Chapter 5

Report
Chapter 5
Poverty,
Inequality, and
Development
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Measuring Income Distribution
Relative Income Share:
• The ratio of the highest 20% to lowest
40% of the population
• The higher the ratio, the greater is
income inequality
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Typical Size Distribution of Personal Income
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Lorenz Curve of Income Distribution
• Depicting:
quintile percentage of population vs.
cumulative percentage of income received
• The closer the Lorenz curve to the line of
equality, the better is the size distribution of
income
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Lorenz Curve of Income Distribution
Data for the United States in 2000:
Quintile
% Income
% Cumulative Income
Lowest 20%
3.6
3.6
Second 20%
8.9
12.5
Third 20%
14.9
27.4
Fourth 20%
23.0
50.4
Richest 20%
49.6
100.0
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Lorenz Curve of Income Distribution
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Lorenz Curve of Income Distribution
The greater the curvature of the Lorenz Curve, the greater is the
degree of income inequality
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Improved Income Distribution
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Worsened Income Distribution
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Crossing Lorenz Curves
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The Gini Coefficient
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The Gini Coefficient
0 < The Gini Coefficient < 1
• 0.41 for U.S.
• 0.30 for Ethiopia
• 0.57 for Brazil
• Gini Coefficient is higher for the
OPEC and Middle-income countries
than Low-income countries
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The Gini Coefficient
Income inequality had had a tendency to
increase.
1960
1980
LDCs
0.544
0.602
Low income countries
0.407
0.450
Middle-income countries 0.603
0.569
The OPEC
0.575
0.612
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Income Distribution Measures
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Income Inequality
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Functional Income Distribution
• Assume a traditional economy in which
labor is the only variable input (capital and
land are fixed): Output = Wages + Profits
• Functional income distribution = Wages as a
percentage of Profits
• The higher the ratio, the greater is income
equality
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Functional Income Distribution
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Poverty Gap
Average percent of income shortfall below
the poverty line. Over 10.5% in LDCs
• Latin America & Caribbean: about 9%
• Middle East and North Africa: about 1%
• Sub-Saharan Africa: about 15%
• South Asia: 13%
• China, East Asia & Pacific: 8%
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Measuring Poverty Gap
• Poverty and income inequality depend on
type of economic, political and institutional
arrangements according to which rising
national incomes are distributed among
broad segments of a population
• A middle-income country may have a higher
poverty rate and poverty gap than a lowincome country (South Africa vs. Sri Lanka)
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Measuring Total Poverty Gap
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Growth and Distribution
The “Inverted-U” Kuznets Curve
• Income inequality increases during the early
stages of growth
• Income equality increases during a later
stage of growth with redistribution of income
and wealth
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The Kuznets Curve
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Evidence on Kuznets Curve
• Cross country evidence supports the
hypothesis
• Time series data show some countries
have been able to grow and improve
income distribution at the same time
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Kuznets Curve in Latin American
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Income Inequality Across Time
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Growth & Inequality, 1965-1996
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Change in Inequality
with or without Growth
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Absolute Poverty
• International Poverty Line: $1 per day per
person
• The Headcount Ratio: The percentage of
people living below the International Poverty
Line
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Regional Poverty Incidence, 2004
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Poverty Incidence in Selected Countries
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Poverty Incidence in Selected Countries
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Human Poverty Index
Human Poverty Index is measured in terms of
deprivation of
• Life: years of life expectancy
• Basic education: adult illiteracy
• Basic needs: lack of access to health services ,
access to safe drinking water, and number of
malnourished children
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Characteristics of Poverty Groups
• Rural population
• Women and children
• Ethnic minorities and indigenous population
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Poverty: Rural vs. Urban
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Indigenous Poverty in Latin America
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Policies of Income Distribution
• Remove factor price distortions: Get factor
prices right!
• Land redistribution and supportive farm
services
• Income redistribution
– Progressive taxation
– Transfer payments
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Policies to Reduce Poverty
• Invest in human and social capital of the poor
• Provision of public goods and social services
• Reduce concentration of economic and
political power
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Appendix 5.1:
Appropriate Technology and
Employment Generation
• Choice of techniques
• Factor price distortions and appropriate
technology
• Possibilities of labor-capital substitution
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Choice of Techniques:
The Price Incentive Model
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Ahluwalia-Chenery Welfare Index
• Constructing poverty-weighted index of
social welfare
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Income Distribution and Growth
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