Poverty, Inequality & Development

Poverty, Inequality & Development Problems & Policies

Measuring Poverty • Topics Covered: – Size Distribution – Lorenz Curve – Gini Coefficient – Functional Distribution

Absolute Poverty • People who are unable to fulfill basic needs • Measured by the number of “Headcount”, i.e. people below the Poverty Line. – Poverty Line --- minimum level to income (people living on < $1 per day)

Headcount Index • Headcount index depends on – H --- number of People below Poverty Line, Yp – Total Population --- N

Headcount Index = H/N

Annaul Income

Annual Income

V

% of population

V = Poverty Line Yellow Area = Poverty Gap

V

% of population

• Thus, Total Poverty Gap (TGP) is simply, H

TGP =

 (Y i 1

p

 Yi )

• Average Poverty Gap (APG) is APG = TPG/H

Foster- Greer- Thorbecke Measure • Degree of inequality • Desirable poverty measure must have: – Anonymity ( privacy) – Population independence (large vs small population) – Monotonicity (if one person’s income increased below PL, others being same, poverty can be no higher than it was) – Distribution sensitivity principle ( income transfer from poor to rich --- economy is strictly poor )

• Headcount index only satisfies first three • This index satisfies all four

H

P 

(Y  1 i 1

N

p

Yp

 Yi )

Human Poverty Index • UNDP • It looks at; –Life expectancy –Basic education –Overall economic provisioning

What is so Bad about Inequality??? 1. Leads to economic inefficiency – Any given average income --- less people qualify for loans --- less growth for them -- less educated, less skilled --- labour inefficiency – Rich spend more on imported items, thus domestic production is affected. Poor spend on domestic goods but devoid of means.

2. Inefficient allocation of assets – Overemphasis on higher education at the cost of quality primary education --more inequality – Efficient scale for farming is medium scale--- small farms owned by large families (unable to support them) --large farms by small families --inefficiency

3. Inequality among those above the poverty line – Extreme poverties --- social instability, lack of solidarity. – High inequality strengthen political and bargaining power of rich--- resource misuse due to rent seeking behaviour

4. Extreme inequality is viewed as unfair

Growth Typologies 1. Modern Sector Enlargement Absolute incomes rise, absolute poverty is reduced, but Lorenz curve crosses so ambiguous affect

2. Modern Sector Enrichment Higher income, less equal relative distribution of income, no change in poverty

3. Traditional Sector Enrichment Higher income, more equal relative distribution of income and less poverty.

Economic Characteristics of Poverty Groups • Rural Poverty – Agrarian background – Subsistence farming – Low paid farm workers – Petty services – In Africa and Asia 80% of all target poverty groups are located in rural areas

• Women – More poor – More malnourished – Less likely to get medical services, clean water, sanitation, other benefits – Lower earning capacity – Limited control over their households – Less access to education, formal sector employment, social security and govt employment programs

• Ethnic minorities & Indigenous populations – Economic, political and social discrimination

Policy Options • Altering functional distribution on income through policies designed to change relative factor prices – Raise minimum wage. – Capital P??? Generally set lower, thus K is preferred to L. – If subsidies on K removed, utilization of L will improve. – Thus factor price distortions---combine growth, efficiency, high employment, less poverty & greater equality

• Modifying size distribution through progressive redistribution of asset ownership – Break concentration of assets – Land reforms – Redistribution policies – Assets will also include education and skills as productive assets

• Reducing the size distribution at the upper levels through progressive income and wealth taxes – Direct and indirect taxes on the rich

• Direct transfer payments and the public provision of goods and services – Tax financed public consumption g&s – Public consumption subsidies – Workfare programs • Pay in-kind basic food stuff