Poverty, Income Distribution and Development (Text, Chapter 5) ECON 3508 Spring 2011 Introduction to Economic Development Poverty, Income Distribution.

ECON 3508 Spring 2011

Introduction to Economic Development

Poverty, Income Distribution and Poverty, Income Distribution and DevelopmentDevelopment (Text, Chapter 5)(Text, Chapter 5)

A. R. M. RitterMay 25, 2011

Agenda

1. Significance of Topic2. Concept and Measurement

Poverty MeasuresIncome Distribution Measures

3. Equity, Poverty and Well-Being4. Evidence re Poverty and Income

Distribution5. Who are the “Poor”6. The Roots of Poverty and Income Mal-

distributionKuznet’s “Inverted U Hypothesis”

7. Policies for Pro-Poor Growth8. Millennium Development Goals

Distribution and Development: Seven Critical Questions (from Todaro)

• 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?• Are high levels of inequality always bad?• What policies can reduce poverty?

1. Significance of TopicCentral development issue : reduce poverty!

“Make poverty history!”

Central focus of development efforts and of this course

The focus of the “Millennium Development Goals”

Is Poverty a “bad thing”? Why?Amartya Sen’s concepts of capabilities and choice

Income and Basic Human Need Fulfillment

Income Distribution: Central to our ideas of fairness and justice

A more equitable income distribution is supportive of both Growth and Poverty Reduction

Growth 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,

2. Concept and Measurement2. Concept and MeasurementProblems of Measuring Real Incomes

Income or consumption?

Accurate Information: sources

Definition of income:Market generated Income? Or

Market generated Income + Transfers Or

Market generated Income + Transfers – Taxes? Or

Market Income + Transfers –Taxes + In-Kind Subsidies? Or

Market Income + Transfers –Taxes + In-Kind Subsidies + Publicly-provided Education + Health Services + Housing, + etc…, ?

Market Income + Transfers –Taxes + In-Kind Subsidies + Education + Health + Home-Produced G $ S

Other complications: Home-produced G&S; Differing prices

Differing needs in different circumstances

A. Poverty Concepts and Measures

1. The United Nations “Human Poverty Index” 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 Measures e.g. population with real incomes (PPP) below

some threshold such as $US 1.00 or $2.00

A. 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)

5.1 Measuring Poverty5.1 Measuring PovertyMeasuring Absolute PovertyMeasuring 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 person

TPG (Yp Yi)i1

H

Measuring the Total Poverty GapMeasuring the Total Poverty Gap

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 /Yp

APGTPG

N

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/Yp

AIS TPG

H

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.

MPI IndicatorsMPI Indicators1. Health - 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)

2. 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).

3. 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.

Interaction 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 individual’s 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.

Computing the MPIThe MPI for the country (or region or group) is then

computed

A 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 calculated

HA 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.

MPI Rankings and Poverty Headcounts for Selected Countries

Poverty Measures for Some African Countries, 2005

Country & Country & HDI RankHDI Rank

Human Poverty Human Poverty Index (UNDP)Index (UNDP)

Per CentPer Cent

GDPpc (PPP)GDPpc (PPP)$US$US

Population below Population below US$1.00 per day, US$1.00 per day,

Per CentPer Cent

65. Mauritius 11.4 12.715 11.9

121. South Africa 23.5 11,110 10.5

135. Ghana 32.3 2,480 44.8

148. Kenya 30.8 1,240 22.8

151. Zimbabwe 40.3 2.038 56.1

154. Uganda 34.7 1,454 11,9

158. Nigeria 37.3 1.128 70.8

159. Tanzania 32.5 744 57.8

169. Ethiopia 54.9 1,055 23.0

177. Sierra Leone 51.7 806 57.0

81. China 11,7 7,100 9.9

Source: UNDP. Human Development Report, 2007/2008

Human Development Indices, Africa, 1975-2005

Country 1974 1985 1995 2005

Mauritius na .692 .751 .804

South Africa .650 .690 .745 .674

Ghana .442 .482 .542 .553

Kenya .466 .534 .544 .521

Zimbabwe .550 .615 .613 .513

Uganda na .420 .433 .545

Nigeria .321 .391 .432 .470

Tanzania na na .419 .467

Ethiopia na .311 .347 .406

China .530 ,595 .691 .777

Source: UNDP. Human Development Report, 2007/2008

3. Equity, Poverty and Well-Being3. Equity, Poverty and Well-Being

The Broad-Based Sense of “Fairness”The Broad-Based Sense of “Fairness”– Religious BasisReligious Basis– Economistic “Games” showing that Economistic “Games” showing that

generally people prefer Fairnessgenerally people prefer Fairness– Design of Human InstitutionsDesign of Human Institutions

The law;The law;

United NationsUnited Nations

Welfare states & income taxationWelfare states & income taxation

Democracy and human rightsDemocracy and human rights

Development assistanceDevelopment assistance

– Survey data (see charts)Survey data (see charts)

Income Distribution: Central to our ideas of fairness and justice

A more equitable income distribution is supportive of both Growth and Poverty Reduction

Growth generally reduces Poverty; But Growth is “Neutral” regarding income distribution ……..

Unless major efforts are made to achieve distributional objectives simultaneously with growth,

Incentives and income Distribution

Vote !!

Income Distribution Concepts and Income Distribution Concepts and MeasuresMeasures

1. Income shares of groups in the population (quintiles or deciles)

2. 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)

The Lorenz Curve and Gini Coefficient

Explained and derived in class

Figure 5.2 The Greater the Curvature of the Lorenz Line, the Figure 5.2 The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of InequalityGreater the Relative Degree of Inequality

Figure 5.3 Estimating the Gini CoefficientFigure 5.3 Estimating the Gini Coefficient

Latin America: Lorenze Curve for Distribution of Educational Spending, for Eight Countries

(explanation in class)

4. Evidence re Poverty and Income Distribution

Some International Comparisons

Income Distribution Measures Income Distribution Measures for Some African Countriesfor Some African Countries

Country Gini Coefficient

Income Share of Richest 20%

Poorest 20 %

Income Share of

Poorest 20%

Income Share of Richest

20%

South Africa .578 17.0 3.5% 62.2

Ghana .408 8.4 5.6 46.6

Kenya .425 8,2 6.0 49.1

Zimbabwe .501 12.0 4.6 55.7

Uganda .357 9.2 5.7 52.5

Nigeria .429 9.1 5.1 48.6

Tanzania .346 5.8 7.3 42.4

Ethiopia .399 4.3 9.1 39.4

Sierra Leone .629 57.6 1.1 63.4

China .570 12.2 4,3 51.9

Canada .326 5.5 7.2 39.9

Source: UNDP. Human Development Report, 2007/2008

5. “Who are the “’Poor’”?

Domestic Aspects– Rural character– Regional dimension– Gender & children– Indigenous dimension

Characteristics of the poor:– Assets; – Human capital; – Income vulnerability– Weak access to public services, – Environmentally hostile environments, – Lack of supportive networks

Table 5.8 Indigenous Poverty in Latin America

6. 6. The Roots of Income Mal-distribution (and Poverty to a large extent)

1. Historical Inheritance and its Momentum:A.A. Pre-Colonial Social StructuresPre-Colonial Social Structures

Significant levels of equality in pre-colonial Significant levels of equality in pre-colonial eras;eras;

High equality for “hunting and gathering” High equality for “hunting and gathering” peoplespeoples

Some cases of severe inequality (e.g. India Some cases of severe inequality (e.g. India with caste system; feudal structures in with caste system; feudal structures in some other cases)some other cases)

B.B. Impacts of ColonialismImpacts of Colonialism– Unequal property rights and institutions Unequal property rights and institutions

imposed by colonial powersimposed by colonial powers– Imperial country living standards for Imperial country living standards for

colonizers; traditional levels for colonizers; traditional levels for indigenous peoplesindigenous peoples

– Public services directed at settler peoples, Public services directed at settler peoples, not indigenous peoplesnot indigenous peoples

– Colonial hierarchies: Social stratification Colonial hierarchies: Social stratification based on Race and Ethnicitybased on Race and Ethnicity

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

interests

Thus: – “Urban bias” – “Upper and middle income class bias” and – “Modern sector bias” in public policypolicy

3. The Nature of the “Modernization” 3. The Nature of the “Modernization” Process:Process:

Does a “Rising Tide Lift all Boats”?Does a “Rising Tide Lift all Boats”?

Would you expect that a process of Would you expect that a process of modernization / development would improve modernization / development would improve everyone’s living standards simultaneously?everyone’s living standards simultaneously?

What forces generate “Inequities”? “Equities”?

Note the Latin American

Effect

3. The Nature of the “Modernization” 3. The Nature of the “Modernization” process: Forces Generating process: Forces Generating InequalitiesInequalities

3. The Nature of the “Modernization” 3. The Nature of the “Modernization” process: Forces Generating process: Forces Generating InequalitiesInequalities

– “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;

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. change

– Uneven access to opportunitiesPrior Elites;

Regional Advantages;

Personal Advantages

3.3. continued: continued: The Nature of the “Modernization” Process: The Nature of the “Modernization” Process:

Forces Generating Greater Forces Generating Greater EqualitiesEqualities

3.3. continued: continued: The Nature of the “Modernization” Process: The Nature of the “Modernization” Process:

Forces Generating Greater Forces Generating Greater EqualitiesEqualities

The exhaustion of surplus labour in agriculture The exhaustion of surplus labour in agriculture and the informal economy?and the informal economy?

Increasing productivity generally promotes Increasing productivity generally promotes rising incomes in supporting service-type rising incomes in supporting service-type activitiesactivities

Broadening Tax Base permits social programs & Broadening Tax Base permits social programs & welfare state type programswelfare state type programs

Broadening human development (education Broadening human development (education health etc.) broadens earning capabilitieshealth etc.) broadens earning capabilities

Regional and rural-urban spread effects Regional and rural-urban spread effects • rising demand for goods and services from elsewhere; rising demand for goods and services from elsewhere; • linkage effectslinkage effects

Emphasis on Human

Development

South Korea: Causal Factors Shaping Income Distribution and Growth

Successful Export

Promotion

GoodMacroeconomic

Management

Good Private-Public

Gov’t Market Mix

Land Reform Coops;

Well Qualified Labour Force

Population Deceleration

Lower LF Growth Rate

Rapid Job Creation

Egalitarian Urban Income Distribution

Rural-Urban Equity

Egalitarian Rural Distribution;

Income Growth

Rural UrbanBalance

Agricultural Expansion

Rapid Growth of Manufacturing

Rapid Growth, Distributional Equity, Poverty Reduction[HDI: # 28; 1970: .707; 2005 .901; Gini: 0.316; Growth pc, 1975-03: 6.1% pa]

Price Policy

Activist and Expanding Social Policies

Increasing Taxes

Empirical Validity of Kuznets” Hypothesis?

Which effects predominate?

– Debatable;Debatable;– Latin American effect in Kuznets “U”Latin American effect in Kuznets “U”– Positives and negatives simultaneously;Positives and negatives simultaneously;– Other factors operateOther factors operate– Ultimately “Public Policy” is paramountUltimately “Public Policy” is paramount

4. Nature of Development Strategies 4. Nature of Development Strategies (and Theorizing):(and Theorizing):

Early Theorizing: Early Theorizing: Capital-Centered theories, Capital-Centered theories, Dualistic Development Models (W.A. Lewis) Dualistic Development Models (W.A. Lewis) The Soviet Model, The Soviet Model, Prebisch - UN ECLAC) Prebisch - UN ECLAC) Rostow ………….Rostow ………….

All emphasizedAll emphasized Growth first; income distribution later;Growth first; income distribution later;

Investment in the Modern Sector, esp. Industry; Investment in the Modern Sector, esp. Industry; Import-substituting industrialization;Import-substituting industrialization;Investment in physical capitalInvestment in physical capitalDe-emphasize traditional economy and informal De-emphasize traditional economy and informal sectorsector

– ““Neo-Liberal” or “Washington Neo-Liberal” or “Washington Consensus” approach focused on Consensus” approach focused on growth first.growth first.

Escape from hyper-inflation, macro-Escape from hyper-inflation, macro-economic and external sector economic and external sector unsustainability and debt, led to “structural unsustainability and debt, led to “structural adjustment” programsadjustment” programs

which often generated “short-term pain” which often generated “short-term pain” hopefully but not always for “long term hopefully but not always for “long term gain”gain”

5. Demographic and Sociological Factors:5. Demographic and Sociological Factors:– “The Poor Have More Children:” large family

size among the poor

reduces family investment per child and

reduces 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..

6. “Market Power”6. “Market Power”

– Concentrated ownership patterns Concentrated ownership patterns – Monopoly and oligopoly power of Monopoly and oligopoly power of

enterprise and individualsenterprise and individuals– The power of professional associations The power of professional associations

and unionsand unions– Political power determining income Political power determining income

patternspatterns

7. International Factors7. International Factors

– Multinational Enterprise: islands of Multinational Enterprise: islands of modernity and higher incomesmodernity and higher incomes

– Technological Transfer of modern capital-Technological Transfer of modern capital-intensive machinery and equipment intensive machinery and equipment higher higher incomes for someincomes for some

– Internationally transferable skills help Internationally transferable skills help generate international income levels for generate international income levels for some, while the unskilled remain with low some, while the unskilled remain with low incomes.incomes.

6. 6. Policies for Pro-Poor GrowthPolicies for Pro-Poor GrowthPossible Approaches and Components of Poverty Possible Approaches and Components of Poverty

Reduction and Equity-Oriented ProgramsReduction and Equity-Oriented Programs

a. a. Achieve Sustained Economic Achieve Sustained Economic GrowthGrowthExceedingExceeding population growth rates;population growth rates;• Permitting rising levels of personal or family Permitting rising levels of personal or family

income and tax revenues;income and tax revenues;• Permitting significant levels of domestic & Permitting significant levels of domestic &

national savingsnational savings

[Note: this is a necessary but insufficient [Note: this is a necessary but insufficient condition for enduring reductions condition for enduring reductions inin poverty poverty]]

b. 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 groups

– Focus sharply on the poorest.

– HOW?

c. c. Emphasize Investment in Human Development

– Fairly Allocated– Education, Health, Nutrition, Clean Water,

Sanitation, – Family Planning– Build the capabilities of the state to provide

necessary public goods [i.e. effective and efficient

Tax Administration

– Plus effective and incorruptible public administration.]

d. d. Increase Demand for the abundant Increase Demand for the abundant resource of the poor, namely labour, [i.e. resource of the poor, namely labour, [i.e. rapid rapid job creation] creation]

– Improve the appropriateness of technology;

– At an Appropriate Time, Switch from Import Substituting Industrialization to Job-creating Export Promotion

– Promote labour intensive public works and infrastructure, especially that serving the needs of the poor;

e. e. Invest in the Physical Assets of the Invest in the Physical Assets of the PoorPoor

Support the “Informal Sector” [in various ways;]Support the “Informal Sector” [in various ways;]– Note the role of “Micro-credit”Note the role of “Micro-credit”

Support Urban Development for low income Support Urban Development for low income neighborhoods [water, sanitation, sidewalks, neighborhoods [water, sanitation, sidewalks, streets, electricity, security, etc.]streets, electricity, security, etc.]

Support Agriculture and Rural Development, Support Agriculture and Rural Development, focusing on low income rural peoplesfocusing on low income rural peoples

– Rural roads; water & sanitation; drainage & irrigation; Rural roads; water & sanitation; drainage & irrigation; electrification in timeelectrification in time

f. f. Combat “Modern sector bias” in Combat “Modern sector bias” in public policy;public policy;

[[plus “Urban Bias”, “Industrial sector bias,” and plus “Urban Bias”, “Industrial sector bias,” and “Middle class bias”]“Middle class bias”]

Reconsider Reconsider

Tax policyTax policy

Government expenditures and social Government expenditures and social benefits and their allocationbenefits and their allocation

Tariff policy and protectionismTariff policy and protectionism

Infrastructure finance and allocationInfrastructure finance and allocation

Credit policiesCredit policies

All types of subsidization of the All types of subsidization of the modern urban sectormodern urban sector

– Avoid megalo-cephalic urbanization

– Agriculture & Rural Development

– Regional Development;

g. g. Redistribute AssetsRedistribute Assets

– Land Reform of various sorts; Land Reform of various sorts;

– Democratic ownership patterns;Democratic ownership patterns;Cooperative Property formsCooperative Property forms

Taxation towards equityTaxation towards equity

Favour small & local enterprise?Favour small & local enterprise?

Democratization of private ownershipDemocratization of private ownership

– Support Territorial Claims of Support Territorial Claims of Indigenous Peoples;Indigenous Peoples;

h. Construct Safety Nets and Transfers h. Construct Safety Nets and Transfers as as possible [for middle income countries]possible [for middle income countries]

– Target the neediest groups;Target the neediest groups;

– Support Human development –promoting Support Human development –promoting activities activities [e.g. as in Brazil under Lula, financial support for the [e.g. as in Brazil under Lula, financial support for the

poorest families that keep their children in poorest families that keep their children in school; school;

or as in Chile, where school lunches programs are or as in Chile, where school lunches programs are provided in low income neighbourhoods]provided in low income neighbourhoods]