1. Poverty, Inequality, and Development
Chapter 5
Poverty, Inequality, and Development

2. 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
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3. Typical Size Distribution of Personal Income
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4. 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
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5. Lorenz Curve of Income Distribution
Data for the United States in 2000:
Quintile % Income % Cumulative Income
Lowest 20%
Second 20%
Third 20%
Fourth 20%
Richest 20%
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6. Lorenz Curve of Income Distribution
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7. Lorenz Curve of Income Distribution
The greater the curvature of the Lorenz Curve, the greater is the degree of income inequality
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8. Improved Income Distribution
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9. Worsened Income Distribution
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10. Crossing Lorenz Curves
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11. The Gini Coefficient
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12. 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
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13. The Gini Coefficient Income inequality had had a tendency to increase.
LDCs
Low income countries
Middle-income countries
The OPEC
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14. Income Distribution Measures
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15. Income Inequality
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16. 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
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17. Functional Income Distribution
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18. 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%
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19. 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)
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20. Measuring Total Poverty Gap
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21. 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
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22. The Kuznets Curve
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23. 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
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24. Kuznets Curve in Latin American
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25. Income Inequality Across Time
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26. Growth & Inequality,
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27. Change in Inequality with or without Growth
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28. Absolute Poverty International Poverty Line: $1 per day per person
The Headcount Ratio: The percentage of people living below the International Poverty Line
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29. Regional Poverty Incidence, 2004
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30. Poverty Incidence in Selected Countries
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31. Poverty Incidence in Selected Countries
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32. 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
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33. Characteristics of Poverty Groups
Rural population
Women and children
Ethnic minorities and indigenous population
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34. Poverty: Rural vs. Urban
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35. Indigenous Poverty in Latin America
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36. Policies of Income Distribution
Remove factor price distortions: Get factor prices right!
Land redistribution and supportive farm services
Income redistribution
Progressive taxation
Transfer payments
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37. 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
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38. Appendix 5.1: Appropriate Technology and Employment Generation
Choice of techniques
Factor price distortions and appropriate technology
Possibilities of labor-capital substitution
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39. Choice of Techniques: The Price Incentive Model
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40. Ahluwalia-Chenery Welfare Index
Constructing poverty-weighted index of social welfare
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41. Income Distribution and Growth
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