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Copyright © 2006 Pearson Addison-Wesley. All rights reserved.
Chapter 5
Poverty, Inequality, and Development
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The Growth Controversy: Seven Critical Questions
What is the extent of relative inequality, and how is this related to the extent of poverty?
Who are the poor? Who benefits from economic growth? Does rapid growth necessarily cause
greater income inequality? Do the poor benefit from growth?
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The Growth Controversy: Seven Critical Questions
Are high levels of inequality always bad? What policies can reduce poverty?
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Measuring Inequality and Poverty
Measuring Inequality– Size distributions
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Table 5.1
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Measuring Inequality and Poverty
Measuring Inequality– size distributions– Lorenz curves
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Figure 5.1
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Figure 5.2
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Measuring Inequality and Poverty
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)
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Figure 5.3
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Figure 5.4
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Measuring Inequality and Poverty
Measuring Inequality– Size distributions– Lorenz curves– Gini coefficients and aggregate measures of
inequality– Functional distributions (see Figure 5.5)
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Figure 5.5
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Measuring Inequality and Poverty
Measuring Absolute Poverty– Headcount Index– Total poverty gap
– Where Yp is the absolute poverty line
– Yi is income of person i
TPG Y Yp ii
H
( )1
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Measuring Inequality and Poverty
Measuring Absolute Poverty– Average poverty gap
– Where H is number of persons– TPG is total poverty gap
APGTPG
H
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Figure 5.6
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Measuring Inequality and Poverty
Measuring Absolute Poverty– Foster-Greer-Thorbecke measure
Pn
Y Y
Y
p ii
H
p
1 1
( )
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Measuring Inequality and Poverty:
Measuring Absolute Poverty– Total poverty gap– Average poverty gap– Foster-Greer-Thorbecke measure– The Human Poverty Index
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Poverty, Inequality, and Social Welfare
What’s so bad about inequality?
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What is so bad about inequality?
Inequality creates inefficiency:– Due to market imperfections– Due to increased conflict
Inequality is unjust
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Inequality and Growth: Causal Mechanisms
Inequality Lower investment by the poor slow growth Lower education (credit market private,
political process public) slow growth Increased property crime slow growth Political Instability insecure Property Rights
slow growth Difficulty of consensus political inflexibility
slow growth
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Poverty, Inequality, and Social Welfare
What’s so bad about inequality? Kuznets’s inverted-U hypothesis (see Figure
5.10 and Tables 5.2 and 5.3) and recent evidence
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Figure 5.10
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Table 5.2
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Table 5.3
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Figure 5.11
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Figure 5.12
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Inequality and Growth: Evidence
Source: Birdsall and Londoño (1997)
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Poverty, Inequality, and Social Welfare
What’s so bad about inequality? Kuznets’s inverted-U hypothesis (see Figure 5.10
and Tables 5.2 and 5.3) and recent evidence 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)
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Poverty, Inequality, and Social Welfare
What’s so bad about inequality? Kuznets’s inverted-U hypothesis Dualistic development and shifting Lorenz
curves: some stylized typologies Types of Growth and inequality (see Figure
5.13)
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Figure 5.7
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Figure 5.8
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Figure 5.9
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Figure 5.13
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Absolute Poverty: Extent and Magnitude
Poverty: some progress
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Figure 5.14
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Figure 5.15
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Figure 5.16
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Table 5.4
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Table 5.4 (cont’d)
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Table 5.4 (cont’d)
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Absolute Poverty: Extent and Magnitude
Poverty: some progress Growth and poverty (see Figures 5.17a and
5.17b)
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Figure 5.17 (a)
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Figure 5.17 (b)
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Economic Characteristics of Poverty Groups
Rural Poverty (see Table 5.5)
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Table 5.5
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Economic Characteristics of Poverty Groups
Rural poverty Women and poverty Ethnic minorities, indigenous populations,
and poverty
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Table 5.6
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The Range of Policy Options: Some Basic Considerations
Areas of intervention Policy options
– Changing relative factor prices– Progressive redistribution of asset ownership– Progressive taxation– Transfer payments and public provision of
goods and services
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Figure 5.18
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The Range of Policy Options: Some Basic Considerations
Areas of intervention Policy options the need for a ‘package’ of policies
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Concepts for Review
Absolute poverty Asset ownership Character of economic
growth Deciles Disposable income Elasticity of factor
substitution
Factor-price distortions Factor share
distribution of income Factors of production Foster-Greer-
Thorbecke (FGT) index Functional distribution
of income
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Concepts for Review (cont’d)
Gini coefficient Headcount index Human Poverty Index Income inequality Indirect taxes Kuznets curve Land reform
Lorenz curve Neoclassical price-
incentive model Personal distribution of
income Poverty gap Progressive income
tax
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Concepts for Review (cont’d)
Public consumption Quintiles Redistribution policies Regressive tax
Size distribution of income
Subsidy Workfare programs
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Figure A5.1
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Table A5.2
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