Poverty, Inequality and Development

1
Poverty, Inequality and Development Todaro
Chapter 5 Part II
2
Overview

• Problems arising from Inequality
• Fields Stylized Development Typologies
• Kuznets Inverted-U Hypothesis
• Growth and Inequality
• Extent of Absolute Poverty

3
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.

4
Welfare Function

• W Social Welfare
• Y National Income
• I degree of inequality
• P degree of absolute poverty

5
Fields Stylized Development 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.

6
Kuznets 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.

7

• 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.

8
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.

9
Extent of Absolute Poverty

• Although the total number of the worlds
  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

10
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.

11

• Widespread poverty actually retards growth
• The developing world elite, unlike their
  developed counterparts have lower savings rates
  and often invest in foreign assets.
• 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.