Development and Human Welfare

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Development and Human Welfare

• By Emmanuel Nnadozie

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• 3 billion citizens of the developing world
• Are growth and development improving their living
  conditions?
• If their welfare is not improving or not
  improving fast, what kinds of changes in
  development patterns and process could improve
  this outcome?
• And how can they be brought about?

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• Should there be income and asset distribution?
• But the slices will be really thin if the
  national cake was cut in the case of poor
  countries
• We shouldnt assume that higher GNPs per capita
  means higher incomes for all, even most families

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What Are the Realities?

• Governments promote economic development for
  glory or power not necessarily for welfare
  improvement
• So they build white elephants and engage in
  military build ups--these provide little
  immediate benefit to the nations citizens

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• Resources may be heavily invested in further
  growth so that significant consumption gains are
  put off to later date.
• If the process continues, that later date never
  arrives.

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What Are the Realities?

• Income and consumption may increase but those who
  are already relatively well-off may get all or
  most of the benefits.
• The rich get richer and the poor get children

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• As GNPs rise, what happens to the welfare of the
  masses of people who remain desperately poor?
• When can they hope to reach an era of mass
  consumption?
• Data gathered in early 60s showed that not only
  was income inequality generally much higher in
  poor countries than in rich countries, inequality
  was apparently rising in many developing countries

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• The mass of people in some countries were not
  benefiting at all from development

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What is Welfare?

• Welfare Economic well-being
• To measure welfare, we consider
• Functional distribution of income -- division
  among factors of production according to
  function
• The size or personal distribution of income
  --how income is apportioned among individuals or
  households
• The personal distribution of income is most
  commonly used as a direct measure of welfare

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What is Welfare?

• But since the functional distribution determines
  income distribution i.e. the ownership of means
  of production, therefore functional distribution
  of income is an important cause of welfare levels
  
• Because of problems involved in establishing
  peoples incomes, through data collection, they
  are mostly understated

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Measuring Income Distribution

• Collect data (cross sectional or time series)
• Analyze data
• by ranking by size
• use household income per capita as your ranking
  criterion
• Show results mostly through a Lorenz's curve

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The Lorenz Curve

• The Lorenz's curve shows the percentage of total
  income accounted for by any cumulative percentage
  of recipients
• The further the Lorenz curve bends away from the
  45o line, the greater is the inequality of income
  distribution
• Dividing A by the total area (AB) under the 45o
  line gives the GINI concentration ratio

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Lorenz Curve
Cumulative percent of income
A
B
Cumulative percent of recipients
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PERSONAL DISTRIBUTION in the US
Personal Income Received (Percent)
4.1
Lowest 20 Income Group
9.9
Second 20 Income Group
Middle 20 Income Group
15.7
Fourth 20 Income Group
23.3
47.0
Highest 20 Income Group
1993 DATA
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The Gini Concentration Ratio

• The theoretical range of the Gini ratio is from
  zero (perfect equality) to one (perfect
  inequality).
• The problem with the Gini concentrtion ratio is
  that Lorenz curves can intersect such that curves
  of different shapes could generate the same Gini
  Ratio

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The Gini Ratio

• To get around this problem, i.e. to really know
  how the poor are faring we could examine both the
  absolute and relative incomes of the poorest 30
  or 40 of the distribution.