1. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Chapter 5 Poverty, Inequality, and Development

2. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-2 The Growth Controversy: Seven Critical Questions n What is the extent of relative inequality, and how is this related to the extent of poverty? n Who are the poor? n Who benefits from economic growth? n Does rapid growth necessarily cause greater income inequality? n Do the poor benefit from growth?

3. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-3 The Growth Controversy: Seven Critical Questions n Are high levels of inequality always bad? n What policies can reduce poverty?

4. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-4 Measuring Inequality and Poverty n Measuring Inequality –Size distributions

5. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-5 Table 5.1

6. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-6 Measuring Inequality and Poverty n Measuring Inequality –size distributions –Lorenz curves

7. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-7 Figure 5.1

8. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-8 Figure 5.2

9. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-9 Measuring Inequality and Poverty n Measuring Inequality –Size distributions (see Table 5.1) –Lorenz curves (see Figures 5.1 and 5.2) –Gini coefficients and aggregate measures of inequality (see Figures 5.3 and 5.4)

10. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-10 Figure 5.3

11. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-11 Figure 5.4

12. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-12 Measuring Inequality and Poverty n Measuring Inequality –Size distributions –Lorenz curves –Gini coefficients and aggregate measures of inequality –Functional distributions (see Figure 5.5)

13. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-13 Figure 5.5

14. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-14 Measuring Inequality and Poverty n Measuring Absolute Poverty –Headcount Index –Total poverty gap –WhereY p is the absolute poverty line –Y i is income of person i

15. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-15 Measuring Inequality and Poverty n Measuring Absolute Poverty –Average poverty gap –WhereH is number of persons –TPG is total poverty gap

16. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-16 Figure 5.6

17. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-17 Measuring Inequality and Poverty n Measuring Absolute Poverty –Foster-Greer-Thorbecke measure

18. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-18 Measuring Inequality and Poverty: n Measuring Absolute Poverty –Total poverty gap –Average poverty gap –Foster-Greer-Thorbecke measure –The Human Poverty Index

19. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-19 Poverty, Inequality, and Social Welfare n What’s so bad about inequality?

20. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-20 What is so bad about inequality? n Inequality creates inefficiency: –Due to market imperfections –Due to increased conflict n Inequality is unjust

21. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-21 Inequality and Growth: Causal Mechanisms n Inequality  n Lower investment by the poor  slow growth n Lower education (credit market  private, political process  public)  slow growth n Increased property crime  slow growth n Political Instability  insecure Property Rights  slow growth n Difficulty of consensus  political inflexibility  slow growth

22. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-22 Poverty, Inequality, and Social Welfare n What’s so bad about inequality? n Kuznets’s inverted-U hypothesis (see Figure 5.10 and Tables 5.2 and 5.3) and recent evidence

23. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-23 Figure 5.10

24. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-24 Table 5.2

25. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-25 Table 5.3

26. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-26 Figure 5.11

27. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-27 Figure 5.12

28. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-28 Inequality and Growth: Evidence Source: Birdsall and Londoño (1997)

29. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-29

30. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-30 Poverty, Inequality, and Social Welfare n What’s so bad about inequality? n Kuznets’s inverted-U hypothesis (see Figure 5.10 and Tables 5.2 and 5.3) and recent evidence n Dualistic development and shifting Lorenz curves: some stylized typologies –Traditional sector enrichment (see Figure 5.7) –Modern sector enrichment (see Figure 5.8) –Modern sector enlargement (see Figure 5.9)

31. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-31 Poverty, Inequality, and Social Welfare n What’s so bad about inequality? n Kuznets’s inverted-U hypothesis n Dualistic development and shifting Lorenz curves: some stylized typologies n Types of Growth and inequality (see Figure 5.13)

32. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-32 Figure 5.7

33. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-33 Figure 5.8

34. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-34 Figure 5.9

35. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-35 Figure 5.13

36. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-36 Absolute Poverty: Extent and Magnitude n Poverty: some progress

37. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-37 Figure 5.14

38. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-38 Figure 5.15

39. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-39 Figure 5.16

40. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-40 Table 5.4

41. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-41 Table 5.4 (cont’d)

42. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-42 Table 5.4 (cont’d)

43. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-43 Absolute Poverty: Extent and Magnitude n Poverty: some progress n Growth and poverty (see Figures 5.17a and 5.17b)

44. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-44 Figure 5.17 (a)

45. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-45 Figure 5.17 (b)

46. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-46 Economic Characteristics of Poverty Groups n Rural Poverty (see Table 5.5)

47. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-47 Table 5.5

48. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-48 Economic Characteristics of Poverty Groups n Rural poverty n Women and poverty n Ethnic minorities, indigenous populations, and poverty

49. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-49 Table 5.6

50. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-50 The Range of Policy Options: Some Basic Considerations n Areas of intervention n Policy options –Changing relative factor prices –Progressive redistribution of asset ownership –Progressive taxation –Transfer payments and public provision of goods and services

51. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-51 Figure 5.18

52. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-52 The Range of Policy Options: Some Basic Considerations n Areas of intervention n Policy options n the need for a ‘package’ of policies

53. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-53 Concepts for Review n Absolute poverty n Asset ownership n Character of economic growth n Deciles n Disposable income n Elasticity of factor substitution n Factor-price distortions n Factor share distribution of income n Factors of production n Foster-Greer- Thorbecke (FGT) index n Functional distribution of income

54. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-54 Concepts for Review (cont’d) n Gini coefficient n Headcount index n Human Poverty Index n Income inequality n Indirect taxes n Kuznets curve n Land reform n Lorenz curve n Neoclassical price- incentive model n Personal distribution of income n Poverty gap n Progressive income tax

55. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-55 Concepts for Review (cont’d) n Public consumption n Quintiles n Redistribution policies n Regressive tax n Size distribution of income n Subsidy n Workfare programs

56. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-56 Figure A5.1

57. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5-57 Table A5.2