the Curvature of the Lorenz Line,the Greater the Relative Degree of InequalityCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-8Figure 5.3 Estimating the Gini CoefficientCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-9Figure 5.4 Four Possible Lorenz CurvesCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-10Figure 5.5 Functional Income Distribution in a Market Economy:An IllustrationCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-115.1 Measuring Inequality and 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 economy Total poverty gap:Where Yp is the absolute poverty line;and Yi the income of the ith poor personTPG=(Yp-Yi)i=1HCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-12Figure 5.6 Measuring the Total Poverty GapCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-135.1 Measuring Inequality and Poverty Measuring Absolute Poverty Average poverty gap(APG):Where N is number of persons in the economy TPG is total poverty gap Note:normalized poverty gap,NPG=APG/YpAPG=TPGNCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-145.1 Measuring Inequality and Poverty Measuring Absolute Poverty Average income shortfall(AIS):Where H is number of poor persons TPG is total poverty gap Note:Normalized income shortfall,NIS=AIS/YpAIS=TPGHCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-155.1 Measuring Inequality and Poverty Measuring Absolute Poverty(continued)The Foster-Greer-Thorbecke(FGT)index:N is the number of persons,H is the number of poor persons,and 0 is a parameter When=0,we get the headcount index measure When=2,we get the“P2”measure11HpiipYYPNYCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-165.1 Measuring Inequality and Poverty Measuring Absolute Poverty The Newly Introduced Multidimensional Poverty Index Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-17The 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.Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-18MPI IndicatorsHealth-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 toward the maximum deprivation in the MPI)Education-two indicators with equal weight-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).Standard of Living,equal weight on 6 deprivations(each counts as 1/18 toward the maximum):lack of electricity;insufficiently safe drinking water;inadequate sanitation;inadequate flooring;unimproved cooking fuel;lack of more than one of 5 assets telephone,radio,TV,bicycle,and motorbike.Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-19Interaction of the deprivations?Building the index from household measures up to the aggregate measure(rather than using already-aggregated statistics),MPI approach takes account of multiplied or interactive harm(complementarity)done when multiple deprivations are experienced by the same individual or family The MPI approach assumes an individuals lack of capability in one area can only to a degree be made up by other capabilities capabilities are treated as substitutes up to a point but then as complements.Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-20Computing the MPIThe MPI for the country(or region or group)is then computed A convenient way to express the resulting value is 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 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.Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-21Table 5.2 MPI Rankings and Poverty Headcounts for Selected CountriesCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-22Multidimensional poverty tells a different story than income povertyThe results showed that knowing income poverty is not enough if our concern is with multidimensional poverty.Multidimensionally,Bangladesh is substantially less poor-but Pakistan substantially poorer-than would be predicted by income povertyEthiopia is far more multidimensionally poor,and Tanzania much less so,than predicted by income poverty.Most Latin American countries e.g.Brazil rank worse on multidimensional poverty than on income poverty;but Colombias income and MPI poverty ranks are about same.Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-235.2 Poverty,Inequality,and Social Welfare Whats So Bad about Extreme 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)Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-24Figure 5.7 Improved Income Distribution under the Traditional-Sector Enrichment Growth Typology Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-25Figure 5.8 Worsened Income Distribution under the Modern-Sector Enrichment Growth TypologyCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-26Figure 5.9 Crossing Lorenz Curves in the Modern-Sector Enlargement Growth TypologyCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-275.2 Poverty,Inequality,and Social Welfare Kuznets Inverted-U Hypothesis Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-28Figure 5.10 The“Inverted-U”Kuznets CurveCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-29Table 5.3 Selected Income Distribution EstimatesCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-30Table 5.4 Income and Inequality in Selected CountriesCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-31Figure 5.11 Kuznets Curve with Latin American Countries IdentifiedCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-32Figure 5.12 Plot of Inequality Data for Selected CountriesCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-335.2 Poverty,Inequality,and Social Welfare Growth and Inequality Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-345.3 Absolute Poverty:Extent and Magnitude Progress on Extreme Poverty Clear progress on$1.25-a-day headcount Less clear progress on$2.00-per-day headcount(see Figure 5.14)Incidence of extreme poverty is uneven Relationship between Growth and Poverty Association between growth and poverty reduction When it is inclusive,growth reduces poverty Lower extreme poverty may also lead to higher growthCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-35Figure 5.13 Long-Term Economic Growth and Income InequalityCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-36Figure 5.14 Global and Regional PovertyTrendsCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-37Table 5.5 Regional Poverty Incidence,2005Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-38Table 5.6 Poverty Incidence in Selected CountriesCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-39Table 5.6 Poverty Incidence in Selected Countries(continued)Copyright 2012 Pearson Addison-Wesley.All rights reserved.5-405.4 Economic Characteristics of High-Poverty Groups Rural poverty Women and poverty Ethnic minorities,indigenous populations,and povertyCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-41Table 5.7 Poverty:Rural versus UrbanCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-42Table 5.8 Indigenous Poverty in Latin AmericaCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-435.5 Policy Options on Income Inequality and Poverty: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 levelsCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-445.5 Policy Options on Income Inequality and Poverty:Some Basic Considerations Policy options Changing relative factor prices Progressive redistribution of asset ownership Progressive taxation Transfer payments and public provision of goods and servicesCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-455.6 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 poorCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-46Concepts for ReviewAbsolute povertyAsset ownershipCharacter of economic growthDecileDisposable incomeFactor share distribution of incomeFactors of productionFoster-Greer-Thorbecke(FGT)indexFunctional distribution of incomeGini coefficientHeadcount indexIncome inequalityIndirect taxesKuznets curve Land reformCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-47Concepts for Review(contd)Lorenz curveMultidimensional poverty index(MPI)Personal distribution of incomeProgressive income taxPublic consumptionQuintilesRedistribution policiesRegressive taxSize distribution of incomeSubsidyTotal poverty gap(TPG)Workfare programsCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-48Appendix 5.1:Appropriate Technology and Employment Generation:The Price Incentive Model Choice of techniques Factor Price distortions and appropriate technology Possibilities of Labor-Capital substitutionCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-49Figure A5.1.1 Choice of Techniques:The Price Incentive ModelCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-50Appendix 5.2:The Ahluwalia-Chenery Welfare Index Constructing poverty-weighted index of social welfareCopyright 2012 Pearson Addison-Wesley.All rights reserved.5-51Table A5.2.1 Income Distribution and Growth in the Twelve Selected Countries