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Chapter 5
Poverty,Inequality, andDevelopment
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
The Growth Controversy:Seven Critical Questions
• What is the extent of relative inequality, andhow is this related to the extent of poverty?
• Who are the poor?
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• Who benefits from economic growth?
• Does rapid growth necessarily causegreater income inequality?
• Do the poor benefit from growth?
The Growth Controversy:Seven Critical Questions
• Are high levels of inequality always bad?
• What policies can reduce poverty?
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Measuring Inequality andPoverty
• Measuring Inequality
– Size distributions (quintiles, deciles)
– Lorenz curves
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– Gini coefficients
– Functional distributions
Table 5.1 Typical Size Distribution ofPersonal Income in a Developing Country byIncome Shares—Quintiles and Deciles
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Figure 5.2 The Greater the Curvature of theLorenz Line, the Greater the RelativeDegree of Inequality
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Figure 5.3 Estimating the GiniCoefficient
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Figure 5.4 Four Possible LorenzCurves
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Figure 5.5 Functional IncomeDistribution in a Market Economy: AnIllustration
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Measuring Inequality andPoverty
• Measuring Absolute Poverty
– Headcount Index
– Total poverty gap
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– WhereYp is the absolute poverty line
– Yi is income of person I
TPG Y Yp ii
H
( )1
Figure 5.6 Measuring the TotalPoverty Gap
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Measuring Inequality andPoverty
• Measuring Absolute Poverty
– Average poverty gap
TPG
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– WhereH is number of persons
– TPG is total poverty gap
APGTPG
H
Measuring Inequality andPoverty
• Measuring Absolute Poverty
– Foster-Greer-Thorbecke measure
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1
1 Hp i
i p
Y YP
N Y
Measuring Inequality andPoverty:
• Measuring Absolute Poverty
– The Human Poverty Index (HPI)
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Poverty, Inequality, and SocialWelfare
• What’s so bad about inequality?
• Dualistic development and shifting Lorenzcurves: some stylized typologies
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– Traditional sector enrichment (see Figure 5.7)
– Modern sector enrichment (see Figure 5.8)
– Modern sector enlargement (see Figure 5.9)
Figure 5.7 Improved IncomeDistribution under the Traditional-Sector Enrichment Growth Typology
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Figure 5.8 Worsened IncomeDistribution under the Modern-SectorEnrichment Growth Typology
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Figure 5.9 Crossing Lorenz Curves inthe Modern-Sector EnlargementGrowth Typology
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Poverty, Inequality, and SocialWelfare
• Kuznets’ inverted-U hypothesis
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Figure 5.10 The “Inverted-U”Kuznets Curve
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Table 5.2 Selected IncomeDistribution Estimate
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Table 5.3 Income and Inequality inSelected Countries
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Figure 5.11 Kuznets Curve withLatin American CountriesIdentified
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Figure 5.12 Plot of Inequality Datafor Selected Countries
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Poverty, Inequality, and SocialWelfare
• Growth and inequality
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Figure 5.13 Long-Term EconomicGrowth and Income Inequality, 1965-1996
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Figure 5.14 Change in Inequality inSelected Countries, with or withoutGrowth
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Absolute Poverty: Extent andMagnitude
• Extreme Poverty
– $1-a-day headcount shows some progress
– Incidence of extreme poverty is uneven
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Table 5.4 Regional PovertyIncidence, 2004
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Table 5.5 Poverty Incidence inSelected Countries
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Table 5.5 Poverty Incidence inSelected Countries (continued)
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Absolute Poverty: Extent andMagnitude
• Growth and poverty
– Impact on per capita growth
– Limited saving and investment by rich in poorcountries
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countries
– Impact on productivity
– Lack of home demand
– Incentives for public participation in thedevelopment process
Economic Characteristics ofPoverty Groups
• Rural Poverty
• Women and poverty (See chapter 8 formore detail)
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• Ethnic minorities, indigenous populations,and poverty
Table 5.6 Poverty: Rural versusUrban
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Table 5.7 Indigenous Poverty inLatin America
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The Range of Policy Options:Some Basic Considerations
• Areas of intervention
– Altering the functional distribution
– Mitigating the size distribution
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– Moderating (reducing) the size distribution atupper levels
– Moderating (increasing) the size distribution atlower levels
The Range of Policy Options:Some Basic Considerations
• Policy options
– Changing relative factor prices
– Progressive redistribution of asset ownership
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– Progressive taxation
– Transfer payments and public provision ofgoods and services
Summary and Conclusions: TheNeed for a Package of Policies
• Policies to correct factor price distortions
• Policies to change the distribution of assets,power, and access to education andassociated employment opportunities
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associated employment opportunities
• Policies of progressive taxation and directedtransfer payments
• Policies designed to build capabilities andhuman and social capital of the poor
Concepts for Review
• Absolute poverty
• Asset ownership
• Character of economicgrowth
• Factor-price distortions
• Factor sharedistribution of income
• Factors of production
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growth
• Deciles
• Disposable income
• Elasticity of factorsubstitution
• Factors of production
• Foster-Greer-Thorbecke (FGT)index
• Functional distributionof income
Concepts for Review (cont’d)
• Gini coefficient
• Headcount index
• Human Poverty Index
• Lorenz curve
• Neoclassical price-incentive model
• Personal distribution of
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• Income inequality
• Indirect taxes
• Kuznets curve
• Land reform
• Personal distribution ofincome
• Poverty gap
• Progressive incometax
Concepts for Review (cont’d)
• Public consumption
• Quintiles
• Redistribution policies
• Size distribution ofincome
• Subsidy
• Workfare programs
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• Regressive tax • Workfare programs
Appendix 5.1: Appropriate Technology andEmployment Generation: The PriceIncentive Model
• Choice of techniques
• Factor Price distortions and appropriatetechnology
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• Possibilities of Labor-Capital substitution
Figure A5.1.1 Choice of Techniques:The Price Incentive Model
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Appendix 5.2: The Ahluwalia-Chenery Welfare Index
• Constructing poverty-weighted index ofsocial welfare
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