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4&5. Poverty and Inequality

4&5. Poverty and Inequality

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ECON 181

Poverty and Inequality.
WARNING: The slides are NOT lecture notes. You still need to read the assigned papers.

Econ 181: Inequality and Poverty

October 10, 2011

1

Contents
1 Poverty 1.1 1.2 Poverty measures . . . . . . . . . . . . . . . . . . . . . 3 4

Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . 10 15

2 Inequality 2.1 2.2 2.3 2.4 2.5 2.6 2.7

Some preliminary information (WDR, 2006) . . . . . . 16 Measuring inequality . . . . . . . . . . . . . . . . . . . 20 Lorenz curve . . . . . . . . . . . . . . . . . . . . . . . 27 Other measures . . . . . . . . . . . . . . . . . . . . . . 35 Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Kuznets’s curve . . . . . . . . . . . . . . . . . . . . . . 43 Is economic growth pro-poor? . . . . . . . . . . . . . . 44
October 10, 2011 2

Econ 181: Inequality and Poverty

1

Poverty

Econ 181: Inequality and Poverty

October 10, 2011

3

1.1

Poverty measures

Concepts • Poverty line: a critical threshold below which individuals are declared to be poor. • The threshold could refer to income, consumption or access to goods and services. • Nutrition-based lines: the amount of money needed to guarantee minimum consumption of calories.

Econ 181: Inequality and Poverty

October 10, 2011

4

Households vs individuals.) 2. relative: how can we compare different needs in different countries? 3. How different are individuals with $1. • why do we need a poverty line? • Say poverty line is $1 per day. Overall consumption or item-by-item consumption (e. enough for for food but not for clothing.. Absolute vs.01 and those with 99 cents? • Read the article by A.• Key issues 1. Econ 181: Inequality and Poverty October 10. Deaton (2006).g. 2011 5 . Consumption is observed at the household level and we usually don’t know how it is distributed.

Measures • Let denote y income (or expenditure). earn less than p. Econ 181: Inequality and Poverty October 10. the Poverty Head-count (PHC) is ∑N 1(yi <p) P HC = i=1 N . we want to account for the total number of people living in this country. 2011 6 . 1(A) = 1 if A is true and 0 otherwise. p the poverty line. • The first measure is to count how many poor are in a country: how many indiv. • If yi < p. m the average income. • However. then individual i is poor. • Hence. • Consider a country with N individuals.

Let’s tax the very poor and give the revenues to the ones just below the poverty line so they can escape poverty. • The main problem with PCH is that it does not account for the extent of the poverty. • However.• PHC is a widely used. Can we still say that both countries are equally poor? 2. Consider two countries with the same PHC and with p = 100. there are some problems. In one country all the poor earn $99 each and in the second they all earn $50 each. 1. Econ 181: Inequality and Poverty October 10. 2011 7 . Consider this poverty alleviation policy.

• It measures the average gap in poverty (p − yi ) relative to the poverty line ∑N p−yi 1 IG = N i=1 ( p )1(yi < p) • This measure it’s also used but it’s less popular. Will IG be the same after the transfer? 3. Consider a transfer from the very poor to the less poor such that they escape poverty. 2. In one country all the poor earn $40 each and in the second half the poor earn $20 and the other half makes $60. • Problems 1. Can we still say that both countries are equally poor?. will IG be the same? Econ 181: Inequality and Poverty October 10. Consider two countries with the same IG and with p = 100. 2011 8 . Consider the same transfer but now the less poor do not escape poverty.• To solve this problem we can use the Income Gap (IG).

Econ 181: Inequality and Poverty October 10. • P2 then solves all the problems described above. Thus P2 takes into account the distribution among the poor. • An interesting case is when α = 2. • However. Greer and Thorbecke proposed what is now known as the FGT index ∑N p−yi α 1 Pα = N i=1 ( p ) 1(yi < p) • The parameter α could take different values. • When α = 0 then P0 = P HC. P2 is not very commonly used. 2011 9 . • When α = 1 then P1 = IG.• To solve this problems Foster.

2 Evidence Econ 181: Inequality and Poverty October 10.1. 2011 10 .

• SSA is the region with the highest PHC. Figure 2: Poverty measures by region 1981-2004 (a) Headcount index 60 50 SSA 40 30 20 LAC 10 MNA Econ 181: % living below $1 a day SAS EAP ECA 1990 October 1995 10. 2011 2000 0 Inequality and Poverty 1980 1985 2005 11 .

57 51.92 37.09 45.56 36.07 3.94 8.84 34.94 47. 2011 12 .64 1.73 28.82 45.90 0.23 28.87 36.42 1.70 10.14 17.60 8.84 32.14 31.46 10.70 Econ 181: Inequality and Poverty October 10.27 9.58 1996 16.35 1984 39.• in Africa the levels are going back to 1981.47 25.02 41.China (b) Number of people 1981 57.73 63.04 44.33 43.66 27.64 0.72 22.69 36.10 18.42 8.69 1987 28.94 46.79 1.36 3.09 3.22 28.75 42.09 20.26 40.76 0.23 28.51 13.77 22.87 41.35 12. Table 1: Poverty measures for $1 a day (a) Percentage of population Region East-Asia and Pacific (EAP) Of which China Eastern-Europe+Central Asia (ECA) Latin America+Caribbean (LAC) Middle East+North Africa (MNA) South Asia (SAS) Of which India Sub-Saharan Africa (SSA) Total Total excl.20 32.13 22.46 17.78 9.66 2.31 46.03 42.66 45.10 23.05 9.08 34.06 39.47 30.98 0.14 1993 25.72 29.15 47.87 1.19 2.19 2004 9.63 20.33 41.77 5.82 45.37 4.09 1.08 49.43 47.54 2002 12.33 13.45 1999 15.02 0.11 46.75 1990 29.77 3.56 24.69 33.66 24.72 28.

2011 13 . 1990s Indicator Headcount ratio (percent) Poverty gap (percent) Squared poverty gap (percent) Mean expenditure (dollars a person per year) Mean poverty line (dollars a person per year) Source: Ali 1999.3 Poverty in 21 African Countries Using National Poverty Lines. Rural 56 23 13 409 325 Urban 43 16 8 959 558 Overall 52 22 12 551 Econ 181: Inequality and Poverty October 10. Table 3.• Comparing different measures.

2011 14 .and an example from Ivory Coast (1985-1988) Econ 181: Inequality and Poverty October 10.• ...

2011 15 .2 Inequality Econ 181: Inequality and Poverty October 10.

2011 16 .2.1 Some preliminary information (WDR. 2006) Econ 181: Inequality and Poverty October 10.

Figure 1 Wealth matters for the immunization of children Percentage not covered 70 60 50 40 Poorest 30 20 10 0 Wealthiest Source: Authors’ own calculations from Demographic Health Survey (DHS) data Note: * indicates that the poorest quintile have higher access to childhood immunization services than the wealthiest quintile. while the endpoints indicate the percentages for the top and the bottom quintile of the asset ownership distribution. The continuous orange line represents the overall percentage of children without access to a basic immunization package in each country. Econ 181: Inequality and Poverty E Jor gypt dan Co (*) lom b Rw ia and a So uth Peru Afr ic Ke a nya Ma law i Bra Zam zil bia Vie (*) tna Tur m k Gu ate ey ma Tan la z Ind ania Tur km ones eni sta ia Mo n (*) roc c Gh o ana Ph Benin ilip Ba pine ngl s ad Co esh mo ro Bo s Pa livia r Ka zak agua y hst an (*) Bu Yem rkin en a Ca Faso me ro Ug on and a Ma India uri tan ia Ha iti Ce ntr Tog al A fric Ethi o opi an a R Ma epub dag lic Mo asc zam ar biq u Gu e ine a Ca Mali mb o Pa dia kis ta Eri n tre a Nig er Ch ad October 10. 2011 17 .

Note: Median values of the test of vocabulary recognition (TVIP) score (a measure of vocabulary recognition in Spanish. The medians by exact month of age were smoothed by estimating fan regressions of the median score on age (in months). using a bandwidth of 3.Figure 2 Opportunities are determined early Cognitive development for children ages three to five in Ecuador differs markedly across family backgrounds Wealthiest and poorest quartiles Median score 110 100 90 80 70 60 40 50 60 Age in months 70 Poorest 25th% Wealthiest 25% Maternal education Median score 110 100 90 80 70 60 40 50 60 Age in months 70 12 or more years 0–5 years Source: Paxson and Schady (2005). Econ 181: Inequality and Poverty October 10. standardized against an international norm) are plotted against the child’s age in months. 2011 18 .

12 0.15 0. Econ 181: Inequality and Poverty October 10.06 0. 2011 19 .Adjusted infant mortality rates by maternal education Probability of dying in the first year 0.09 Years of maternal education 10th percentile or 0 year 25th percentile or 2 years 50th percentile or 5 years 75th percentile or 10 years 90th percentile or 11 years 0.03 1982 1986 1990 1994 1998 Source: Paxson and Schady (2004).00 1978 0.

2.2 Measuring inequality Econ 181: Inequality and Poverty October 10. 2011 20 .

22-22-56 or 20-30-50? • We hence need some criteria to rank distributions.Initial ideas • Suppose we have two people only. Econ 181: Inequality and Poverty October 10. a 50-50 division is equal. 2011 21 . • A 90-10 or 10-90 are clear unequal distributions. • Clearly. • That is. • Which distribution is more unequal. • Consider now the case we three individuals. we need a set of goals for any inequality measure.

• All we care about if the ranking of income (yi ): • y1 ≤ y2 ≤ . . • If Nthabiseng makes R100 a week and Pieter R500. . ≤ yn Econ 181: Inequality and Poverty October 10. 2011 22 . • Ethical arguments require that it doesn’t matter who earns the income. the inequality should be the same if Nthabiseng now makes R500 and Pieter only R100.Four criteria 1. Anonymity principle.

2011 23 . Econ 181: Inequality and Poverty October 10. • Cloning the entire population (with their corresponding income) should not alter inequality. Population principle.2. • The size of the population shouldn’t matter in order to measure inequality. • Comparing the income distribution over n people and other with same income but twice (2n) the population should lead to the same inequality measure.

rands or metacais.20. • If we multiply the income of all individuals by λ ̸= 0 inequality should remain unchanged.) • All that matter are shares of total income. Econ 181: Inequality and Poverty October 10. • That is.4000.3.40) should be the same as the one from (1000. • It shouldn’t matter whether income is expressed in dollars.2000. 2011 24 . the inequality on an income distribution of (10. Relative income principle.

• This is also called a regressive transfer. taking money from a person with income yi to another one with income yj ≥ yi increases inequality. The Dalton principle. • That is. Econ 181: Inequality and Poverty October 10. • Dalton (1920)’s principle suggest that transfer from “poor” individuals to “richer” ones should increase inequality. 2011 25 .4.

.2. • Let the income distribution of income (y1 ≤ y2 ≤ . yn . . . y2 . . . yn ) Econ 181: Inequality and Poverty October 10. . . . . . . y2 . . . I(y1 . yi − δ. y2 . . 1. . 2. . yn ) a measure of inequality. ≤ yn ). . λyn ) 4. . . . . . • and let I(y1 . . Relative income principle: I(y1 . yn ) = I(y1 . . . λy2 .. . yn ) < I(y1 . . Anonymity: the function I does not vary with a permutation on the income distribution of individuals {1. . yn ) 3. . y2 . . Population principle: I(y1 . . . y1 . . . y2 . . . .• We can now formalize these four criteria as follows.n}. . y2 . Dalton principle: for δ > 0. . yn ) = I(λy1 . . . . . . 2011 26 . yj + δ. .

Econ 181: Inequality and Poverty October 10. point A shows that the income of share of the bottom 20% of the population is 10%. • The Lorenz curve relates the share of total income held by x% of the population. • In figure 6.2. • Point B say that the bottom 80% holds 70% of total income. the rich 20% enjoys 30% of total income.3 Lorenz curve • Before looking at some alternative inequality measure.4. let’s start with a graphical device. • Put differently. 2011 27 .

(1998) Econ 181: Inequality and Poverty October 10. D. 2011 28 .Ray.

the x% of population enjoys x% of total income. the bottom 20% of pop. 2011 29 . • The Lorenz curve in such case will be equal to the diagonal. Econ 181: Inequality and Poverty October 10. where all the income is held but only person. • Consider the opposite case. enjoys 20% of total income • Hence.• Consider the case when income is equally distributed 1 (everybody enjoys the same n th of total income). • The Lorenz curve is flat until it hits 100% of the population where it becomes vertical. the one closest to the diagonal has less inequality (for all points). • Given two Lorenz curves.

2011 30 .• L(2) is more or less unequal than L(1)? Econ 181: Inequality and Poverty October 10.

Econ 181: Inequality and Poverty October 10.• Does the Lorenz curve satisfy the four criteria for inequality? • In homework 2 you will have a chance to answer this question in detail. • There is one problem with Lorenz comparisons. 2011 31 . • When a pair the curves cross we cannot rank them using the Lorenz criteria.

Why? Econ 181: Inequality and Poverty October 10. 2011 32 .• We cannot rank L(2) and L(1).

• Examples: 1 Econ 181: Inequality and Poverty October 10. 2011 33 .

• Examples: 2 Econ 181: Inequality and Poverty October 10. 2011 34 .

• Person i has an income equal to yi • Let’s define the mean income as ∑n 1 µ ≡ n i=1 yi • We will consider four alternative measure of inequality commonly found in the literature Econ 181: Inequality and Poverty October 10.4 Other measures • Consider a population with n individuals. 2011 35 .2.

The range • The range (R) is defined as the gap between the richest (yn ) and the poorest (y1 ) income (expressed in terms of the average income) • Recall than income is sorted from the lowest to highest income • R= 1 µ (yn − y1 ) • Inequality increases when the gap increases. 2011 36 . • Does this satisfy the Dalton principle? Econ 181: Inequality and Poverty October 10. • Note that this measure does not take into account the incomes between the richest and the poorest. • If the second poorest person transfer money to the second richest one. the inequality will remain intact.

2011 37 .The Kuznets ratios • Introduced by Simon Kuznets. • The idea is to compare the share of income of the top x% of the population and the bottom z%. you can compare the income of the top 10% and the one of the bottom 20%. • Bigger ratios indicate higher inequality. • Does this satisfy the Dalton principle? Econ 181: Inequality and Poverty October 10. • For example.

Econ 181: Inequality and Poverty October 10.The coefficient of variation • It is the ratio between the standard deviation (σ) and the mean (µ). • Does this satisfy the Dalton principle?. where σ = n i=1 (yi − µ) . √∑n σ 1 2 • C = µ . 2011 38 .

when inequality is higher. • The Gini coefficient is the ratio M M +S (see next graph. Econ 181: Inequality and Poverty October 10.The Gini coefficient • This measure is related to the Lorenz curve. 2011 39 .) • The Gini coefficient satisfies all the criteria supported by the Lorenz curve. • That is. M will be bigger and the Gini coefficient will be higher.

2011 40 .M S Econ 181: Inequality and Poverty October 10.

2011 41 .2.5 Evidence Econ 181: Inequality and Poverty October 10.

Squirer Journal of DeÕelopment Economics 57 (1998) 259–287 Table 1 Decadal medians of Gini coefficients for the income distribution.60 31.32 33.• Inequality in SSA is the highest.86 34.00 1990s 28.59 33. Deininger.57 41.86 1980s 24.22 32.80 39. K.20 34. by Region 1960–1990 1960s Eastern Europe South Asia OECD and high income East Asia and Pacific Middle East and North Africa Sub-Saharan Africa Latin America 22.93 32.63 48.76 31.80 39.00 1970s 21.00 263 Regions are ordered by increasing inequality in the 1990s.04 34.90 53. L.67 32. except for LA.42 40.88 49. Econ 181: Inequality and Poverty October 10. Source: Deininger and Squire Ž1996.77 32.63 51.40 43.30 50..50 49. 2011 42 .20 34.72 42.

6 Kuznets’s curve • How does inequality respond to economic development? • Kuznets hypothesis an “inverted-U” relation.2. Econ 181: Inequality and Poverty October 10. • Inequality is highest for countries with middle-income and lower for the rich and poor. 2011 43 .

7 Is economic growth pro-poor? Econ 181: Inequality and Poverty October 10.2. 2011 44 .

Econ 181: Inequality and Poverty October 10.3517 t-stat = 9.3 Growth is the key to poverty reduction .Figure 4. Change in log poverty headcount index (x100) 500 BUL 400 LVA 300 200 MLI PER MDA ARG HUN POL LAO CIV PAR YEM VEN SVN TTO COL MNG ZWE BGD LSO SLV ROM GEO NER VNM NGA BWA HRV BDI NIC UGA ZAF RUS ZMB GHA 0 MDG UZB ETH EGYLKAIND BRA BOL BFA PHLHON MEX KEN TURPAN MAU ECU GMB DZA LTU SEN CMR GUY CHN URY ALB CRI AZE EST IDN PAK MAR IRN JAM KAZ TUN THA LYS 100 0 –100 –200 –300 –400 –150 y = –2.5225 N = 73 –100 GTM –50 0 50 100 150 Change in log mean consumption or income between surveys (x100) Source: WDR 2006. .30 R2 = 0.3841x + 2. 2011 45 . .

2011 46 . on average.515 R2 = 0. growth is distribution-neutral Change in log Gini index (x100) 50 40 30 20 10 0 –10 –20 –30 –40 –50 –60 –150 y = –0.004 N = 73 LVA MLI NER NGA PAR CRI ZWE BDI SVN BWA LAO CHN BGD ARG GHA HUN HRV MDA LSO PHL MEX ECU PER NIC COL SLV CIV EGY GMB MDG IDN HON VNM URY AZEBRA MAR PAN GEO IND LTUALBUGA LYS PAK ROM TTO RUS CMR THA ZAF IRN TUR VEN TUN BFA MNG JAM DZA ZMB GUY YEM MAU KAZ BOL KEN SEN ETH POL EST BUL GTM UZB LKA –100 –50 0 50 100 Change in log mean consumption or income between surveys (x100) 150 Source: WDR 2006. .Figure 4.0288x + 3.4 .3717 t-stat = 0. and. Econ 181: Inequality and Poverty October 10. .

Shimeles (2006) “Inequality in sub-Saharan Africa: a synthesis of recent research on the levels. and A. Ravallion (2007) “Absolute Poverty Measures for the Developing World. 2011 47 . and M. • Inequality in South Africa: van der Berg et al (2005) “Trends in poverty and inequality since the political transition. 1981-2004” World Bank.1) Okojie. effects and determinants of inequality in its different dimensions”. • Recent trends in PHC: Chen. trends. (2001) “Globalisation. Y. S. Poverty and Inequality in Sub-Saharan Africa: A Political Economy Appraisal.Sources • Lorenz curves come from Debraj Ray (1998) textbook. Econ 181: Inequality and Poverty October 10.” • Inequality in SSA (tables 6 and 7) from by Tsikata.” • Inequality in SSA (table 3. C.

• FGT in Africa: Can Africa Claim the 21st Century? The World Bank Washington. 2011 48 . Econ 181: Inequality and Poverty October 10.C. • FGT in Ivory Coast: Deaton (1997) The Analysis of Household Surveys. D.

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