Poverty, Inequality, and Development

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Poverty, Inequality, and Development

• Chapter 5

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Questions about growth and poverty

• 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?

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Measuring inequality the size distribution of
income Kuznets compare bottom 40 to top 20
(why?)
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Relative Inequality The Lorenz Curve
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The Greater the Curvature of the Lorenz Line,
the Greater the Degree of Relative Inequality
(why relative?)
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Four Possible Lorenz Curves
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Estimating the Gini Coefficient
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Functional Income Distribution
Profit Max Firm NR PQ(L,K) wL Factor demand
function VMPL P(?Q/?L) Marginal labor cost w
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Measuring Poverty

• Key concern absolute poverty
• How to define?
• 1/day?
• Meet minimal needs for subsistence?
• Each country defines own poverty line
• Problems comparing across countries
• What about relative poverty?
• What about people above the poverty line?

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Measuring Poverty

• Measuring Absolute Poverty
• Headcount index H/N
• Total poverty gap
• where Yp is the absolute poverty line
• Yi is income of person I
• H is number of people below Yp
• N is size of the population

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Foster-Greer-Thorbecke Measure
H P? (1/N) S (YP
Yi)/YP? i 1

• Interpretation
• ? 0 is headcount index
• ? 1 is standard poverty gap (interpret?)
• ? 2 measures poverty intensity (why?)

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Inequality, Poverty and Policy

• Whats so bad about inequality?
• Some inequality necessary for markets and
  incentives to function so where do we draw the
  line?
• Should we care about absolute poverty, relative
  poverty (inequality), or both?
• Costs associated with both absolute poverty and
  inequality
• We might define aggregate welfare as depending
  on
• average income
• income distribution (inequality)
• absolute poverty
• But how do we prioritize in policy?

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What to do about Poverty?

• Does economic growth solve the poverty problem?
• Or are other policies needed in addition to ones
  that address growth?

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Comparison of Gross National Product Growth Rates
and Income Growth Rates of the Bottom 40 of the
Population in Selected Less Developed Countries
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Where Poverty Has Fallen, and Where It Has Not
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Growth and the Poor
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Growth and the Poor contd
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Who are the poor? More are in rural areas
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More are ethnic minorities and indigenous peoples
And more are in households headed by women.
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A Range of Policy Options

• Pro-growth strategynecessary but not sufficient?
• Create opportunity invest in human capital,
  reduce legal and institutional barriers to
  economic opportunity
• Income redistribution strategies
• changing relative factor prices
• progressive redistribution of asset ownership
• progressive taxation
• transfer payments and public provision of goods
  and services
• adverse impacts on growth?