Carleton UniversityIntroduction to Economic Development

January 31 and February 5, 2013

Poverty, Income Distribution and Development

(Text, Chapter 5)

Agenda1. Significance of Topic2. Concept and Measurement

Poverty MeasuresIncome Distribution Measures

3. Equity, Poverty and Well-Being4. Comments on Evidence re Poverty and Income

Distribution5. The Roots of Poverty and Income Mal-

distributionKuznet’s “Inverted U Hypothesis”

6. Policies for Pro-Poor Growth7. Millennium Development Goals

1. Significance of Topic Central development issue in Africa:

reduce poverty!

“Make poverty history!” Central focus of development efforts and of

this course The focus of the “Millennium Development

Goals”

Is Poverty a “bad thing”? Why? Amartya Sen’s concepts of capabilities and

choice Income and Basic Human Need Fulfillment

Income Distribution: Central to our ideas of fairness and justice

A more equitable income distribution is supportive of both Growth and Poverty Reduction

Growth generally reduces Poverty; But Growth is “Neutral” regarding the “fairness” of income distribution ……..

Unless major efforts are made to achieve distributional objectives simultaneously with growth,

2. Concept and MeasurementProblems of Measuring Real Incomes

Income or consumption?

Accurate Information: sources

Definition of income:Market generated Income? Or

Market generated Income + Transfers Or

Market generated Income + Transfers – Taxes? Or

Market Income + Transfers –Taxes + In-Kind Subsidies? Or

Market Income + Transfers –Taxes + In-Kind Subsidies + Publicly-provided Education + Health Services?

Market Income + Transfers –Taxes + In-Kind Subsidies + Education + Health + Home-Produced G $ S

Other complications: Home-produced G&S; Differing prices

Differing needs in different circumstances

A. Poverty Concepts and Measures1. The United Nations “Human Poverty

Index” (Used until 2010; now replaced by another measure)

Attempts to measure poverty with a composite index including:

1. Probability of not surviving to age 40;2. Adult illiteracy rate;3. Population without access to improved water source4. Underweight children under age five.

2. Arbitrary Income “Cut-Offs” or Measures e.g. population with real incomes (PPP)

below some threshold such as $US 1.00 or $2.00

A. Poverty Concepts and Measures, cont’d

3. Calculations of real income necessary to meet basic human needs (used in Latin America – ECLA - and national measures)

4. Canada: “LICO” or lower income cut-off, i.e. 50% of median income; (more a measure of distribution than of poverty)

5. Composite measures of Basic Need Fulfillment in real terms (access to water, literacy, child mortality, etc. (as in example in text)

6. The New UNDP “Multidimensional Poverty Index” (MPI)

• Identification of poverty status through a dual cutoff: • First, cutoff levels within each dimension (analogous

to falling below a poverty line for example $1.25 per day for income poverty);

• Second, cutoff in the number of dimensions in which a person must be deprived (below a line) to be deemed multidimensionally poor.

• MPI focuses on deprivations in health, education, and standard of living; and each receives equal (that is one-third of the overall total) weight.

MPI Indicators1. Health (1/3rd weight) - two indicators with equal weight –

• whether any child has died in the family, and

• whether any adult or child in the family is malnourished –weighted equally (each counts as one-sixth weight toward the maximum deprivation in the MPI)

2. Education (1/3rd) - two indicators with equal weight (1/6th each) –

1. whether no household member completed 5 years of schooling, and

2. whether any school-aged child is out of school for grades 1 through 8 (each counts one-sixth toward the MPI).

3. Living Standards (1/3rd) : measured as an average of six deprivations (1/18th each): safe water, electricity, sanitation, flooring, improved cooking fuel, and possession of at least two of telephone,

bicycle, radio, TV, motorbike or car

Computing the MPIThe MPI for the country (or region or group) is then

computed

• A convenient way to express the resulting value is

H*A, so that MPI = H*Ai.e., The product of the headcount ratio “H” (the percent of people

living in multidimensional poverty), and the average intensity of deprivation “A” (the percent of weighted indicators for which poor households are deprived on average).

• The adjusted headcount ratio HA is readily calculated

HA satisfies some desirable properties. Important example:

Dimensional monotonicity: If a person already identified as poor becomes deprived in another indicator she is measured as even poorer - not the case using a simple headcount ratio.

Multi-dimensional Poverty Indices for some Countries

CountryMPI

2000-2008MPI

Head-count, % of Total Population

Population below Poverty

Line$1.25 PPP per person

per day

Czech Rep. 0.000 0.0 0.0

China 0.056 12.5 15.9

Kenya 0.302 60.4 19.7

Ghana 0.140 30.1 30.0

Nigeria 0.582 63.5 43.4

Tanzania 0.367 65.3 88.5

Zambia 0.325 63.7 64.3

Ethiopia 0.582 90.9 39.0

Liberia 0.482 83.9 83.7

Niger 0.642 92.7 65.7

7. Measuring Poverty

Measuring Absolute Poverty– Headcount Index: H/N

Where H is the number of persons who are poor and N is the total number of people in the economy

– Total Poverty Gap:

Where Yp is the absolute poverty line; and Yi the income of the ith poor person

TPG (Yp Yi)i1

H

Measuring the Total Poverty Gap

MPI Rankings and Poverty Headcounts for Selected Countries

Other Poverty Measures for Some African Countries, 2005

Country & Country & HDI RankHDI Rank

Human Poverty Index Human Poverty Index (pre-2009) (UNDP) (pre-2009) (UNDP)

Per CentPer Cent

GDPpc (PPP)GDPpc (PPP)$US$US

Population below Population below US$1.00 per day, US$1.00 per day,

Per CentPer Cent

65. Mauritius 11.4 12,715 11.9

121. South Africa 23.5 11,110 10.5

135. Ghana 32.3 2,480 44.8

148. Kenya 30.8 1,240 22.8

151. Zimbabwe 40.3 2.038 56.1

154. Uganda 34.7 1,454 11,9

158. Nigeria 37.3 1.128 70.8

159. Tanzania 32.5 744 57.8

169. Ethiopia 54.9 1,055 23.0

177. Sierra Leone 51.7 806 57.0

81. China 11,7 7,100 9.9

Source: UNDP. Human Development Report, 2007/2008

Human Development Indices, Africa, 1975-2005

Country 1974 1985 1995 2005Mauritius na .692 .751 .804

South Africa

.650 .690 .745 .674

Ghana .442 .482 .542 .553

Kenya .466 .534 .544 .521

Zimbabwe .550 .615 .613 .513

Uganda na .420 .433 .545

Nigeria .321 .391 .432 .470

Tanzania na na .419 .467

Ethiopia na .311 .347 .406

China .530 ,595 .691 .777Source: UNDP. Human Development Report, 2007/2008

Income Distribution and Well-Being

Income distribution and poverty: the differences

The Broad-Based Sense of “Fairness”– Religious Basis

– Design of Human Institutions

• The Law;

• United Nations

• Welfare states & income taxation

• Democracy and human rights

• Development assistance

– Economistic “Games” showing that generally people prefer Fairness

Income Distribution: Central to our ideas of fairness and justice

A more equitable income distribution is supportive of both Growth and Poverty Reduction

Growth generally reduces Poverty; But Growth may be “Neutral” regarding income distribution

(Unless major efforts are made to achieve distributional objectives simultaneously with growth)

Incentives and Income Distribution

Vote !!

Perceptions of Individual Well-Being and HappinessLiberia Kenya USA Canada

Overall Life SatisfactionMin 0 to 10 Max 3.4 3.7 7.5 8.0

Satisfaction with Standard of Living (%) 46 25 75 87

Happiness: Purposeful Life 100 98 95 91

Happiness:Treated with Respect 82 78 94 93

Negative Life Experience 17 19 28 25

Source: UNDP Human Development Report 2010

Income Distribution Concepts and Measures

1. Income shares of groups in the population (quintiles or deciles)

2. Ratios of shares,

e.g. income share of top 10% / income share of poorest 10%

3. Lorenz Curve (See text, pp37-41)

4. Gini Coefficient (in class)

Figure 5.2 The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of Inequality

Figure 5.3 Estimating the Gini Coefficient

4. Evidence re Income Distribution

Some International Comparisons

Income Distribution Measures for Some African Countries

Country Gini Coefficient

Income Share of Richest 20%

Poorest 20 %

Income Share of Poorest

20%

Income Share of Richest

20%

S. Africa .578 17.0 3.5% 62.2

Ghana .408 8.4 5.6 46.6

Kenya .425 8,2 6.0 49.1

Zimbabwe .501 12.0 4.6 55.7

Uganda .357 9.2 5.7 52.5

Nigeria .429 9.1 5.1 48.6

Tanzania .346 5.8 7.3 42.4

Ethiopia .399 4.3 9.1 39.4

Sierra Leone .629 57.6 1.1 63.4

China .570 12.2 4,3 51.9Source: UNDP. Human Development Report, 2007/2008

“Who are the ‘Poor’ ”?Domestic Aspects

– Rural character– Regional dimension– Gender & children– Indigenous dimension– Some may be subject to disabilities

Characteristics of the poor:– Assets; – Human capital (education, health); – Income vulnerability– Weak access to public services, – Environmentally hostile environments, – Lack of supportive networks

5. The Roots of Income Mal-distribution and Poverty

5. The Roots of Income Mal-distribution and Poverty

1. Historical Inheritance and its Momentum:

Pre-Colonial Social Structures: Significant levels of equality in some pre-colonial

eras; High equality for “hunting and gathering”

peoples High inequality in some more complex societies

(e.g. caste system in India)

B.Impacts of ColonialismUnequal property rights and institutions

imposed by colonial powers: Note Latin America and Caribbean

Imperial country living standards for colonizers; traditional levels for Africans

Public services directed at settler peoples, not indigenous peoples

Colonial hierarchies: Social stratification based on Race and Ethnicity

2. Political Factors:Disproportionate power and influence of elites and

moneyed interests (e.g. property, gender, and literacy qualifications to the vote until recently)

Result: – Public Policy has often been shaped in their

interestsThus:

– “Urban bias” – “Upper and middle income class bias” and – “Modern sector bias” in public policy

3. The Nature of the “Modernization” Process:

Does a “Rising Tide Lift all Boats”?Would you expect that a process of

modernization / development would improve everyone’s living standards simultaneously?

What forces generate “Inequities”? “Equities”?

Note the Latin American

Effect

3. The Nature of the “Modernization” process: Forces Generating Inequalities“Scarce capital” generates high returns for

its owners;Scarce skilled labour generates higher

incomes for those with crucial skills;Abundant unskilled labour generates low

wages and incomes;

3. The Nature of the “Modernization” process: Forces Generating Inequalities, cont’dInternational technological transfer: much

recent vintage technology is “labour-saving,” thereby reducing the demand for labour and thus wages and incomes.

“Backwash Effects” of “modernization” and tech. change

Uneven access to opportunities

• Prior Elites;

• Regional Advantages;

• Personal Advantages

3. continued: The Nature of the “Modernization” Process: Forces Generating Greater Equalities

The exhaustion of surplus labour in agriculture and the informal economy?

Increasing productivity generally promotes rising incomes in supporting service-type activities

Broadening Tax Base permits social programs & welfare state type programs

Broadening human development (education health etc.) broadens earning capabilities

Regional and rural-urban spread effects • rising demand for goods and services from

elsewhere; • linkage effects

Emphasis on Human

Development

South Korea: Causal Factors Shaping Income Distribution and Growth

Successful Export

Promotion

GoodMacroeconomic

Management

Good Private-Public

Gov’t Market Mix

Land Reform Coops;

Well Qualified Labour Force

Population Deceleration

Lower LF Growth Rate

Rapid Job Creation

Egalitarian Urban Income Distribution

Rural-Urban Equity

Egalitarian Rural Distribution;

Income Growth

Rural UrbanBalance

Agricultural Expansion

Rapid Growth of Manufacturing

Rapid Growth, Distributional Equity, Poverty Reduction[HDI: # 15 in world; 1970: .707; 2005 .901; Gini: 0.316; Growth pc, 1975-03: 6.1% pa]

Price Policy

Activist and Expanding Social Policies

Increasing Taxes

Empirical Validity of Kuznets” Hypothesis?

Which effects predominate?

Kuznets Curve with Latin American Countries Identified

Note the Latin American

Effect

Empirical Validity of Kuznets” Hypothesis?

Which effects predominate?

– Debatable;– Latin American effect in Kuznets “U”– Positives and negatives simultaneously;– Other factors operate– Ultimately “Public Policy” is paramount

4. Nature of Development Strategies (and Theorizing):

Early Theorizing: • Capital-Centered theories, • Dualistic Development Models (W.A. Lewis) • The Soviet Model, • Prebisch - UN ECLAC) • W. W. Rostow ………….

All emphasized Growth first; income distribution later;

• Investment in the Modern Sector, esp. Industry;

• Import-substituting industrialization;• Investment in physical capital• De-emphasize traditional economy and

informal sector

5. “Neo-Liberal” or “Washington Consensus” approach focused on growth first.

• Escape from hyper-inflation, macro-economic and external sector unsustainability and debt, led to “structural adjustment” programs

• which often generated “short-term pain” hopefully but not always for “long term gain”

6. Demographic and Sociological Factors: “The Poor Have More Children:” large family size

among the poor • reduces family investment per child and • reduces possible inheritances per child vis-à-vis

the rich; Labour force participation for poor women is low vis-à-

vis rich women;

• Higher female labour force participation rates for better-off women raise family incomes for better-off groups.

The rural poor sometimes have little alternative to damaging their own environment, often resulting in worsening future poverty.

7. “Market Power”– Concentrated ownership patterns

– Monopoly and oligopoly power of enterprise and individuals

– The power of professional associations, unions and organized groups

– Political power determining income patterns

8. International Factors

– Multinational Enterprise: islands of modernity and higher incomes

– Technological Transfer of modern capital-intensive machinery and equipment higher incomes for some

– Internationally transferable skills help generate international income levels for some, while the unskilled remain with low incomes.

6. Policies for Pro-Poor GrowthPossible Approaches and Components of Poverty

Reduction and Equity-Oriented Programs

1. Achieve Sustained Economic GrowthExceeding population growth rates;• Permitting rising levels of personal or family

income and tax revenues;• Permitting significant levels of domestic &

national savings

[Note: this is a necessary but insufficient condition for enduring reductions in poverty]

2. Strive for “Equity with Growth”

– Make the growth process compatible with equity, that is poverty reduction, improved income distribution and human development for low income groups

– Focus sharply on the poorest.

– HOW?

3. Emphasize Public Investment in Human Development– Fairly Allocated– Education, Health, Nutrition, Clean Water,

Sanitation, – Family Planning– Build the capabilities of the state to provide

necessary public goods • [i.e. effective and efficient Tax Administration

– Plus effective and incorruptible public administration.]

4. Increase Demand for the abundant resource of the poor, namely labour, [i.e. rapid job creation]

[Now difficult due to China’s manufacturing dominance due to cheap labour, mega-economies of large scale, undervalued exchange rate]

Improve the appropriateness of technology? At an Appropriate Time, Switch from Import

Substituting Industrialization to Job-creating Export Promotion

Promote labour intensive public works and infrastructure, especially that serving the needs of the poor;

Don’t subsidize the use of capital• Making capital artificially cheap increases the

use of capital and the “capital intensity of production processes at the expense of labour

• Avoid – Investment incentives

– Tax credits,

– Subsidized interest rates

– Tariff advantages for capital goods imports

– Overvalued exchange rates for capital goods imports

5. Invest in the Physical Assets of the Poor Support the “Informal Sector” [in various ways;]

– Note the role of “Micro-credit” Support Urban Development for low income

neighbourhoods [water, sanitation, sidewalks, streets, electricity, security, etc.]

Support Agriculture and Rural Development, focusing on low income rural peoples

– Rural roads; water & sanitation; drainage & irrigation; garbage collection, law and order, electrification in time

Avoid hyper-concentrated urbanization and “First City” Bias

Promote Agriculture & Rural Development

Regional Development;

6. Redistributive Taxation

Progressive income taxes;

Wealth taxes

Note the importance of Tax Administration

7. Redistribute Assets Land Reform of various sorts; Democratic ownership patterns;

• Cooperative Property forms• Taxation towards equity• Favour small & local enterprise?• Democratization of private ownership

Support Territorial Claims of Indigenous Peoples;

8. Construct Safety Nets and Transfers as possible [for middle income countries] Target the neediest groups; “Workfare” programs Support Human development –

promoting activities [e.g. as in Brazil under Lula, financial support

for the poorest families that keep their children in school;

or as in Chile, where school lunches programs are provided in low income neighbourhoods]