Chapter 6: Inequality & Poverty Measuring Inequality

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Chapter 6:Inequality & Poverty

  • 1.Measuring Inequality

  • Patterns of Inequality

    • Growth and Inequality
    • What Else Might Cause Inequality?
  • Why Inequality Matters

  • Measuring Poverty

    • Poverty Lines
    • $1 a Day
  • How Much Poverty Is There?

    • Dissenting Opinions on the Extent of Absolute Poverty
    • Who Are the Poor?
    • Are Women Poorer than Men?
  • Strategies to Reduce Poverty

    • “Growth is Good for the Poor”
    • Sometimes Growth May Not Be Enough
    • Pro-Poor Growth is needed
    • The Washington Consensus and the Poor
    • Improving Opportunities for the Poor
    • Income Transfers and Safety Nets
  • Global Inequality and “the End of Poverty”

Chapter 6: Learning Objectives

  • After reading the chapter, you ought to understand and be able to explain:

  • Why rising per capita income is necessary but not sufficient for broadly reducing poverty and improving human welfare.

  • The distinction between income inequality and poverty.

  • The use of the head-count ratio and poverty gap to measure poverty.

  • The use of the Lorenz curve, the Gini concentration ratio, and frequency distributions to measure the size distribution of income.

  • Kuznets’s inverted-U hypothesis describing changes in income inequality in the process of economic development.

  • How empirical evidence provides only weak support for Kuznets’s hypothesis while strongly confirming the link between economic growth and poverty.

  • The geography of world poverty, especially the concentration of poverty in rural areas.

  • Development and Human Welfare: Which policy approaches are most promising for achieving equitable growth.

1. Measuring Inequality

  • Both growth and inequality affect poverty

  • Simple way of measuring distribution is using frequency distribution as shown in figure 6.1 for 3 countries: Bangladesh, Mexico & USA

  • Income inequality can be measured by quintiles or shares of income orconsumption (micro-level): Table 6.1

1.Measuring inequality cont.

  • We can get a measure of relative inequality in general by looking at table on comparative share of income or consumption of the three countries. Range=Top 20%/Bottom 20%

  • Range in Bangladesh = 41/9= 4.5

  • Range in Mexico= 53.7/3.5=15.3

  • Range in USA = 59.8/3.4= 17.6

  • USA has most unequal income. Bangladesh least unequal based on range: simple measure of variance.

Simple calculation of Inequality using Range: Top 20%/bottom 20%

  • Based on Table 6.1

  • Range in Bangladesh = 41/9= 4.5

  • Range in Mexico= 53.7/3.5=15.3

  • Range in USA = 59.8/3.4= 17.6

  • USA has most unequal income and Bangladesh least unequal.

Some Observations from 3 countries

  • Bangladesh, Mexico &USA show similar lognormal distribution with flat tail to the right.

  • While these distributions are similar in in terms of frequency distribution shapes, they are not identical.

  • The degree of inequality or varies among the three nations.

2.Measuring Inequality: Lorenz Curve & Gini Coefficient Ratio (GCR)

  • Gini Coefficient relates cumulative % of income recipients (persons) to cumulative % of consumption or income received

  • GCR= (A) /(A+B) where A= area of inequality

  • 0

  • If GCR = 1 ( Perfect inequality)

  • See Figure 6.2 on the Lorenz Curve

2.Patterns of Inequality

  • Three categories of inequality

  • Low: GCR<0.4

  • Medium: GCR (0.4-0.5)

  • High (GCR> 0.5)

  • See Table 6.2 for GCRs by country and region. Which are low, high, and medium country African countries?

Measuring Poverty

    • Poverty Lines ($1/day) : The Global Poverty line is $1 per day according to WDR 1990
    • WDR estimated in 1990 about 1.12billio or 1/3 of the world population in absolute poverty
    • 36% of Bangladeshi live below poverty line
    • Methods of measuring Poverty
    • Headcount Index: # of people below poverty line
    • Poverty Gap: How many people fall below poverty line and how far they are from the line

Measuring Poverty

  • The Poverty Gap (PG)= (PL-MC)/PL)xHI

  • PL=Poverty line, MC=mean consumption per capita for individuals below poverty line

  • HI= Head Count Index

  • The PG measures how much income is needed to get the poor from poverty line..

  • It shows the severity of poverty

How much Poverty is there?

  • How Much Poverty Is There?

    • Dissenting Opinions on the Extent of Absolute Poverty
    • Who Are the Poor?
    • Are Women Poorer than Men?

How much poverty is there

  • The number of people living below $1 a day or $365 per year

  • See figure 6.5 for poverty levels for various regions of the world.

  • The number of people below $1 in the world declined by 400 million between 1981-2001.

  • This is good news? But what are bad news?

China Leads in reducing poverty

  • China Head Count Index in 1981 was 64% it fell to 17% in 2001.

  • Africa’s population growth led to doubling the number of people living below poverty line.

  • China lowered poverty gap from 23% to 4%. A remarkable human achievement.

Strategies for Reduce Poverty

  • Two elements of strategy: 1.Promote market oriented economic growth.2. Direct investment on basic health, education of the poor

  • Recommendation of Washington Consensus

  • Macroeconomic stability, more openness to trade and investment, increase public investment on infrastructure, and credit, etc

  • Combine this with labor-intensive demand growth that would benefit the poor.

Strategies for reducing poverty

  • Economic growth will lead to poverty reduction-World Bank Approach. “Trickle down Approach”

  • Human Development Report approach sees problems with economic growth approach. HDR argues it can be jobless, ruthless, voiceless, and rootless, & futureless or unsustainable.

Problems with Economic Growth Approach

  • What kind of growth? UNDP argues growth can be: “jobless” overall economy grows but does not expand employment,

  • ruthless”-where the rich only benefit, leaving millions in poverty,

  • voiceless, no basic democratic freedoms, and

  • rootless “ undermine cultural identity, and

  • futureless” where present generation squanders resources needed for future generation, UNDP’s Human Development Report 1996.

Conclusion Summary Chapter 6

  • 1. Chapter 6 probes the relationship between economic growth and the goal of improving human welfare. After World War II, economists tended to accept that the benefits of growth would trickle down to the poor. This complacent view was challenged by evidence of rising income inequality and a stubborn prevalence of poverty in many developing countries. Such evidence stimu­lated active concern with promoting more equitable growth. During the 1980s, poverty-oriented policies were pushed to the background by the need to cope with macroeconomic shocks. Since then, concern with poverty-oriented policy has revived, but not as an alternative to concern about growth. The evidence of the past half century shows that growth is necessary for alleviating widespread poverty.

  • 2. The first step is to explain basic concepts and measures relating to devel­opment, including the functional and size distributions of income, frequency distributions, the Lorenz curve showing income shares, the Gini concentration ratio, and the poverty line. Tables provide up-to-date statistics for a wide range of countries. The discussion in the text emphasizes measure­ment problems, the distinction between relative and absolute poverty, and the difference between inequality and equity. The stylized facts indicate that in most regions poverty is falling rapidly; a notable exception is Africa where poverty is rising. Opinions disagree on where to exactly draw the global poverty line.

  • 3. Is there a pattern to the changes in inequality and poverty that occur during economic development? With regard to inequality, Kuznets’s inverted-U hypothesis still serves as a baseline. The hypothesis states that inequality first rises and then falls over the course of development. This hypothesis received some support from cross-section data, and data for specific countries exhibit great differences. More recent econometric tests show no relationship between inequality and growth. Therefore, rising inequality is not an inevitable con­comi­tant of development. Differences in inequality have been attributed to factors such as education, population growth, the structure of asset owner­ship, and control by entrenched elites. On balance, the determinants of income inequality are not well understood. In­equality matters because the poor may be credit constrained or may not be politically connected.

Chapter 6 Summary Conclusion

  • IV. Looking at poverty, the empirical pattern is clear and simple: Poverty is diminishing in countries that are growing rapidly, while in the absence of economic growth rising poverty is virtually unavoidable.

  • V. The chapter contrasts the two broad strategies of growth as good and growth not being good enough. It describes the role of the Washington Consensus and its impact on poverty. It suggests some methods of poverty intervention such as improving opportunities and providing income transfers and safety nets. It closes by exploring the popular issue of global income inequality and shows how conclusions depend on the chosen unit of measurement. It also provides Sachs’s arguments for The End of Poverty.

  • There are 3 boxed examples. The first study compares the national poverty lines of Bangladesh, Mexico, and the United States. The second example provides Pritchett’s dissension on the global poverty line of a “$1 a day.” The 3rd describes an interview with Dani Rodrik who explains why development strategies should be poverty focused.

  • It has eliminated the previous focus on four strategies for poverty and compressed the strategies into two. It has new section on global inequality and visions on the end of poverty.

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