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Carleton UniversityIntroduction to Economic Development
January 31 and February 5, 2013
Poverty, Income Distribution and Development
(Text, Chapter 5)
Agenda1. Significance of Topic2. Concept and Measurement
Poverty MeasuresIncome Distribution Measures
3. Equity, Poverty and Well-Being4. Comments on Evidence re Poverty and Income
Distribution5. The Roots of Poverty and Income Mal-
distributionKuznet’s “Inverted U Hypothesis”
6. Policies for Pro-Poor Growth7. Millennium Development Goals
1. Significance of Topic Central development issue in Africa:
reduce poverty!
“Make poverty history!” Central focus of development efforts and of
this course The focus of the “Millennium Development
Goals”
Is Poverty a “bad thing”? Why? Amartya Sen’s concepts of capabilities and
choice Income and Basic Human Need Fulfillment
Income Distribution: Central to our ideas of fairness and justice
A more equitable income distribution is supportive of both Growth and Poverty Reduction
Growth generally reduces Poverty; But Growth is “Neutral” regarding the “fairness” of income distribution ……..
Unless major efforts are made to achieve distributional objectives simultaneously with growth,
2. Concept and MeasurementProblems of Measuring Real Incomes
Income or consumption?
Accurate Information: sources
Definition of income:Market generated Income? Or
Market generated Income + Transfers Or
Market generated Income + Transfers – Taxes? Or
Market Income + Transfers –Taxes + In-Kind Subsidies? Or
Market Income + Transfers –Taxes + In-Kind Subsidies + Publicly-provided Education + Health Services?
Market Income + Transfers –Taxes + In-Kind Subsidies + Education + Health + Home-Produced G $ S
Other complications: Home-produced G&S; Differing prices
Differing needs in different circumstances
A. Poverty Concepts and Measures1. The United Nations “Human Poverty
Index” (Used until 2010; now replaced by another measure)
Attempts to measure poverty with a composite index including:
1. Probability of not surviving to age 40;2. Adult illiteracy rate;3. Population without access to improved water source4. Underweight children under age five.
2. Arbitrary Income “Cut-Offs” or Measures e.g. population with real incomes (PPP)
below some threshold such as $US 1.00 or $2.00
A. Poverty Concepts and Measures, cont’d
3. Calculations of real income necessary to meet basic human needs (used in Latin America – ECLA - and national measures)
4. Canada: “LICO” or lower income cut-off, i.e. 50% of median income; (more a measure of distribution than of poverty)
5. Composite measures of Basic Need Fulfillment in real terms (access to water, literacy, child mortality, etc. (as in example in text)
6. The New UNDP “Multidimensional Poverty Index” (MPI)
• Identification of poverty status through a dual cutoff: • First, cutoff levels within each dimension (analogous
to falling below a poverty line for example $1.25 per day for income poverty);
• Second, cutoff in the number of dimensions in which a person must be deprived (below a line) to be deemed multidimensionally poor.
• MPI focuses on deprivations in health, education, and standard of living; and each receives equal (that is one-third of the overall total) weight.
MPI Indicators1. Health (1/3rd weight) - two indicators with equal weight –
• whether any child has died in the family, and
• whether any adult or child in the family is malnourished –weighted equally (each counts as one-sixth weight toward the maximum deprivation in the MPI)
2. Education (1/3rd) - two indicators with equal weight (1/6th each) –
1. whether no household member completed 5 years of schooling, and
2. whether any school-aged child is out of school for grades 1 through 8 (each counts one-sixth toward the MPI).
3. Living Standards (1/3rd) : measured as an average of six deprivations (1/18th each): safe water, electricity, sanitation, flooring, improved cooking fuel, and possession of at least two of telephone,
bicycle, radio, TV, motorbike or car
Computing the MPIThe MPI for the country (or region or group) is then
computed
• A convenient way to express the resulting value is
H*A, so that MPI = H*Ai.e., The product of the headcount ratio “H” (the percent of people
living in multidimensional poverty), and the average intensity of deprivation “A” (the percent of weighted indicators for which poor households are deprived on average).
• The adjusted headcount ratio HA is readily calculated
HA satisfies some desirable properties. Important example:
Dimensional monotonicity: If a person already identified as poor becomes deprived in another indicator she is measured as even poorer - not the case using a simple headcount ratio.
Multi-dimensional Poverty Indices for some Countries
CountryMPI
2000-2008MPI
Head-count, % of Total Population
Population below Poverty
Line$1.25 PPP per person
per day
Czech Rep. 0.000 0.0 0.0
China 0.056 12.5 15.9
Kenya 0.302 60.4 19.7
Ghana 0.140 30.1 30.0
Nigeria 0.582 63.5 43.4
Tanzania 0.367 65.3 88.5
Zambia 0.325 63.7 64.3
Ethiopia 0.582 90.9 39.0
Liberia 0.482 83.9 83.7
Niger 0.642 92.7 65.7
7. Measuring Poverty
Measuring Absolute Poverty– Headcount Index: H/N
Where H is the number of persons who are poor and N is the total number of people in the economy
– Total Poverty Gap:
Where Yp is the absolute poverty line; and Yi the income of the ith poor person
TPG (Yp Yi)i1
H
Measuring the Total Poverty Gap
MPI Rankings and Poverty Headcounts for Selected Countries
Other Poverty Measures for Some African Countries, 2005
Country & Country & HDI RankHDI Rank
Human Poverty Index Human Poverty Index (pre-2009) (UNDP) (pre-2009) (UNDP)
Per CentPer Cent
GDPpc (PPP)GDPpc (PPP)$US$US
Population below Population below US$1.00 per day, US$1.00 per day,
Per CentPer Cent
65. Mauritius 11.4 12,715 11.9
121. South Africa 23.5 11,110 10.5
135. Ghana 32.3 2,480 44.8
148. Kenya 30.8 1,240 22.8
151. Zimbabwe 40.3 2.038 56.1
154. Uganda 34.7 1,454 11,9
158. Nigeria 37.3 1.128 70.8
159. Tanzania 32.5 744 57.8
169. Ethiopia 54.9 1,055 23.0
177. Sierra Leone 51.7 806 57.0
81. China 11,7 7,100 9.9
Source: UNDP. Human Development Report, 2007/2008
Human Development Indices, Africa, 1975-2005
Country 1974 1985 1995 2005Mauritius na .692 .751 .804
South Africa
.650 .690 .745 .674
Ghana .442 .482 .542 .553
Kenya .466 .534 .544 .521
Zimbabwe .550 .615 .613 .513
Uganda na .420 .433 .545
Nigeria .321 .391 .432 .470
Tanzania na na .419 .467
Ethiopia na .311 .347 .406
China .530 ,595 .691 .777Source: UNDP. Human Development Report, 2007/2008
Income Distribution and Well-Being
Income distribution and poverty: the differences
The Broad-Based Sense of “Fairness”– Religious Basis
– Design of Human Institutions
• The Law;
• United Nations
• Welfare states & income taxation
• Democracy and human rights
• Development assistance
– Economistic “Games” showing that generally people prefer Fairness
Income Distribution: Central to our ideas of fairness and justice
A more equitable income distribution is supportive of both Growth and Poverty Reduction
Growth generally reduces Poverty; But Growth may be “Neutral” regarding income distribution
(Unless major efforts are made to achieve distributional objectives simultaneously with growth)
Incentives and Income Distribution
Vote !!
Perceptions of Individual Well-Being and HappinessLiberia Kenya USA Canada
Overall Life SatisfactionMin 0 to 10 Max 3.4 3.7 7.5 8.0
Satisfaction with Standard of Living (%) 46 25 75 87
Happiness: Purposeful Life 100 98 95 91
Happiness:Treated with Respect 82 78 94 93
Negative Life Experience 17 19 28 25
Source: UNDP Human Development Report 2010
Income Distribution Concepts and Measures
1. Income shares of groups in the population (quintiles or deciles)
2. Ratios of shares,
e.g. income share of top 10% / income share of poorest 10%
3. Lorenz Curve (See text, pp37-41)
4. Gini Coefficient (in class)
Figure 5.2 The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of Inequality
Figure 5.3 Estimating the Gini Coefficient
4. Evidence re Income Distribution
Some International Comparisons
Income Distribution Measures for Some African Countries
Country Gini Coefficient
Income Share of Richest 20%
Poorest 20 %
Income Share of Poorest
20%
Income Share of Richest
20%
S. Africa .578 17.0 3.5% 62.2
Ghana .408 8.4 5.6 46.6
Kenya .425 8,2 6.0 49.1
Zimbabwe .501 12.0 4.6 55.7
Uganda .357 9.2 5.7 52.5
Nigeria .429 9.1 5.1 48.6
Tanzania .346 5.8 7.3 42.4
Ethiopia .399 4.3 9.1 39.4
Sierra Leone .629 57.6 1.1 63.4
China .570 12.2 4,3 51.9Source: UNDP. Human Development Report, 2007/2008
“Who are the ‘Poor’ ”?Domestic Aspects
– Rural character– Regional dimension– Gender & children– Indigenous dimension– Some may be subject to disabilities
Characteristics of the poor:– Assets; – Human capital (education, health); – Income vulnerability– Weak access to public services, – Environmentally hostile environments, – Lack of supportive networks
5. The Roots of Income Mal-distribution and Poverty
5. The Roots of Income Mal-distribution and Poverty
1. Historical Inheritance and its Momentum:
Pre-Colonial Social Structures: Significant levels of equality in some pre-colonial
eras; High equality for “hunting and gathering”
peoples High inequality in some more complex societies
(e.g. caste system in India)
B.Impacts of ColonialismUnequal property rights and institutions
imposed by colonial powers: Note Latin America and Caribbean
Imperial country living standards for colonizers; traditional levels for Africans
Public services directed at settler peoples, not indigenous peoples
Colonial hierarchies: Social stratification based on Race and Ethnicity
2. Political Factors:Disproportionate power and influence of elites and
moneyed interests (e.g. property, gender, and literacy qualifications to the vote until recently)
Result: – Public Policy has often been shaped in their
interestsThus:
– “Urban bias” – “Upper and middle income class bias” and – “Modern sector bias” in public policy
3. The Nature of the “Modernization” Process:
Does a “Rising Tide Lift all Boats”?Would you expect that a process of
modernization / development would improve everyone’s living standards simultaneously?
What forces generate “Inequities”? “Equities”?
Note the Latin American
Effect
3. The Nature of the “Modernization” process: Forces Generating Inequalities“Scarce capital” generates high returns for
its owners;Scarce skilled labour generates higher
incomes for those with crucial skills;Abundant unskilled labour generates low
wages and incomes;
3. The Nature of the “Modernization” process: Forces Generating Inequalities, cont’dInternational technological transfer: much
recent vintage technology is “labour-saving,” thereby reducing the demand for labour and thus wages and incomes.
“Backwash Effects” of “modernization” and tech. change
Uneven access to opportunities
• Prior Elites;
• Regional Advantages;
• Personal Advantages
3. continued: The Nature of the “Modernization” Process: Forces Generating Greater Equalities
The exhaustion of surplus labour in agriculture and the informal economy?
Increasing productivity generally promotes rising incomes in supporting service-type activities
Broadening Tax Base permits social programs & welfare state type programs
Broadening human development (education health etc.) broadens earning capabilities
Regional and rural-urban spread effects • rising demand for goods and services from
elsewhere; • linkage effects
Emphasis on Human
Development
South Korea: Causal Factors Shaping Income Distribution and Growth
Successful Export
Promotion
GoodMacroeconomic
Management
Good Private-Public
Gov’t Market Mix
Land Reform Coops;
Well Qualified Labour Force
Population Deceleration
Lower LF Growth Rate
Rapid Job Creation
Egalitarian Urban Income Distribution
Rural-Urban Equity
Egalitarian Rural Distribution;
Income Growth
Rural UrbanBalance
Agricultural Expansion
Rapid Growth of Manufacturing
Rapid Growth, Distributional Equity, Poverty Reduction[HDI: # 15 in world; 1970: .707; 2005 .901; Gini: 0.316; Growth pc, 1975-03: 6.1% pa]
Price Policy
Activist and Expanding Social Policies
Increasing Taxes
Empirical Validity of Kuznets” Hypothesis?
Which effects predominate?
Kuznets Curve with Latin American Countries Identified
Note the Latin American
Effect
Empirical Validity of Kuznets” Hypothesis?
Which effects predominate?
– Debatable;– Latin American effect in Kuznets “U”– Positives and negatives simultaneously;– Other factors operate– Ultimately “Public Policy” is paramount
4. Nature of Development Strategies (and Theorizing):
Early Theorizing: • Capital-Centered theories, • Dualistic Development Models (W.A. Lewis) • The Soviet Model, • Prebisch - UN ECLAC) • W. W. Rostow ………….
All emphasized Growth first; income distribution later;
• Investment in the Modern Sector, esp. Industry;
• Import-substituting industrialization;• Investment in physical capital• De-emphasize traditional economy and
informal sector
5. “Neo-Liberal” or “Washington Consensus” approach focused on growth first.
• Escape from hyper-inflation, macro-economic and external sector unsustainability and debt, led to “structural adjustment” programs
• which often generated “short-term pain” hopefully but not always for “long term gain”
6. Demographic and Sociological Factors: “The Poor Have More Children:” large family size
among the poor • reduces family investment per child and • reduces possible inheritances per child vis-à-vis
the rich; Labour force participation for poor women is low vis-à-
vis rich women;
• Higher female labour force participation rates for better-off women raise family incomes for better-off groups.
The rural poor sometimes have little alternative to damaging their own environment, often resulting in worsening future poverty.
7. “Market Power”– Concentrated ownership patterns
– Monopoly and oligopoly power of enterprise and individuals
– The power of professional associations, unions and organized groups
– Political power determining income patterns
8. International Factors
– Multinational Enterprise: islands of modernity and higher incomes
– Technological Transfer of modern capital-intensive machinery and equipment higher incomes for some
– Internationally transferable skills help generate international income levels for some, while the unskilled remain with low incomes.
6. Policies for Pro-Poor GrowthPossible Approaches and Components of Poverty
Reduction and Equity-Oriented Programs
1. Achieve Sustained Economic GrowthExceeding population growth rates;• Permitting rising levels of personal or family
income and tax revenues;• Permitting significant levels of domestic &
national savings
[Note: this is a necessary but insufficient condition for enduring reductions in poverty]
2. Strive for “Equity with Growth”
– Make the growth process compatible with equity, that is poverty reduction, improved income distribution and human development for low income groups
– Focus sharply on the poorest.
– HOW?
3. Emphasize Public Investment in Human Development– Fairly Allocated– Education, Health, Nutrition, Clean Water,
Sanitation, – Family Planning– Build the capabilities of the state to provide
necessary public goods • [i.e. effective and efficient Tax Administration
– Plus effective and incorruptible public administration.]
4. Increase Demand for the abundant resource of the poor, namely labour, [i.e. rapid job creation]
[Now difficult due to China’s manufacturing dominance due to cheap labour, mega-economies of large scale, undervalued exchange rate]
Improve the appropriateness of technology? At an Appropriate Time, Switch from Import
Substituting Industrialization to Job-creating Export Promotion
Promote labour intensive public works and infrastructure, especially that serving the needs of the poor;
Don’t subsidize the use of capital• Making capital artificially cheap increases the
use of capital and the “capital intensity of production processes at the expense of labour
• Avoid – Investment incentives
– Tax credits,
– Subsidized interest rates
– Tariff advantages for capital goods imports
– Overvalued exchange rates for capital goods imports
5. Invest in the Physical Assets of the Poor Support the “Informal Sector” [in various ways;]
– Note the role of “Micro-credit” Support Urban Development for low income
neighbourhoods [water, sanitation, sidewalks, streets, electricity, security, etc.]
Support Agriculture and Rural Development, focusing on low income rural peoples
– Rural roads; water & sanitation; drainage & irrigation; garbage collection, law and order, electrification in time
Avoid hyper-concentrated urbanization and “First City” Bias
Promote Agriculture & Rural Development
Regional Development;
6. Redistributive Taxation
Progressive income taxes;
Wealth taxes
Note the importance of Tax Administration
7. Redistribute Assets Land Reform of various sorts; Democratic ownership patterns;
• Cooperative Property forms• Taxation towards equity• Favour small & local enterprise?• Democratization of private ownership
Support Territorial Claims of Indigenous Peoples;
8. Construct Safety Nets and Transfers as possible [for middle income countries] Target the neediest groups; “Workfare” programs Support Human development –
promoting activities [e.g. as in Brazil under Lula, financial support
for the poorest families that keep their children in school;
or as in Chile, where school lunches programs are provided in low income neighbourhoods]