Poverty, Inequality, and Development Chapter 5 Poverty, Inequality, and Development

Measuring Income Distribution Relative Income Share: The ratio of the highest 20% to lowest 40% of the population The higher the ratio, the greater is income inequality Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Typical Size Distribution of Personal Income Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Lorenz Curve of Income Distribution Depicting: quintile percentage of population vs. cumulative percentage of income received The closer the Lorenz curve to the line of equality, the better is the size distribution of income Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Lorenz Curve of Income Distribution Data for the United States in 2000: Quintile % Income % Cumulative Income Lowest 20% 3.6 3.6 Second 20% 8.9 12.5 Third 20% 14.9 27.4 Fourth 20% 23.0 50.4 Richest 20% 49.6 100.0 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Lorenz Curve of Income Distribution Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Lorenz Curve of Income Distribution The greater the curvature of the Lorenz Curve, the greater is the degree of income inequality Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Improved Income Distribution Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Worsened Income Distribution Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Crossing Lorenz Curves Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

The Gini Coefficient Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

The Gini Coefficient 0 < The Gini Coefficient < 1 0.41 for U.S. 0.30 for Ethiopia 0.57 for Brazil Gini Coefficient is higher for the OPEC and Middle-income countries than Low-income countries Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

The Gini Coefficient Income inequality had had a tendency to increase. 1960 1980 LDCs 0.544 0.602 Low income countries 0.407 0.450 Middle-income countries 0.603 0.569 The OPEC 0.575 0.612 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Income Distribution Measures Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Income Inequality Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Functional Income Distribution Assume a traditional economy in which labor is the only variable input (capital and land are fixed): Output = Wages + Profits Functional income distribution = Wages as a percentage of Profits The higher the ratio, the greater is income equality Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Functional Income Distribution Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Poverty Gap Average percent of income shortfall below the poverty line. Over 10.5% in LDCs Latin America & Caribbean: about 9% Middle East and North Africa: about 1% Sub-Saharan Africa: about 15% South Asia: 13% China, East Asia & Pacific: 8% Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Measuring Poverty Gap Poverty and income inequality depend on type of economic, political and institutional arrangements according to which rising national incomes are distributed among broad segments of a population A middle-income country may have a higher poverty rate and poverty gap than a low-income country (South Africa vs. Sri Lanka) Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Measuring Total Poverty Gap Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Growth and Distribution The “Inverted-U” Kuznets Curve Income inequality increases during the early stages of growth Income equality increases during a later stage of growth with redistribution of income and wealth Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

The Kuznets Curve Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Evidence on Kuznets Curve Cross country evidence supports the hypothesis Time series data show some countries have been able to grow and improve income distribution at the same time Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Kuznets Curve in Latin American Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Income Inequality Across Time Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Growth & Inequality, 1965-1996 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Change in Inequality with or without Growth Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Absolute Poverty International Poverty Line: $1 per day per person The Headcount Ratio: The percentage of people living below the International Poverty Line Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Regional Poverty Incidence, 2004 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Poverty Incidence in Selected Countries Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Poverty Incidence in Selected Countries Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Human Poverty Index Human Poverty Index is measured in terms of deprivation of Life: years of life expectancy Basic education: adult illiteracy Basic needs: lack of access to health services , access to safe drinking water, and number of malnourished children Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Characteristics of Poverty Groups Rural population Women and children Ethnic minorities and indigenous population Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Poverty: Rural vs. Urban Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Indigenous Poverty in Latin America Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Policies of Income Distribution Remove factor price distortions: Get factor prices right! Land redistribution and supportive farm services Income redistribution Progressive taxation Transfer payments Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Policies to Reduce Poverty Invest in human and social capital of the poor Provision of public goods and social services Reduce concentration of economic and political power Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Appendix 5.1: Appropriate Technology and Employment Generation Choice of techniques Factor price distortions and appropriate technology Possibilities of labor-capital substitution Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Choice of Techniques: The Price Incentive Model Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Ahluwalia-Chenery Welfare Index Constructing poverty-weighted index of social welfare Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Income Distribution and Growth Copyright © 2009 Pearson Addison-Wesley. All rights reserved.