Poverty, Inequality, and Development. Outline: Outline: –Measurement of Poverty and Inequality –Economic characteristics of poverty groups –Why is inequality.

Poverty, Inequality, Poverty, Inequality, and Development and Development

Poverty, Inequality, and Poverty, Inequality, and

DevelopmentDevelopment Outline:Outline:

– Measurement of Poverty and Measurement of Poverty and InequalityInequality

– Economic characteristics of poverty Economic characteristics of poverty groupsgroups

– Why is inequality a problem? Why is inequality a problem? – Relationship between growth and Relationship between growth and

inequality inequality – Relationship between growth and Relationship between growth and

poverty poverty


DevelopmentDevelopment Introduction and ImportanceIntroduction and Importance

– Absolute poverty and indicatorsAbsolute poverty and indicators– Economic characteristics of the poorEconomic characteristics of the poor– Policy options for addressing povertyPolicy options for addressing poverty


DevelopmentDevelopment

– Case Studies: Case Studies: Microfinance - Hope for the Poor: The Grameen Bank of Bangladesh at

– Workfare as a Poverty Policy: The Bangladesh Food for Work Program

http://wps.aw.com/http://wps.aw.com/aw_todarosmit_econdevelp_8/0,6111,284582-,aw_todarosmit_econdevelp_8/0,6111,284582-,00.html00.html

– Pushing back poverty in India at Pushing back poverty in India at http://www.ifpri.org/pubs/books/ufa/ufa_ch27.pdfhttp://www.ifpri.org/pubs/books/ufa/ufa_ch27.pdf

Measuring Inequality and PovertyMeasuring Inequality and Poverty Measuring Inequality: Measuring Inequality:

– Personal or size distribution of income Personal or size distribution of income deals with the individual persons or deals with the individual persons or households and the total income they households and the total income they receivereceive

– Functional or factor share distribution Functional or factor share distribution of income uses the share of total of income uses the share of total national income that each of the national income that each of the factors of production receivesfactors of production receives

Measuring InequalityMeasuring Inequality

Personal or size distribution of Personal or size distribution of income income – Quintiles and DecilesQuintiles and Deciles– Lorenz CurveLorenz Curve– Gini Coefficients Gini Coefficients – Coefficient of Variation (CV)Coefficient of Variation (CV)


Quintiles and DecilesQuintiles and Deciles– Divide the population into successive Divide the population into successive

quintiles or deciles according to quintiles or deciles according to ascending income levels and then ascending income levels and then determine the proportion of N.I determine the proportion of N.I received by each income group received by each income group

– Common measure of income Common measure of income inequality is the ratio of incomes inequality is the ratio of incomes received by the top 20% and bottom received by the top 20% and bottom 40% of the population40% of the population


Lorenz curvesLorenz curves– Show the actual quantitative Show the actual quantitative

relationship between the percentage relationship between the percentage of income recipients and the of income recipients and the percentage of total income they percentage of total income they received during a time period (year)received during a time period (year)

– Depict the variance of the size Depict the variance of the size distribution of income from perfect distribution of income from perfect equality equality


Gini coefficientGini coefficient– Is measured graphically by dividing the Is measured graphically by dividing the

area between the perfect equality line area between the perfect equality line and the Lorenz curve by the total area and the Lorenz curve by the total area lying to the right of the equality line in a lying to the right of the equality line in a Lorenz curve diagramLorenz curve diagram

– Ranges in value from 0 (perfect equality) Ranges in value from 0 (perfect equality) to 1 (perfect inequality)to 1 (perfect inequality)

– Satisfies the properties of anonymity, Satisfies the properties of anonymity, scale independence, population scale independence, population independence, and transfer principlesindependence, and transfer principles


Coefficient of Variation (CV)Coefficient of Variation (CV)– Is sample SD divided by the sample mean Is sample SD divided by the sample mean

also satisfies the properties of anonymity, also satisfies the properties of anonymity, scale independence, population scale independence, population independence, and transfer principlesindependence, and transfer principles

Functional distributionFunctional distribution– Influence of non-market forces minimizes Influence of non-market forces minimizes

the application of this measurethe application of this measure All inequality measures are measuring All inequality measures are measuring

relative incomerelative income

Measuring Absolute Poverty Measuring Absolute Poverty

A situation where a population or A situation where a population or sections of the population are able to sections of the population are able to maintain maintain minimum levels of livingminimum levels of living (IPL)(IPL)

Absolute poverty is measured using Absolute poverty is measured using – Headcount (H)Headcount (H)– Headcount Index (H/N)Headcount Index (H/N)– Poverty Gap (total income shortfall)Poverty Gap (total income shortfall)– FGT Index has desirable properties of a FGT Index has desirable properties of a

poverty measure poverty measure

Measuring Absolute Poverty Measuring Absolute Poverty

P2 measure is used as a standard P2 measure is used as a standard poverty measure by the World poverty measure by the World Bank and most UN agenciesBank and most UN agencies

The Human Poverty Index (HPI) is The Human Poverty Index (HPI) is used by the UNDP and measures used by the UNDP and measures poverty as three key deprivations- poverty as three key deprivations- survival, knowledge, and economic survival, knowledge, and economic provisions provisions

Characteristics of Poverty Groups Characteristics of Poverty Groups

Rural povertyRural poverty Women and povertyWomen and poverty Ethnic minorities and poverty Ethnic minorities and poverty

Why is inequality bad? Why is inequality bad?

Extreme inequality leads to Extreme inequality leads to economic inefficiency and curtails economic inefficiency and curtails growth growth

Extreme inequality undermines Extreme inequality undermines social stability and solidaritysocial stability and solidarity

Extreme inequality is viewed as Extreme inequality is viewed as unfair unfair

Kuznets’ Inverted- U HypothesisKuznets’ Inverted- U Hypothesis

In the early stages of growth, In the early stages of growth, distribution of income will tend to distribution of income will tend to worsen, where as later stages it will worsen, where as later stages it will improve improve

Reasons for the inverted- U curve Reasons for the inverted- U curve Evidence on the inverted U- Evidence on the inverted U-

hypothesis hypothesis

Kuznets Curve with Latin American Countries IdentifiedKuznets Curve with Latin American Countries Identified

Relation in conflict? Relation in conflict? Relation between economic growth and inequalityRelation between economic growth and inequality Relation between economic growth and poverty Relation between economic growth and poverty Overview of inequality and growth in his paper Overview of inequality and growth in his paper

"Inequality and Economic Performance." The "Inequality and Economic Performance." The paper is available at:paper is available at:http://http://www.worldbank.org/poverty/inequal/econ/ferreira.www.worldbank.org/poverty/inequal/econ/ferreira.pdfpdf

Case study: Case study: Workfare as a Poverty Policy: The Bangladesh Food for Work Program at http://wps.aw.com/wps/media/objects/277/284582/todarocasestudies.pdf

Relation between economic Relation between economic growth and inequalitygrowth and inequality

Does growth affect the level of inequality?Does growth affect the level of inequality?– No consensus No consensus

Does initial inequality affect growth? Does initial inequality affect growth? – Negative relation between growth and initial Negative relation between growth and initial

inequality in income (refer to inequality in income (refer to Why is inequality Why is inequality bad?) bad?)

– Positive relation between growth and initial Positive relation between growth and initial inequality (only Forbes found this relation)inequality (only Forbes found this relation)

– Initial inequality in assets and human capital Initial inequality in assets and human capital negatively affects growth (as it hurts the poor negatively affects growth (as it hurts the poor the most)the most)

The main flow of causation appears to be initial The main flow of causation appears to be initial inequality hampering growth and not the other way inequality hampering growth and not the other way round. round.

Comparison of Gross National Product Growth Rates and Income Comparison of Gross National Product Growth Rates and Income Growth Rates of the Bottom 40% of the Population in Selected Less Growth Rates of the Bottom 40% of the Population in Selected Less Developed CountriesDeveloped Countries

Relation between economic Relation between economic growth and povertygrowth and poverty

Traditionally, it was considered that there is Traditionally, it was considered that there is trade-off between growth and poverty. trade-off between growth and poverty.

Why are similar rates of growth associated Why are similar rates of growth associated with different rates of poverty reduction? with different rates of poverty reduction? – Redistribution of growth benefits reduces Redistribution of growth benefits reduces

povertypoverty– Initial inequality in income enhances poverty Initial inequality in income enhances poverty – Sectoral composition of growth (agriculture Sectoral composition of growth (agriculture

versus modern, rural versus urban)versus modern, rural versus urban) Efforts to reduce poverty lead to higher growth Efforts to reduce poverty lead to higher growth

and higher growth leads to reduction in poverty.and higher growth leads to reduction in poverty.

Policy Options- refer pp.236- 242 Policy Options- refer pp.236- 242 from the textbook for the course and from the textbook for the course and the case studythe case study

Altering the functional distribution of Altering the functional distribution of income through policies designed to income through policies designed to change relative factor prices change relative factor prices – Removal of factor price distortionsRemoval of factor price distortions

Modifying the size distribution Modifying the size distribution through progressive redistribution of through progressive redistribution of asset ownership asset ownership – Redistribution policies such as land Redistribution policies such as land

reform reform

Reducing the size distribution at the Reducing the size distribution at the upper levels through progressive upper levels through progressive income and wealth taxes income and wealth taxes – Direct progressive income taxes Direct progressive income taxes – Indirect taxes Indirect taxes

Direct transfer payments and the Direct transfer payments and the public provision of goods and public provision of goods and services services – Workfare programs superior to welfare Workfare programs superior to welfare

and handouts. and handouts.

Poverty, Inequality, and Development. Outline: Outline: –Measurement of Poverty and Inequality –Economic characteristics of poverty groups –Why is inequality.

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