Poverty,
Inequality, and
Development
Outline:
1. Measuring Inequality
2. Measuring Absolute Poverty
3. Poverty, Inequality, and Social Welfare
4. Growth and Inequality
5. Absolute Poverty: Extent and Magnitude
6. Policy Options on Income Inequality and Poverty: Some Basic Considerations
Measuring Inequality
Economists usually distinguish
between two principal measures of
income distribution for both analytical
and quantitative purposes: the
personal or size distribution of income
and the functional or distributive factor
share distribution of income.
Size Distributions
The personal or size distribution of income is the measure most used by
economists. It simply deals with individual persons or households and
the total incomes they receive.
Lorenz Curves
The Lorenz curve is a graphical
representation of income inequality or
wealth inequality developed by
American economist Max Lorenz in
1905.
The graph plots percentiles of the
population on the horizontal axis
according to income or wealth.
Gini Coefficients and Aggregate
Measures of Inequality
This is an aggregate numerical measure of
income inequality ranging from 0 (perfect
equality) to 1 (perfect inequality).
It is measured graphically by dividing the
area between the perfect equality line and
the Lorenz curves by the total area lying to
the right of the equality line in a Lorenz
diagram.
Functional Distributions
The functional distribution of income refers to the amounts of income paid
to various individuals or households. A single individual may receive income
from more than one factor of production or from one source.
Measuring Absolute Poverty
Absolute poverty is the situation of being unable or only barely able to meet
the subsistence essentials of food, clothing, and shelter.
Poverty gap is a ratio showing the average shortfall of the total population
from the poverty line—the minimum level of income required to secure the
necessities for survival. In other words, it reflects the intensity of poverty in
a nation.
The Poverty Gap Index
The poverty gap statistic is most valuable to economists and government
officials for calculating the poverty gap index. The index, also produced by
the World Bank, takes the mean shortfall from the poverty line and divides
it by the value of the poverty line.
Poverty,
Inequality, and
Social Welfare
What’s So Bad about Extreme
Inequality?
No civilized people can feel satisfied with a situation in which their
fellow humans exist in conditions of such absolute human misery
Contact your local animal shelter that may have food stored for times like
these.
Dualistic Development and Shifting Lorenz
Curves: Some Stylized Typologies
1. The modern-sector enlargement growth typology, in which the two-sector economy develops by
enlarging the size of its modern sector while maintaining constant wages in both sectors.
2. The modern-sector enrichment growth typology, in which the economy grows but such growth is
limited to a fixed number of people in the modern sector, with both the numbers of workers and
their wages held constant in the traditional sector.
3. The traditional-sector enrichment growth typology, in which all of the benefits of growth are divided
among traditional-sector workers, with little or no growth occurring in the modern sector.
Using these three special cases and Lorenz
curves, Fields demonstrated the validity of
the following propositions:
1. In the traditional-sector enrichment typology, growth results in higher income, a more equal relative
distribution of income, and less poverty. Traditional- sector enrichment growth causes the Lorenz
curve to shift uniformly upward and closer toward the line of equality.
Using these three special cases and Lorenz
curves, Fields demonstrated the validity of
the following propositions:
2. In the modern-sector enrichment growth typology, growth results in higher incomes, a less equal
relative distribution of income, and no change in poverty. Modern-sector enrichment growth causes the
Lorenz curve to shift downward and farther from the line of equality
Using these three special cases and Lorenz
curves, Fields demonstrated the validity of
the following propositions:
3. Finally, in the case of Lewis-type, modern-sector enlargement growth, absolute incomes rise and
absolute poverty is reduced, but the Lorenz curves will always cross, indicating that we cannot make
any unambiguous statement about changes in relative inequality: It may improve or worsen. Fields
shows that if, in fact, this style of growth experience is predominant, inequality is likely first to worsen in
the early stages of development and then to improve.
Kuznets’s Inverted-U
Hypothesis
According to the Kuznets’ Inverted U-
hypothesis, as per capita national income
of a country increases, in the initial stages
of growth, inequality in income distribution
rises and after reaching the highest degree
in the intermediate level the income
inequality falls.
Growth and
Inequality Note that they may feel disoriented too especially since
disaster can greatly affect their scent markers.
High levels of inequality reduce growth in relatively
poor countries but encourage growth in richer
countries, according to a recent paper by NBER
Research Associate Robert Barro. In Inequality,
Growth and Investment (NBER Working Paper
No.7038), Barro studies a broad panel of countries
between 1960 and1995 and finds that growth
tends to fall with greater inequality when income
per capita is less than $2,000 (in 1985 dollars) and
to rise with inequality when income per capita is
more than $2,000.D
Growth and
Inequality Note that they may feel disoriented too especially since
disaster can greatly affect their scent markers.
He therefore concludes that income-equalizing
policies might be justified on the grounds of
promoting growth in poor countries. For richer
countries, however, active income redistribution
appears to involve a trade-off between the benefits
of greater inequality and a reduction in overall
economic growth.
Absolute Poverty: Extent and Magnitude
The Multidimensional Poverty Index (MPI)
The MPI is the most prominent application of multidimensional poverty measurement; it
incorporates three dimensions at the household level: health, education, and wealth.
Multidimensional Poverty Index (MPI) is a poverty measure that identifies the poor using dual
cutoffs for levels and numbers of deprivations, and then multiplies the percentage of people living in
poverty times the percent of weighted indicators for which poor households are deprived on
average.
Growth and Poverty
Are the reduction of poverty and the acceleration of growth in conflict? Or are they complementary?
Traditionally, a body of opinion held that rapid growth is bad for the poor because they would be
bypassed and marginalized by the structural changes of modern growth. Beyond this, there had been
considerable concern in policy circles that the public expenditures required for the reduction of poverty
would entail a reduction in the rate of growth. The concerns that concentrated efforts to lower poverty
would slow the rate of growth paralleled the arguments that countries with lower inequality would
experience slower growth. If there were redistribution of income or assets from rich to poor, even
through progressive taxation, the concern was expressed that savings would fall.
Economic
Characteristics
of High-Poverty
Groups
Rural Poverty
Perhaps the most valid generalizations about the poor are that they are
disproportionately located in rural areas, that they are primarily engaged in
agricultural and associated activities, that they are more likely to be women and
children than adult males, and that they are often concentrated among minority
ethnic groups and indigenous peoples.
Women and Poverty
Women make up a substantial majority of the world’s poor. If we compared the lives of the inhabitants of
the poorest communities throughout the developing world, we would discover that virtually everywhere
women and children experience the harshest deprivation. They are more likely to be poor and
malnourished and less likely to receive medical services, clean water, sanitation, and other benefits.
Policy Options on
Income Inequality and
Poverty: Some Basic
Considerations
Areas of Intervention
1. Altering the functional 2. Mitigating the size distribution—the
distribution—the returns to labor, land, functional income distribution of an
and capital as determined by factor prices, economy translated into a size distribution
utilization levels, and the consequent by knowledge of how ownership and
shares of national income that accrue to control over productive assets and labor
the owners of each factor. skills are concentrated and distributed
throughout the population. The distribution
of these asset holdings and skill
endowments ultimately determines the
distribution of personal income.
Areas of Intervention
3. Moderating (reducing) the size 4. Moderating (increasing) the size
distribution at the upper levels through distribution at the lower levels through
progressive taxation of personal income public expenditures of tax revenues to
and wealth. raise the incomes of the poor either directly
(e.g., by conditional or unconditional cash
transfers) or indirectly(e.g., through public
employment creation such as local
infrastructure projects or the provision of
primary education and health care).
Progressive Income and Wealth Taxes
Any national policy attempting to improve the living
Altering the standards of the bottom 40% must secure sufficient financial
resources to transform paper plans into program realities.
Functional The major source of such development finance is the direct
and progressive taxation of both income and wealth.
Distribution of
Income through
Direct Transfer Payments and the Public Provision of Goods
Relative Factor and Services
The direct provision of tax-financed public consumption
Prices goods and services to the very poor is another potentially
important instrument of a comprehensive policy designed to
eradicate poverty.
Money, Morality and
What Religion Has
to Do With It
Do you have to believe in a higher power to be
good? Depends on who you ask (and where
they live).
