Income inequality and poverty

Astrig Tasgian (Economic Department, Univ. of Torino) Master in Management of Development March 14, 2012

LECTURE TOPICS
Is

there a trade-off between equity and economic growth, between equity and economic efficiency? Alternative theories The concept of absolute poverty Policies to redistribute income and assets and to reduce poverty

The personal distribution of income The best concept of income distribution is the personal distribution of income: how total national income of a country is distributed among individuals or households irrespective of the source of that income (wages and salaries, interest, profit, dividends, rent, gifts, inheritance etc.)

Measures of personal income distribution

Divide the population in quintiles or deciles: what % of total income goes to each % group Lorenz curve GINI INDEX: 0 Perfect equality 100 Perfect inequality 50-70 Countries with very unequal income distribution 20-35 Countries with relatively equitable income distribution

Income inequality
Data show that income inequality is greater in LDC than in DC because of larger differences between sectors in labour productivity & wages and because DC (especially North Europe) have implemented progressive taxation, social expend., welfare payments to the poor, unemploym. benefits). But US is unequal. - Income distribution is vey unequal in Latin America (land concentration) and in some African countries - Less unequal in Asia and in ex-socialist countries
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Some evidence on income inequality

From the 80s income inequality has risen in the majority of countries, because of debt crisis,structural adjustment, globalization which has decreased bargaining power of L and increased power of K : share of wages has declined and that of profits increased - In most Latin American countries over 200207 income inequality has declined because of economic growth, increase in employment and minimum wage, public works, targeted social spending, conditional cash transfers.
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INCOME DISTRIBUTION VS. GROWTH ALTERNATIVE THEORIES NEOCLASSICAL THEORY An unequal distribution of income is a necessary condition for rapid economic growth

ASSUMPTIONS: - The rich have a higher propensity to save: S I - Inequality stimulates entrepreneurship OBJECTIONS: - In many LDCs there is not a

national bourgeoisie devoted to national economic development; the rich spend a large % of income in luxury C, jewelry, gold, non productive I; capital flight

- Saving potential of the poor is often underestimated

NEOCLASSICAL THEORY
Inequality is a temporary situation: - trickle-down mechanism: the benefits of growth would spread automatically to all social groups through market mechanisms (higher employment, greater productivity, lower prices of C goods, higher wages) - alternatively, when per capita income would be high enough, it would be possible to implement some redistribution policies, according to some neoclassicals

INCOME REDISTRIBUTION HAS POSITIVE EFFECTS ON ECONOMIC GROWTH NON ECONOMISTS: inequality and poverty breed crime, social and pol. instability which discourage investment and ec. growth. BASIC NEEDS SCHOOL: better nutrition,health,education increase labour productivity, so total output increases. KEYNESIAN THEORY: an income redistribution enlarges the domestic market stimulates investment and local production of goods demanded by the poor; scale of production rises unit production costs fall.

INCOME REDISTRIBUTION HAS POSITIVE EFFECTS ON ECONOMIC GROWTH Income redistribution and poverty reduction help economic growth by correcting market failures that particularly affect the poor:

- imperfections of the credit market: a poor, even with a good project, cannot get a bank loan since he has no collateral - imperfections of the human capital market: very bright capable children may not get educated if they are born in a poor illiterate family.

Increasing access of the poor to credit and education improves both equity and efficiency

INCOME REDISTRIBUTION HAS POSITIVE EFFECTS ON ECONOMIC GROWTH LATIN AMERICAN STRUCTURALIST SCHOOL

Positive effects of income redistribution on economic growth depend on changes in the structure of demand Assumptions: - Low income people have a higher propensity to consume necessities (food, clothing etc.) - The production of necessities is more labor intensive - Necessities have a lower import content

LATIN AMERICAN STRUCTURALIST SCHOOL

Objections: - The tastes of low income people are distorted by publicity, imitation effects,etc - Some luxury goods (tobacco, luxury clothing and furniture, consumer electronics, etc) and domestic services are labor intensive - Often LDCs produce locally luxury goods and import necessities such as food

Horizontal vs. vertical inequalities

VERTICAL

INEQUALITY is inequality among individuals or households in income, consumption and sometimes assets.

HORIZONTAL

INEQUALITIES are inequalities between groups defined by area of residence, nationality, ethnicity, race, caste, religion, gender,etc. Regional inequalities, urban-rural inequalities gender inequalities, etc. Group inequalities within a country can be a source of violent conflict.

GENDER INEQUALITY Despite progress in last 30 yrs. (CEDAW, Convention on elimination of all forms of discrimination against women of 1979, has been ratified by 187 countries), gender inequalities in resources, in education and health opportunities are still very large in the world, especially in poor LDCs and at lower incomes.
Female literacy rate and school enrollment are much lower than male, especially in South Asia and SubSahara Africa. In India the mortality rate among children of 1-5 yrs. is 50% higher for girls than for boys. In SSA more than 55% of HIV infected adults are women

GENDER INEQUALITY -There are 100 million missing women (Sen) in LDCs (especially in India and China): they die from neglect, insufficient food and medical care, treated differently than their brothers; they die because of high maternal mortality (high risk of death in pregnancy and childbirth), female infanticide. Furthermore, because of sex-selective abortions (prenatal sex determination with cheap mobile ultrasound clinics), there are mln of missing girls at birth (in 2008 it is estimated that in China an additional 1 million girls and in India 257000 more would have been born if sex ratios at birth resembled those found worldwide). WDR 2012 Gender Equality and Development : excess female deaths account for an estimated 3.9 million women each year in low and middle income countries (of whom 37% are never born, 15% die in early childhood and over a third in their reproductive years).

GENDER INEQUALITY

Women are caught in an inequality trap that prevents them from realizing their potential as individuals. In patriarchal societies they are often denied property and inheritance rights. Their freedom of movement is restricted by social norms. Girls are less likely to be sent to school; women are less likely to work outside the home; women are more likely to engage in low productivity activities than men, to work in the informal sector and to be unpaid family workers;

GENDER INEQUALITY

women generally earn less than men for similar work; underrepresented in politics. Feminization of poverty. WDR 2012: Progress has been slowest in 3 domains: a) control over resources (women have no say in household decisions about spending) and access to assets; b) domestic violence; c) political voice: parliamentary representation,etc.

Gender equality and development Greater gender equality and womens empowerment (3 Millennium Development Goal) have positive effects on ec. dev. : education and outside work can decrease their fertility rate (they marry later and have fewer, more evenly spaced children) and therefore population growth rate. They also increase productivity. A greater female participation in the labour force helps to decrease poverty and boosts GDP growth.

Gender equality and development The positive effects extend to future generations. Literature shows evidence of a correlation between mothers education and earnings, and child welfare (education, nutrition and especially health). Its stronger than the corresponding correlation with fathers education and earnings. The under-5 yrs. mortality rate is twice as high for children of illiterate mothers as for children whose mothers have secondary or higher education. Income or assets in the hands of women are associated with larger improvements in child health and education.

GDI and GEM

-The Human Dev. Report 1995 introduced two new measures of human development that highlight the status of women. The Gender-related Development Index (GDI) considered inequalities by gender in the HDI dimensions. The Gender Empowerment Measure (GEM) examined the extent to which women and men are able to actively participate in economic and political life and take part in decision-making. - The HDR 2010 introduced a new measure: the Gender Inequality Index (GII)

Gender Inequality Index (GII)

The GII captures the loss of achievement, due to gender inequality, in 3 dimensions: - reproductive health (measured by maternal mortality rate and adolescent fertility rate) - empowerment (ratio of female to male representatives in Parliament and differences in secondary and higher education attainment) - labour market (labour force participation)

The index shows the loss in human development due to inequality between female and male achievements in the 3 dimensions. Lack of data prevents taking into account gender wage gap, time use and ownership of economic assets.

Gender Inequality Index (GII)

-The

GII ranges from 0.05 (Sweden) to 0.77 (Yemen) (losses in achievement of 5 to 77%). Saudi Arabia with a global Human Development Index (HDI) ranking of 56, a per capita income of $25,000 has a GII value of 0.65 and a ranking of 135 out of 146 countries - Among the medium HDI countries China is the closest to gender equality with a GII of 0.21 while Indias GII is 0.62 - Burundi, with a GII of 0.478, is the closest to gender equality among the low HDI countries

The concept of absolute poverty: its evolution

Multidimensional concept 60s-mid 70s MONETARY or INCOME POVERTY: insufficient level of income or C mid 70-80s HUMAN POVERTY: inability to satisfy some basic needs Today the concept includes also: - INSECURITY, VULNERABILITY to negative external shocks (natural disasters, wars, bad weather, disease, loss of job etc.) - SOCIAL EXCLUSION, LACK OF VOICE and power in the institutions and society

INCOME POVERTY AND HUMAN POVERTY

Income poverty: the share of the worlds people leaving on less than 1.25 $ a day has fallen from 42% in 1990 to 25.2% in 2005 (see table 2.8 WDI) and to 22.4% in 2008 according to estimates released by World Bank on 29 Feb. 2012. It has fallen in all regions since 1990, except in Europe and Central Asia. There are large regional variations. In general, poverty has fallen faster in countries with rapid economic growth: the decline in poverty was driven by China. This association between economic growth and poverty reduction has been quantified by some economists (Ravaillon and Chen, Dollar and Kraay).

INCOME POVERTY AND HUMAN POVERTY

However, income distribution matters for poverty reduction, because it affects the rate at which economic growth converts into poverty reduction (the growth elasticity of poverty). Economic growth reduces income poverty most when initial inequality is narrow. In countries with low inequality the benefits of economic growth spread more easily to the poor. In a mechanical sense the rate of income poverty reduction in a country is a function of two things: the rate of economic growth and the share of any increment in growth captured by the poor. If the economic pie gets bigger, will the poor gets a larger slice? Thus every 1% increase in growth reduces poverty by about 1.5% in Viet Nam and by only 0.75% in Mexico.

Human poverty index (HPI)

The Human Development Report 1997 introduced a human poverty index (HPI). Rather than measure poverty by income, the HPI used indicators of the most basic dimensions of deprivation: a short life (the probability of not surviving to ages 40) , lack of basic education (measured by the percentage of adults who are illiterate), lack of access to public and private resources (measured by the percentage of the population without access to safe water and the percentage of underweight children for their age ).

Multidimensional Poverty Index (MPI)

The Human Development Report 2010 replaced it with a new measure: the Multidimensional Poverty Index (MPI), which considers deprivations across the same 3 dimensions as the HDI (health, education and living standards) measured by 10 indicators: malnutrition, child mortality (health), years of schooling and children not enrolled (education), no access to electricity, clean water, adequate sanitation, using dirty cooking fuel, a home with a dirt floor, lack of assets (living standards). The MPI represents the share of population that is multidimensionally poor, adjusted by the intensity of the deprivations suffered. About 1.7 billion people living in the 109 countries covered by the MPI (1/3 of their population) live in multidimensional poverty as against 1.3 billion people living on less than 1.25 $ a day in the same countries. Half of the worlds multidimensionally poor live in South Asia (844 million people) and 458 million live in Africa.

Policy options to reduce poverty and inequalities in the distribution of income

REDISTRIBUTION OF WEALTH, ASSETS: land and capital (physical, financial and human) LAND REFORM

A land reform (that transforms tenants or landless labourers into smallholders) to be successful needs to be accompanied by complementary policies that guarantee access to necessary inputs (credit, seeds, fertilizers, equipment, extension services, marketing facilities) and by policies to eliminate price distortions.

LAND REFORM effects of land reform on productivity may depend on the type of crop cultivated, the quality of land. If there are economies of scale, to split a large farm into small plots might cause a reduction in productivity; large farms might have better access to input and output markets. However, generally speaking a more equitable land distribution increases agricultural efficiency and output: no trade-off between equity and efficiency. The smallholder has more incentive to increase production compared to the tenant or sharecropper.
The

LAND REFORM

One beneficial byproduct of land reform is to change the local political structure in the village: it gives more voice to the poor, it induces them to get involved in local self-governing institutions.

However,

given the strong opposition of vested interests, many economists and policy advisers (for ex. World Bank) consider coercive land reform as politically unfeasible, so they drop it from the agenda of poverty alleviation (Stiglitz: land reform is not included in the structural reforms of IMF). The World Bank in the WDR 2006 says: Expropriating land (with compensation) is probably the most disruptive redistribution instrument. It might provoke conflict, violence, undermining growth.

LAND REFORM Instead the WB advocates: a) negotiated or market based land reform (Market or community-based approaches that allow community members to obtain subsidized credit for land rentals or purchases); b) divesting state lands; c) laws that clearly define land rights and extend them to women that often lack land rights (customary right holders do not hold formal legal rights to the land they occupy) d) tenancy reforms providing greater security of tenure so that the tenant cannot be easily evicted; e) taxing more the underused land

REDISTRIBUTION OF WEALTH, ASSETS Improve the access of the poor (including girls) to human capital in the form of education and skill, as a way to raise their income-earning potential. -Free universal primary education for all ( free textbooks) - Conditional cash transfers to poor families (in Mexico Progresa,in Br. Bolsa Escola,B.Familia) - School lunches - Schools near home - Female teachers - Separate latrines for girls - Sensibilisation, awareness campaigns with families - Against absenteism, hire teachers locally; contract teachers

Redistribution policies that affect monetary income

DIRECTLY : - progressive taxation on income - money transfers INDIRECTLY : - policies to increase employment (public works, appropriate technology, labour intensive technology) - policies to support or control prices - policies to raise the productivity of the poor, to promote income generating activities - minimum wages laws

Redistribution policies that affect real income, welfare distribution of essential goods and services: food, contraceptives, drugs, seeds, fertilizers, school lunches; provision of clean water, electricity, roads, especially in remote areas; public health and education, public transport and housing etc. High administrative costs of direct distribution Social expenditures often benefit mainly the rich in urban areas Difficult to identify the poor and to reach them
Direct

SOCIAL SERVICES ARE FAILING POOR PEOPLE

Social services are failing poor people in access, quantity and quality Public spending on health and education is typically enjoyed by the non-poor, by the urban middle and upper class Doctors, nurses, teachers do not want to serve in remote rural areas (absenteeism) or they treat poor patients very badly. Lack of demand: even if social services are free, there is no guarantee that the poor will use them, because of problems of distance, costs to travel and to lose one day work, tradition and culture (refusal to send the daughter to school or the wife to the clinic).

DELIVERY OF SOCIAL SERVICES:what role for the State? Central government Local government: decentralization Grass-root associations, community organisations, NGOs Community managed water systems, rubbish collection (K costs paid by govt or donors and operation, maintenance costs by community) Public-private partnership: govt financing with contracting or just regulation; public funding of private education through vouchers to poor kids Participation of beneficiaries as monitors of quality (Educo in El Salvador).

DELIVERY OF SOCIAL SERVICES

Self-organisation of poor communities is the best way to ensure that anti-poverty programs will reach the poor - However, one should not romanticize the value of local community: there is corruption also at local level, local landlords can capture local institutions - NGOs, civil society should be a complement, not a substitute for State activities
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Policy options to reduce inequalities in the distribution of income

Need

for an integrated package of policies that support each other It depends on the socio-economic characteristics of the poor The order of implementation of the policies is important

A STRATEGY FOR REDUCING POVERTY It must be nationally owned

4 COMPONENTS: ECONOMIC GROWTH: a) it increases average income, so directly reduces income poverty, especially if income inequality is narrow. b) indirectly it reduces non income poverty by enabling public investment in education, health etc. HUMAN and SOCIAL DEVELOPMENT: a)promoting self-employment, microenterprises; increasing employment; b) improving access of the poor to ec. assets and basic social services

Virtuous circle between human development and ec. growth

A STRATEGY FOR REDUCING POVERTY INSTITUTIONAL DEVELOPMENT - Accountability - Good governance, fight against corruption - Empowerment of the poor, capacity building of civil society - Strengthening the process of democratisation, decentralization - Strengthening the judiciary system A REDUCTION IN THE INSECURITY OF THE POOR