Chapter 6

POVERT INEQUALITY & DEVELOPMENT

MEASURING INEQUALITY 1. Size distribution 2. Function distribution SIZE DISTRIBUTIONS Individual person or household & the total income they receive The way in which the income is received in not considered Income derived from: employment, profits, inherited wealth Quintiles Deciles

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LORENZ CURVE Shows the actual quantitative relationship between the percentage of income recipients & percentage of total income they received

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GINI COEFFICIENTS Gini Coefficients & aggregate measures of equality The relative degree of income equality in a country can be obtained by calculating the ratio of area between the diagonal & the Lorenz curve divided by the total area of the half square in which the curve lies

Are aggregate inequality measures: 1. 0: perfect equality 2. 1: perfect inequality 3. Highly unequal distributions of in come :0. 5-0.7 4. Relatively Equitable distributions: 0.2-0.3

The lower the lorenz curve the more the equality is. When eve 2 Lorenz curve cross: We need more information
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ANOMITY PRINCIPLE:

our measure of inequality should not

depend on who has the higher income, rich or poor

SCALE INDEPENDENCE PRINCIPLE:

should not depend on the size of the economy

our

measure

of

Measure dispersion of in income not its magnitude

FUNCTIONAL DISTRIBUTION

Second common measure of income distribution The share of national income that each of the factors of production (land, labor, capital) receives.

Inquires into the that labor receives as a whole &compare this with the % of total income distributed to Land & capital

Land & capital: rent interest & profit It attempts to explain the income of a factor of Production by contribution that factor makes to Production

Diagrammatic illustration Assume: 2 FOP: Capital (fixed), labor(variable) Demand for labor is a declining function

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MEASURE OF ABSOLUTE POVERTY

The number of people who are unable to command sufficient resources to satisfy basic needs.

They are counted as total number of people living below a specified minimum level, International poverty line

Absolute poverty

may be measured as the number of People whose

income fall below the poverty line:

Headcount taken as a fraction of the total population (headcount index) H:whose income <poverty line

N: Total population

Poverty

gap:

he

total

amount

of

income

necessary

to

raise

everyone who is below the poverty line up to that line

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HUMAN POVERTY INDE

Introduced by UNDP in 1997 Not satisfied with a $ a day approach

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Poverty should be measured in 3 ways

1. 2. 3.

Life Basic Education Economic provisioning: the % of people without access to health services & safe water + % of children under 5 Who are under weight

Low HPI is good: smaller % of people are deprived

POVERTY INEQUALITY & SOCIEL DEVELOPMENT

WHATS SO BAD ABOUT INEQUALITY??????? 1. Extreme income inequality leads to economic inefficiency.

The higher the inequality the less the % of people who qualify for a loan

Poverty Lack of Collateral Cant educate children Overall saving are lower as highest rate of saving are with the middle class

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Elites spend most of their money on luxury Drain of recourses Inefficient allocation of assets Over emphasis o higher education at the expense of quality universal primary education

2. Extreme Income Disparities Undermine Social

Stability & solidarity

Strengths power of rich

Viewed As Unfair

DUALISTIC DEVELOPEMT & SHIFTING LORENZ CURVE SOME STYLIZED TOPOLOGIES 1 The Modern Sector Enlargement
Enlarges the modern sector

Constant wages in both sectors

Absolute income increases

Absolute poverty decreases

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2 Modern Sector Enrichment

Economy grows, but growth is limited to a fixed Number of people in the modern sector

Number of workers & wages held constant in traditional sector

Less equal distribution of income

No change in poverty

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3 Traditional Sector Enrichment

All benefits of growth are divided among traditional Sector

workers, little or no growth in the modern sector

Poverty decreases

Growth results in more equal distribution of income

Kuznets Inverted U Hypothesis

In the early stages of economic growth the Distribution of income will tend to worsen whereas Later stages it will improve

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Early growth concentrated in modern sector where Employment is limited but wages & productivity are Higher

Income gap between the 2 sectors may increase than begin to converge.

Income transfers from rich to poor & poverty reducing public expenditures are difficult to undertake by govt in low income countries

Inequality in the modern sector is much greater than inequality in the traditional sector.

Returns to education may rise first as the emerging Modern sector demands skills, then fall as the Supply of educated workers increase & the supply of Unskilled workers fall

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GROWTH & INEQUALITY There is no strong or obvious relationship between GNP growth & distribution of income

Economic characteristics of poverty groups

Magnitude of absolute poverty result from low per capita income+highly unequal distribution of income
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At higher levels of per capita income there are no guarantees that low level of poverty Rural Poverty Generalization: Poor rural areas Engaged in agriculture Are more likely to be women & children Are minority ethnic groups From research: two thirds of the poor earn small farmers or low paid workers One third in petty services+urban centers Govt expenditures urban areasmodern manufacturing & commercial Urban sector bias of Govt core of many development problems

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WOMEN & POVERTY Women substantial majority of the worlds poor Women & children experience harshest deprivation Poor Malnourished No medical services No clean water No sanitation Less access to education
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Less access to social security Less access to govt employment programs Female headed house hold lower earning capacity limited control over spouses contribute to this phenomena Female-headed house hold less education, lower incomes Women are paid less Women subjevt to laws that further compromise earning potential Laws owing property GNP per capita is inadequate measure of development does not reflect the extend of absolute poverty India: girls are 4 times more likely to suffer from malnutrition than boys Larger proportion of the work performed by women is not accounted for: collecting fire wood, cooking, Urban areas training programs limited to men Agriculture extension programs male dominated crops at the expense of women vegetable crops Status of women is low

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ETHNIC MINORITIES & POVERTY Discrimination Conflict Live in extreme poverty Malnourished Poor Illiterate

RANGE OF POLICY OPTIONS: SOME BACIS CONSIDERENATION

1. Altering The Functional Distributing Of Income Institutional constraints & faulty government policy wage rate is highr than what it would be in the free market Labor unions higher wages

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govt reduce the price of labor in comparison to capital employers substitute labor instead of capital employment increasesless poverty greater equality 2. Modifying Size Distribution Through Progressive

Redistribution Of Assets Ownership Reduce the concentrated control of assets, the unequal distribution of power, and the unequal access to education Land reforms Micro loans Public policy should play a role

3. Reducing The Size Distribution At The Upper Levels Through Progressive Income & Wealth Tax Direct progressive income taxes should be levied Progressive tax structures in developing countries turn out to be Regressive poor taxed at the source of incomerich has the power to go unreported

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4. Increase the size distribution at the lower ends through direct transfer payments & the public provisions of goods & services Direct money transfers Subsidized food programs Govt policy to keep price of essentials low Subsidies

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