Topic 3

Poverty, Inequality, and

Development

1
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?
„ Are high levels of inequality always bad?
„ What policies can reduce poverty?

2
Contents

„ Measuring Inequality and poverty

„ Inequality, povety, social welfare, and
development
„ Policy implications

3
Measuring Inequality and Poverty

„ Measuring Inequality
„ Size distributions (quintiles, deciles)

„ Lorenz curves

„ Gini coefficients

„ Functional distributions

4
Size Distribution of Personal Income

„ The incomes of all individuals are arranged in

ascending order, then the population is divided
into deciles or quintiles. Then the percentage of
national income of each group is determined.

„ Kuznets ratio – ratio of income received by top

20% and income received by bottom 40% (From
Next table Kuznets ratio = 51/14 = 3.64).

5
Typical Size Distribution of Personal
Income in a Developing Country by Income
Shares-Quintiles and Deciles

6
Lorenz Curve
„ Graphical representation of the size distribution of
personal income.
„ Shows the actual quantitative relationship between
the percentage of income recipients and the
percentage of total income they received during a
given year.
„ With the percentage of income on the Y-axis and
the percentage of income recipients on the X-axis,
the diagonal represents perfect equality.
„ The further the Lorenz curve is away from the
diagonal, the greater the degree of inequality.
7
The Lorenz Curve

8
The Greater the Curvature of the Lorenz
Line, the Greater the Relative Degree of
Inequality

9
Gini Coefficient
„ The Gini coefficient is calculated by taking the area
between the Lorenz curve and the diagonal and dividing it
by the half-square area in which the curve lies.
„ So, a Gini coefficient of 0 would mean perfect equality,
and a coefficient of 1 would mean perfect inequality.
„ Coefficients between 0.50 and 0.70 are considered to mean
a highly unequal distribution of income. Coefficients
between 0.20 and 0.35 are considered to represent
relatively equitable distributions of income.
„ Since we are dealing in percentage terms, we can compare
Gini coefficients across countries.

10
Estimating the Gini Coefficient

11
Four Possible Lorenz Curves

12
Factor Share Distribution of Income
„ Rather than looking at separate individuals, this
attempts to explain the share of national income
received by each of the factors of production.
„ It compares labour’s share of national income with
that of land, financial and physical capital.
„ With free and competitive markets for output and
the factors of production, each factor should be
paid according to is contribution to national
output. However, non-market forces often
intervene to determine the distribution of factor
payments.
13
Functional Income Distribution in a
Market Economy: An Illustration

14
Measuring Inequality and Poverty

„ Measuring Absolute Poverty

„ Headcount Index
„ Absolute Poverty: the number of people living below the
minimum level of income needed to satisfy basic necessities.
„ International Poverty Line: $1 a day or $2 a day in PPP dollars.
„ Headcount index is simply H/N.
„ Note that in each country, a local absolute poverty line will
need to be calculated, taking into account a local basket of
good which would meet basic nutritional requirements, etc.
„ The headcount index does not measure the extent to which the
poor lie below the poverty line.It also fails the distributional
sensitivity and monotonicity axioms.
15
Measuring Inequality and Poverty

„ Measuring Absolute Poverty

„ Total poverty gap: Measures the total income
needed to raise everyone who is below the
poverty line to that line.

TPG = ∑i =1 (Yp − Yi )
H

„ Where Yp is the absolute poverty line

„ Yi is income of person I

16
Measuring the Total Poverty Gap

17
Measuring Inequality and Poverty

„ Measuring Absolute Poverty

TPG
„ Average poverty gap APG =
H
„ WhereH is number of persons H
„ TPG is total poverty gap
1 ∑ p i
(Y
i =1
− Y ) α

„ Foster-Greer-Thorbecke measure Pα =
n Yp

„ The Human Poverty Index (HPI)

18
Foster-Greer-Thorbecke Measure (FGT)

„ A poverty measure is said to be decomposable if the poverty

measure of a group is a weighted average of the poverty
measures of the individuals in the group. An important
property of decomposable poverty measures is that, ceteris
paribus, a reduction in the poverty measure of a subgroup
always decreases poverty of the population as a whole. The
Headcount Index and AIS are both decomposable but fail
the transfer and monotinicity axioms.
H

1∑
(Y p − Yi )α
„ The FGT indicator Pα = i =1
n Yp

19
Sen-Shorrocks-Thon Index (SST)

„ The index is a weighted sum of the poverty gap ratios of the

poor. The decrease with rank order in the income
distribution so that more weight is given to the poverty gap
of the poorer individuals.

H
⎛ 2( N − i ) + 1 ⎞⎛ YP − Yi ⎞
SST = ∑ ⎜ ⎟⎜⎜ ⎟⎟
i =1 ⎝ ⎠⎝ YP ⎠
2
N

20
Human Poverty Index

„ Analogous to the Human Development Index, it

goes beyond income measures and looks at human
poverty in three areas of deprivation
„ Life Expectancy
„ Education
„ Economic Provisioning
„ A low HPI is good (smaller percentage of the
population is deprived), and a high HPI is bad.

21
Inequality, Poverty and Social Welfare

22
Problems Arising from Inequality

Why should relative poverty be a concern?

„ Measures of inequality among the poor

„ Extreme Inequality results in

„ Economic Inefficiency
„ Social Instability and Conflict
„ Most of us as a part of our value system, view
inequality as unfair.

23
Welfare Function
W = Social Welfare
Y = National Income
I = degree of inequality
P = degree of absolute poverty

Welfare funstion W = F (Y , I , P )
+ − −

24
Dualistic development and shifting Lorenz
curves: Some typologies

„ Classifications of cases of dualistic development

by common characteristics:
„ Modern-Sector Enlargement Growth

„ Modern-Sector Enrichment Growth

„ Traditional-Sector Enrichment Growth

„ Certain policies may cause inequality to increase

initially but may make everyone better off and
reduce inequality in the long-run.

25
Poverty, Inequality, and Social Welfare

„ What’s so bad about inequality?

„ Dualistic development and shifting Lorenz curves: some
stylized typologies
„ Traditional sector enrichment (see)
„ Modern sector enrichment (see)
„ Modern sector enlargement (see)

26
Improved Income Distribution under the
Traditional-Sector Enrichment Growth
Typology

27
Worsened Income Distribution under the
Modern-Sector Enrichment Growth
Typology

28
Crossing Lorenz Curves in the Modern-
Sector Enlargement Growth Typology

29
Selected Income Distribution Estimate

30
Income Distribution of Vietnam, 2002-2008

Quintile Quintile Quintile Quintile Quintile

Year 1 2 3 4 5 Gap

2002 6.1 10.0 14.1 20.8 49.0 8.1

2004 5.8 9.9 14.3 21.2 48.7 8.4

2006 5.8 10.0 14.4 21.3 48.4 8.4

2008 5.5 9.6 14.1 21.4 49.4 8.9

31
Kuznet’s Inverted-U Hypothesis
„ The hypothesis states that in early stages of
growth, inequality will increase only to fall at later
stages, leading to an inverted-U shaped
relationship between per capita national income
and measures of inequality.
„ Explanations for the hypothesized relationship
point to the nature of structural change.
„ The validity of the relationship remains an
empirical question. There is significant evidence
to suggest that increases in per capita income does
not have to paired with worsening inequality.
32
 Kuznet’s Inverted-U Hypothesis
„ Per capita income does not appear to be highly
correlated with any of the three inequality
measures for the set of LDCs that we have
considered.
„ “Latin America Effect” – the observed inverted-U
relationship may be attributed to the social and
political history of Latin American countries
which while being middle-income countries have
the highest average level of inequality in the
world.
„ For many countries there is no particular tendency
for inequality to change much in the process of
economic development. 33
Poverty, Inequality, and Social Welfare:
Kuznets’ inverted-U hypothesis

34
Kuznets Curve with Latin American
Countries Identified

35
Growth and Inequality

„ There is no obvious relationship between

economic growth rates and measures of inequality.
„ Who participates often determines whether growth
leads to a reduction or increase in inequality.

36
 Income and Inequality in Vietnam, 2002-
2008
14000 0.440

12000
0.435

10000
0.430

8000
0.425
6000

0.420
4000

0.415
2000

0 0.410
2002 2004 2006 2008
37
Income Gini
Long-Term Economic Growth and Income
Inequality, 1965-1996

38
Change in Inequality in Selected Countries,
with or without Growth

39
Extent of Absolute Poverty

„ Although the total number of the world’s

population living in absolute poverty (global
headcount) has increased over the last 20years, the
percentage of the population living in absolute
poverty (global headcount ratio) has fallen, despite
rapid population growth.
„ Much of the improvement has occured in the
developing world

40
 Growth and Poverty
„ The traditional thinking was that efforts expended towards
reducing poverty would slow down growth rates and that
countries with lower inequality would experience slower
growth rates.
„ Reductions in poverty need not come at the expense of
high economic growth. We can look at China – a country
that has experienced the highest growth rates in the past 20
years and the most dramatic reduction in absolute poverty.
„ Widespread poverty actually retards growth
„ The developing world elite, unlike their developed
counterparts have lower savings rates and often invest in
foreign assets.
41
 Growth and Poverty

„ Extreme poverty leads to poor health, nutrition

and education which results in low productivity
and slower growth
„ Increasing the income of the poor increases
demand for domestic products.
„ Reduction in mass poverty can act as a powerful
incentive to participate in the development
process, while growing income disparities and
absolute poverty can have the opposite effect.
42
Regional Poverty Incidence, 2004

43
Poverty Incidence in Selected Countries

44
Poverty Incidence in Selected Countries
(continued)

45
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

46
Characteristics of Poverty Groups

The majority of the world’s poor are:

„ Rural inhabitants

„ Primarily engaged in agriculture

„ Women and children

„ Minority ethnic groups and indigenous peoples

47
Characteristics of Poverty Groups in
Vietnam

48
Rural Inhabitants

„ Disproportionate number of the poor are located in

rural areas and are engaged in agricultural
production
„ Urban/Modern-sector bias in government
expenditures exacerbates the disparities between
the well-being or rural and urban families.

49
Poverty: Rural versus Urban

50
 Poverty: Rural versus Urban in Vietnam
40
Country Rural Urban
35

30

25

20

15

10

0
2002 2004 2006 2008
51
Women and Children
„ Women and children are more likely to be poor,
malnourished and less likely to receive medical
attention, access to clean water, sanitation, etc.
„ Prevalence of female-headed households in LDCs
„ Large income disparities between male-headed
and female-headed households due in part to the
lower earning power of women who are often paid
less for similar work.
„ Women have limited control over their spouses
income and other household resources

52
Women and Children

„ They also have limited access to education, social

services and employment opportunities. They
often face barriers to higher-paying occupations
forcing them into informal and low-productivity
jobs.
„ Often the discrimination is institutionalized by
laws and customs.
„ Higher rates of infant mortality, illness and
illiteracy, higher school drop-out rates in female-
headed households.
53
Women and Children

„ Gender bias in intra-household allocation

„ Female-male sex ratio imbalance
„ Women often do not receive compensation
for a large portion of their work.
„ The low status of women results in slower
economic growth.

54
Women and Children
„ When the status of women in the household is favourable
in terms of earnings there is less bias against girls and the
overall welfare of the children improves
„ At low income levels, nearly all of a woman’s income
goes toward household food consumption. The fraction is
smaller for men. This highlights the importance of
integrating women into the development process.
„ Poverty alleviation programs that work almost exclusively
with men tend to exacerbate the inequalities between men
and women.

55
Ethnic Minorities and Indigenous People

„ 40% of the world’s nations have 5 or more

distinguishable ethnic groups, with one or more
facing considerable economic, social and political
hardship.
„ Indigenous people also suffer similarly. They are
more likely to be poor, malnourished and
unemployed.

56
Although it has been shown that poverty tend to decline
as per capita income climbs, high level of absolute
poverty can retard growth and widespread poverty can
still exist in countries with medium to high levels of
income. Attacking poverty by emphasizing growth has
its problems. Poverty itself must be addressed.

57
Poverty: Ethnic groups

Kinh/Chiness Others
Education poverty rate 13.7 27.8
Health poverty rate 51.2 60.7
Shelter poverty rate 12.8 39.7
Water and sanitation poverty rate 33.8 87.8
Child-work poverty rate 7.3 23
Social protection poverty rate 9.8 3.7

58
Indigenous Poverty in Latin America

59
The Range of Policy Options: Policy
Objectives

„ Increasing women’s participation in

educational and training programs, formal
sector employment and agricultural
extension programs
„ Improve women’s access to government
resources – health programs, social services,
etc.
„ Legalizing informal-sector employment
60
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

61
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

62
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

63
Appendix 1: Appropriate Technology and
Employment Generation: The Price
Incentive Model

„ Choice of techniques
„ Factor Price distortions and appropriate
technology
„ Possibilities of Labor-Capital substitution

64
Choice of Techniques: The Price Incentive
Model

65
Appendix 2: The Ahluwalia-Chenery
Welfare Index

„ Constructing poverty-weighted index of social

welfare

66