Poverty, Inequality and Development

Chapter 6 Intro to Development Economics

Economic Development, 8th ed., by Todaro and Smith

Two principal measures of inequality or income distribution

personal or size distribution of income measures the total income received by persons or households, regardless of its source Kuznets ratio Lorenz curve Gini Coefficient
2

functional or distributive factor share measures the share that each of the factors of production (labor, capital, land) receives.

Kuznets ratio: is the ratio of the income received by the top 20% and the bottom 40% of the population.

Lorenz curve: is a diagram that shows the quantitative relationship between the % of income recipients and the % of the total income that they receive. if the Lorenz curve is a 45o diagonal, then there is perfect equality the more the Lorenz line curves away from the 45o diagonal, the greater the degree of inequality
3

Gini coefficient: is the area between the Line of equality (45o diagonal) and the Lorenz curve, divided by the total area of the half-square in which the curve lies. Gini coefficient is a number between 0 (perfect equality) and 1 (perfect inequality) If Gini is 0.5 to 0.7 high inequality If Gini is 0.2 to 0.35 relatively equitable
7

Measuring absolute poverty

Absolute poverty: headcount H of people below the international poverty line. Total poverty gap (TPG) total amount of income necessary to raise everybody below the poverty line, up to that line:

TPG = i =1 (Yp - Yi )
H

where

Yp is the absolute poverty line Yi is income of person i

10

Average poverty gap (APG) per capita poverty gap:

TPG APG = H

Normalized poverty gap (NPG) is the size of the poverty gap relative to the poverty line: it is a number between 0 and 1, and can be compared across countries:

APG NPG = Yp

11

12

Foster-Greer-Thorbecke index (FGT) measures the degree of inequality among the poor:

1 Pa = N

(Y
i =1

- Yi )

Yp

and when a = 2, then the index becomes P2, which the World Bank used widely as a measure of the severity of poverty.

13

Human Poverty Index (HPI) it is a measure of poverty composed by three key deprivations: 1. of life life expectancy 2. of basic education adult illiteracy 3. of economic provisioning two components: (1) % of people without access to health services and safe water, and (2) % of children under 5 who are underweight. A low HPI is good means that a small % of population is deprived. A high HPI reflects great deprivation.
14

Kuznets Inverted-U Hypothesis

Kuznets curve depicts changes in the Gini coefficient as per capita GNP expands Inequality worsens during the early stages of economic growth this is due to the wage differential required for structural change from traditional to modern sector

Eventually, inequality improves this might not happen, and depends on the nature of development

15

16

17

18

Policies for poverty reduction

Four main possible areas of policy action to reduce poverty 1. Altering functional income distribution 2. Mitigating the concentration of productive assets and labor skills 3. Reducing concentration of income and wealth at the upper levels 4. Increasing income at the lower levels
19

Policy # 1 changes in relative

factor prices: (1) elimination of artificial wages in modern sector; (2) elimination of subsidies to capital equipment.

Policy # 2 redistribution
of asset ownership: (1) land reform; (2) provision of microcredit; (3) wider access to education.

Policy # 3 progressive income

and wealth taxes: (1) improvement of tax enforcement on non-wage earnings; (2) reduction of indirect taxes (sales taxes).

Policy # 4 direct transfer

payments and public provision of goods and services: (1) rural public health projects; (2) school lunches; (3) food for work (workfare programs)
20

Capital: New Delhi Area: 3.3 thousand km2 Population: 1,016 million Annual population growth: 1.8%

India - 2000
GNI per capita: $460 GNI per capita (PPP): $ 2,390 GNP per capita growth rate: 4.2% (since 1990) Agriculture % GDP: 27% Exports % GDP: 8.9%

Females as share of labor force: 32% Population on less than $1 per day: 44.2% Illiteracy rate: 44% (female 62%) Mortality under age 5: 90 per 1,000 live births Child malnutrition: 53% HDI: 0.45 (low)
21

Ranking India
One of the highest absolute poverty rates in the world India has the largest number of people living on less than a dollar per day (509 million): almost half of the worlds poor reside in India Second largest population in the world Geographically, the largest country in South Asia and the 7th largest in the world India has one of the lowest per capita income outside of Africa
22

Other facts in India

Gained independence from Britain in 1947: former colony was divided into three: Hindu India, and Islamic Pakistan and what today is Bangladesh Initially with socialist economy and politics, it started adopting market capitalism in the late 1980s

23

Economics in India
Agricultural productivity has risen substantially since the late 1970s: India is self-sufficient in grain production GNP grew an average of 5.3% in the 1980s, and 6.0% in the 1990s, but given population growth, per capita gains have been small Main industrial activities: cotton and jute textile production, high-tech software services Economic development in the 1990s: privatization telecommunications, liberalization of exports for electronics, facilitation of imports of capital goods
24

Problems in India
Population size and growth: being self-sufficient in grain production is jeopardized by population growth Environmental damage: farm-land has suffered severe ecological damage through deforestation, which is affecting agricultural productivity Ethnic violence: between Hindu and Muslim fundamentalists Poverty: fueled also by unemployment
25