Economic

Development, 12th Ed.

M. P. Todaro and S. C. Smith
Slides for Chapter Five

Updated and Expanded

Stephen C. Smith
Fall 2017
ssmith@gwu.edu
DistribuEon and Development: Eight CriEcal QuesEons

•  1. How can we best measure inequality and poverty?

•  2. What is the extent of relaEve inequality in
developing countries; how is this related to the extent
of poverty?
•  3. Who are the poor, and what are their economic
characterisEcs?
•  4. What determines the nature of economic growth—
that is, who benefits from economic growth, and why?

 DistribuEon and Development: Eight CriEcal QuesEons

•  5. Are rapid economic growth and more equal income

distribuEon compaEble or conflicEng objecEves?: Is rapid growth
achievable only at a cost of greater income inequality or can
lessening income dispariEes contribute to higher growth rates?
•  6. Do the poor benefit from growth, and does this depend on the
type of growth a developing country experiences? What might be
done to help the poor benefit more?
•  7. What is so bad about extreme inequality?
•  8. What kinds of policies are required to reduce the magnitude
and extent of absolute poverty?
 A Capabilities-Based Social Welfare Framework
•  Placing where we are at this point in our study of economic development in the
context of Chapter 1…
•  Generally, we may think of welfare as a function W:
•  W = W(Y, E, H, M, other capabilities…),
•  Where Y=standard of living, E=Education, H=Health, M=Empowerment and other
factors reflecting important capabilities
•  So far, these have been treated as averages; but also distribution matters
•  In chapters 3 and 4, we focused attention on the first element, Y (income, or
permanent income from wealth, or broadly living standards), in frameworks such as:
–  Growth models
–  Theories of constraints on growth like coordination failures
–  Growth diagnostics
•  There, we used average incomes Y as the outcome variable, focusing on investment
•  Now, in considering distribution aspects of Y, we expand from averages to address:
–  (Relative) Inequality of Income
–  (Absolute) Income Poverty
•  Thus in this chapter, our welfare framework will become:
•  w = w(Y, I, P)
•  Then, having studied income poverty, we will be in a good position analytically to to
study multidimensional poverty, returning to a broader capabilities framework,
•  Later, we examine health and education capabilities and deprivation in chapter 8
 5.1 Measuring Inequality
•  Measuring Inequality
–  Size distribuEons (quinEles, deciles)
–  Lorenz curves
–  Gini coefficients and aggregate measures of
inequality
–  FuncEonal distribuEons
 Desirable ProperEes for Inequality
Measures
•  Anonymity: measure should not depend on who has higher income;
e.g. whether we believe the rich or poor to be good or bad people
•  Scale independence: inequality measures should not depend on size of
the economy – want a measure of income dispersion
•  PopulaEon independence principle: an inequality measure should not
be based on the number of income recipients
•  Transfer principle - all other incomes constant, if transfer income from
a richer to a poorer person (not so much that the poorer person is now
richer than the originally rich person), resulEng new income
distribuEon is more equal
•  Gini coefficient saEsfies all four properEes; so does the
coefficient of variaEon (CV), and some others
 Table 5.1 Typical Size DistribuEon of Personal Income in a
Developing Country by Income Shares—QuinEles and Deciles
Figure 5.1 The Lorenz Curve
Figure 5.2 The Greater the Curvature of the Lorenz Line, the
Greater the RelaEve Degree of Inequality
Figure 5.3 EsEmaEng the Gini Coefficient
 Calculating the Gini
Coefficient: Numerical
Examples
•  Expression: G = A/(A+B)
 Calculating the Gini: In-Class Example

•  Half the people have “1”

•  The other half have “2”
•  What is the Lorenz curve?
•  How can you use this to compute the Gini?
 A Brief Review: Desirable
ProperEes for Inequality Measures
•  Anonymity: not depend on who has higher income
•  Scale independence: not depend on size of the economy
–  What happens if everyone’s income goes up by 25%?
•  PopulaEon independence: not based on number of recipients
•  Transfer principle - transfer income from a richer to a poorer person,
resulEng distribuEon is more equal
–  What if transfers so much that these people “trade places?”
•  Gini coefficient saEsfies all four properEes; but so does the CV and some
others
•  This can leave ambiguity in direcEon of change in inequality:
–  (As we will see, remains ambiguity when it comes to combining inequality concerns
with other concerns)
Figure 5.4 Four Possible Lorenz Curves
Figure 5.5 FuncEonal Income DistribuEon in a Market Economy:
An IllustraEon
 Desirable ProperEes for Poverty
Measures
•  Desirable properEes for poverty measures:
–  Anonymity
–  PopulaEon independence
–  Monotonicity
–  DistribuEonal sensiEvity
•  Plus, the Focus Principle (Amartya Sen):
–  A good poverty measure will be based only on the
incomes (wellbeing) of the poor, not the nonpoor
•  As we will see, P2 has these properEes
 Monotonicity and DistribuEonal SensiEvity
•  Monotonicity principle: If you add income to someone below the poverty
line, all other incomes held constant, poverty falls
–  There is a “less decisive” version, called weak monotonicity, which requires
that poverty can be “no greater than” it was (the main version of the principle
above is someEmes called strong monotonicity for clarity)
•  DistribuEonal sensiEvity principle: if you transfer income from a poor
person to a richer person (even if the “richer” person is also below the
poverty line), the resulEng economy is deemed strictly poorer.
•  These principles are important; they clarify what is lacking in some of the
most widely used measures
•  Note: Looking ahead, we will see that the headcount raEo measure
(fracEon below the poverty line) saEsfies anonymity and populaEon
independence, but not monotonicity (it saEsfies only “weak
monotonicity”; and it fails on distribuEonal sensiEvity
•  The simple headcount (number who are poor) fails even to saEsfy the
populaEon independence principle.
 5.2 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; H/N is the frac5on who are poor
•  Does not meet desirably properEes and accordingly is likely to
cause incenEve problems:
 Unintended Policy IncenEves of
Using Headcount Measures
•  When agencies told mission includes poverty reducEon…
•  Measuring poverty by headcount or fracEon poor creates incenEve to
report improvements in these measures; this plausibly focuses efforts
toward those closer to poverty line
•  CircumstanEal evidence:
–  Incumbent poliEcians frame poverty progress in terms of headcount or fracEon –
staff would anEcipate and want favorable results - by this measure - to report.
–  Government policy exhibits “urban bias,” e.g. emphasizing job creaEon for the poor
in ciEes - who are closer to the poverty line.
–  Reports: NGOs work near main roads, or district towns, easier-to-reach; if so, people
assisted are less poor on average.
–  MFIs have focused commonly on the richest of the poor
–  MDGs: “halving poverty” sends a signal. Regions and countries were compared in
UN MDG reports e.g. 2014 based on progress on this measure – without menEon of
P2 or usually to any other indicator
 5.2 Measuring Absolute Poverty

•  Total poverty gap:
–  Where Yp is the absolute poverty line; and Yi the
income of the ith poor person
H
TPG = ∑ (Yp − Yi )
i=1
Figure 5.6 Measuring the Total
Poverty Gap
 5.2 Measuring Absolute Poverty

•  Average poverty gap (APG):

TPG
APG =
N

–  Where N is number of persons in the economy
–  TPG is total poverty gap
–  Note: normalized poverty gap, NPG = APG/Yp
 5.2 Measuring Absolute Poverty

•  Measuring Absolute Poverty

–  Average income shorqall (AIS):
TPG
AIS =
H

–  Where H is number of poor persons

–  TPG is total poverty gap
–  Note: Normalized income shorqall, NIS = AIS/Yp
 5.2 Measuring Absolute Poverty

•  The Foster-Greer-Thorbecke (FGT) index:

α
1 "$ Y p − Yi %'
H
Pα = ∑$
N i=1 # Y p '&

–  N is the number of persons, H is the number of
poor persons, and α ≥0 is a parameter
–  When α=0, we get the headcount index measure
–  When α=2, we get the “P2” measure
 Measuring Poverty: Alternative Expression
for P1 - the “normalized poverty gap”
•  Start with definition of P1 from Pα formula
•  With some algebra we find: P1 = (H/
N)*(NIS)
–  (To find this, first multiply the basic P1 formula
by (H/H); then, take out constant Yp; then
apply definition of TIS and collect terms)
•  Interpretation: P1 is per capita poverty
gap = headcount ratio (H/N) times
normalized income shortfall (AIS) among
the poor
•  That is, poverty goes up whenever either
the fraction of people in poverty goes up,
or the fractional income deficits go up
 Measuring Poverty: Numerical Example using P2

•  Consider an 8-person economy with the following

income distribution: (6,.6,.8,.8,2,2,6,6)
•  The poverty line is 1.
•  Question: What is the level of poverty?
•  You want to answer using a measure that has
the desirable properties for a poverty measure
•  You can never go wrong by answering using P2
•  Using the formula (from equation 5.3 in the text,
with α=2), we can calculate P2 as:
•  P2 = (1/8)[.42 + .42 + .22 + .22] =
•  (1/8)[.16 + .16 +.04 + .04] = .4/8 = .05
 An Alternative Expression for P2

•  Uses inequality among the poor

•  P2 = [H/N]{NIS2 + (1 - NIS)2 (CVP)2}
•  This form helps us see intuitively
how each property is present
•  BTW, similar in spirit to the Sen
measure “S”:
•  S = [H/N]{NIS + (1 – NIS) (GP)}
 Just an Aside - Measuring Poverty: Numerical
Example with Alternative P2 Formula

•  Using P2: A Note (beyond scope of this class)

•  Note: You can calculate the same result as
above via the alternative formula in equation
5.4 (there may be round off error). The CV is .
1/.7 = .143; squared value .02. The NIS is .3.
So, P2 = .5[.09 + (.49)(.02)] ~.05.
•  Remember - you have the entire population,
so do not make the sample size adjustment
 Measuring Poverty: Just Continuing the Same
Numerical Example, with P1

•  You can always calculate P1 using the

full Pα formula, summing
individually;
•  Or, using the simplified P1 formula
(H/N)*(NIS), we can calculate P1 as:
•  P1 = (H/N)*[TIS/(H*Yp)] =
•  (1/2)*[(1.2)*/(4*1)] = (1/2)*(.3)
= .15
 Measuring Poverty: Using P2

•  The four key properties are present because for

P2:
•  Measure is Anonymous, by construction;
•  The Population Principle holds because one divides
the result by population;
•  Monotonicity holds because adding income to any
of the poor will decrease P2 by lowering one of the
squared income shortfalls;
•  Distributional sensitivity holds because squaring
poverty gaps ensures that income provided to a
poorer person will reduce P2 more than the same
income provided to a less poor person.
Table 5.5 Regional Poverty Incidence, 2005
Table 5.5 Income Poverty Incidence at $1.25 per day (along
with Gini index) in Selected Countries
Table 5.5 (conEnued): Income Poverty Incidence at $2 per day
(along with Gini index) in Selected Countries
 Preview: Measuring Poverty - Income
or MulEdimensional Indicators?
•  Given that we are measuring poverty with income, we have
good measures that, like P2, saEsfies desirable properEes
•  If must have a single indicator, income has advantages e.g.
clarity, flexibility
•  But in general is measuring income sufficient?
•  Following Amartya Sen’s capability approach, it is apparent
that, in general, poverty needs to be conceptualized – and so
measured – in a mulEdimensional way
•  The new MPI is the best-known effort to do so – we return to
it soon…
 5.3 Poverty, Inequality, and Social
Welfare
•  What’s So Bad about Extreme Inequality?
•  DualisEc Development and Shiting Lorenz
Curves: Some Stylized Typologies
–  TradiEonal-sector enrichment (see Figure 5.7)
–  Modern-sector enrichment (see Figure 5.8)
–  Modern-sector enlargement (see Figure 5.9)
 What’s So Bad about Extreme Inequality? 3 Factors

•  Extreme income inequality leads to economic inefficiency.

–  Smaller fraction of population qualifies for credit e.g. for business or school
–  Overall rate of saving in the economy tends to be lower: Highest rate of
marginal savings usually found among the middle classes.
–  Inequality may lead to an inefficient asset allocation e.g. overemphasis on
higher education at the expense of quality universal primary education
–  High inequality of land ownership inefficient because most efficient scales
for farming are family and medium-size farms.
–  The result can be a lower average income and a lower rate of economic
growth when inequality is high.
–  Moreover, these factors in turn often beget still more inequality
•  Extreme disparities undermine social stability and solidarity
–  High inequality strengthens political power of the rich, and thus
concentrates economic and social bargaining power
–  High inequality facilitates rent seeking
•  Finally, extreme inequality is generally viewed as unfair.
–  John Rawls’ thought experiment: uncertainty behind the “veil of ignorance.”
Table 5.2 Selected Income DistribuEon EsEmates
 Poverty, Inequality, and Social Welfare
•  Dualistic Development and Shifting
Lorenz Curves: Some Stylized Typologies
–  Traditional sector enrichment (see Figure
5.7)
–  Modern sector enrichment (see Figure 5.8)
–  Modern sector enlargement (see Figure 5.9)
–  Note: there is an “interaction effect”
–  An implication of Modern sector enlargement
(but not other processes): Kuznets’ Inverted-
U relationship
–  That is, an inverted-U is consistent with
modern sector enlargement growth, but not
traditional or modern
sector enrichment growth
Figure 5.7 Improved Income DistribuEon under the TradiEonal-
Sector Enrichment Growth Typology
Figure 5.8 Worsened Income DistribuEon under the Modern-
Sector Enrichment Growth Typology
Figure 5.9 Crossing Lorenz Curves in the Modern-Sector
Enlargement Growth Typology
 5.3 Poverty, Inequality, and Social
Welfare
•  Kuznets’ Inverted-U Hypothesis
•  The inverted-U is consistent with modern
sector enlargement growth, but not
tradiEonal or modern sector enrichment
growth
Figure 5.10 The “Inverted-U” Kuznets Curve
Figure 5.11 Kuznets Curve with LaEn American
Countries IdenEfied
Figure 5.12 Plot of Inequality Data for Selected
Countries
Table 5.3 Income and Inequality in Selected
Countries
Table 5.4 Income and Inequality in Selected
Countries
Income and Inequality in Selected Countries, Most recent available (2016 WDI)
Country Income Per Capita (US $, 2011) Gini Coefficient Survey Year for Gini Calculation

Low Income

Ethiopia 660.0 33.2 2010

Mozambique 480.0 45.6 2008

Nepal 730.0 32.8 2010

Cambodia 1,140.0 30.8 2012

Zambia 1,300.0 55.6 2010

Lower Middle Income

India 1,680.0 35.2 2011

Cameroon 1,200.0 46.5 2014

Bolivia 3,070.0 48.4 2014

Egypt 3,460.0 (32.1) (2005)

Indonesia 3,400.0 39.5 2013

Upper Middle Income

Namibia 4,620.0 61.0 2009

Bulgaria 7,470.0 36.0 2012

South Africa 5,480.0 63.4 2011

Argentina 11,960.0 42.7 2014

Brazil 8,840.0 51.5 2014

Mexico 9,040.0 48.2 2014

Upper Income

Hungary 12,570.0 30.6 2012

Spain 27,520.0 35.9 2012

Germany 43,660.0 30.1 2011

United States 56,180.0 41.1 2013

Norway 82,330.0 25.9 2012

Table 5.5 Regional Poverty Incidence, 2005
Table 5.5 Income Poverty Incidence at $1.25 per day (along
with Gini index) in Selected Countries
Table 5.5 (conEnued): Income Poverty Incidence at $2 per day
(along with Gini index) in Selected Countries
 5.4 Absolute Poverty: Extent and
Magnitude
•  Progress on Extreme Poverty
–  Clear progress on $1.25-a-day headcount
–  Less clear progress on $2.00-per-day headcount (see
Figure 5.14)
–  Incidence of extreme poverty is uneven
•  RelaEonship between Growth and Poverty
–  AssociaEon between growth and poverty reducEon
–  When it is inclusive, growth reduces poverty
–  Lower extreme poverty may also lead to higher
growth
Figure 5.13 Global and Regional Poverty Trends, 1981–2010
Table 5.4 Regional Poverty Incidence,
2010
 Regional Poverty Incidence, 2013
Region Headcount Ratio Poverty Gap Squared Poverty Gap (%)
(%)
Regional Aggregation
at $1.25 per Day
East Asia and the Pacific 0.53 0.17 0.06
Europe and Central Asia 0.67 0.18 0.14
Latin America and the 3.16 1.74 1.36
Caribbean
Middle East and North Survey Data is too low, result is suppressed
Africa Coverage the
South Asia 2.0 0.28 0.07
Sub-Saharan Africa 22.59 7.57 3.62
Total 4.63 1.49 0.75
Regional Aggregation
at $2 per Day
East Asia and the Pacific 4.34 0.82 0.27
Europe and Central Asia 2.46 0.66 0.30
Latin America and the 5.83 2.75 1.91
Caribbean
Middle East and North Survey Data is too low, result is suppressed
Africa Coverage the
South Asia 17.98 3.47 1.02
Sub-Saharan Africa 43.59 17.26 9.17
Total 16.11 4.27 2.02
 Income Poverty Incidence at $1.25 per day (along with GINI index)
Country Year Per Capita Monthly Income (2011 Headcount Ratio
in Selected
Poverty Gap (%)
Countries
Squared Poverty Gap Gini Index
PPP) (%) (%) (%)
Bangladesh 2010 109.03 2.17 0.28 0.06 32.13
Benin 2011 82.42 27.64 7.33 2.85 43.44
Brazil 2014 563.57 2.15 1.11 0.84 51.48
Burkina Faso 2014 83.83 12.64 2.14 0.55 35.30
China- Rural 2013 290.41 0.44 0.10 0.05 33.97
China-Urban 2013 373.40 0.15 0.07 0.06 36.69
Cote d’Ivoire 2008 119.31 14.17 4.57 2.10 43.18
Guatemala 2014 257.19 3.17 1.01 0.49 48.66
Honduras 2014 236.33 7.76 3.08 1.85 50.64
India- Rural 2011 95.84 4.23 0.62 0.16 31.13
India- Urban 2011 146.66 2.08 0.28 0.07 39.01
Indonesia- 2014 133.13 0.59 0.05 0.01 31.91
Rural
Indonesia- 2014 191.32 0.79 0.08 0.01 42.77
Urban
Madagascar 2012 46.66 58.82 23.34 12.17 42.65
Mexico 2014 341.5 1.02 0.22 0.07 48.21
Mozambique 2008 59.56 46.16 17.28 8.84 45.58
Nicaragua 2014 288.89 1.53 0.49 0.25 47.05
Nigeria 2009 75.86 31.56 10.66 5.00 42.97
Pakistan 2013 134.53 0.45 0.04 .01 30.69
Peru 2014 424.12 0.87 0.22 .09 44.14
Philippines 2012 174.01 2.62 0.40 .10 43.04
Rwanda 2013 82.57 34.84 10.6 4.46 50.44
 Income Poverty Incidence at $2.00 per day (along with GINI index)
in Selected Countries
Country Year Per Capita Monthly Income Headcount Ratio Poverty Gap (%) Squared Poverty Gap Gini Index
(2011 PPP) (%) (%) (%)
Bangladesh 2010 109.03 21.98 4.16 1.18 32.13
Benin 2011 82.42 55.89 20.75 9.95 43.44
Brazil 2014 563.57 3.87 1.82 1.23 51.48
Burkina Faso 2014 83.83 47.9 12.81 4.68 35.30
China- Rural 2013 290.41 4.29 0.75 0.23 33.97
China-Urban 2013 373.40 0.62 0.17 0.09 36.69
Cote d’Ivoire 2008 119.31 31.12 11.29 5.73 43.18
Guatemala 2014 257.19 10.49 3.08 1.41 48.66
Honduras 2014 236.33 17.35 6.54 3.67 50.64
India- Rural 2011 95.84 28.58 6.09 1.91 31.13
India- Urban 2011 146.66 15.57 3.27 1.00 39.01
Indonesia- 2014 133.13 11.04 1.73 0.42 31.91
Rural
Indonesia- 2014 191.32 9.71 1.59 0.41 42.77
Urban
Madagascar 2012 46.66 79.65 41.21 25.20 42.65
Mexico 2014 341.5 3.53 0.94 0.37 48.21
Mozambique 2008 59.56 71.18 33.34 19.42 45.58
Nicaragua 2014 288.89 6.76 1.81 0.76 47.05
Nigeria 2009 75.86 56.47 23.42 12.66 42.97
Pakistan 2013 134.53 7.98 1.17 0.28 30.69
Peru 2014 424.12 3.53 0.92 0.37 44.12
Philippines 2012 174.01 15.2 3.31 1.07 43.04
 5.4 Measuring Absolute Poverty

•  The Newly Introduced MulEdimensional

Poverty Index
 The MulEdimensional Poverty Index (MPI)

•  IdenEficaEon 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 mul5dimensionally poor.
•  MPI focuses on deprivaEons in health, educaEon, and standard of
living; and each receives equal (that is one-third of the overall total)
weight.
 MPI Indicators
•  Health - 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 toward the maximum
deprivaEon in the MPI)
•  EducaEon - two indicators with equal weight - whether no household
member completed 5 years of schooling, and whether any school-aged
child is out of school for grades 1 through 8 (each counts one-sixth toward
the MPI)
•  Standard of Living, equal weight on 6 deprivaEons (each counts as 1/18
toward the maximum): lack of electricity; insufficiently safe drinking water;
inadequate sanitaEon; inadequate flooring; unimproved cooking fuel; lack
of more than one of 5 assets – telephone, radio, TV, bicycle, and motorbike
 InteracEon of the deprivaEons?
•  Building the index from household measures up to the aggregate
measure (rather than using already-aggregated staEsEcs), MPI
approach takes account of mulEplied or interacEve harm
(complementarity) done when mulEple deprivaEons are
experienced by the same individual or family
•  The MPI approach assumes an individual’s lack of capability in one
area can only to a degree be made up by other capabiliEes –
capabiliEes are treated as subsEtutes up to a point but then as
complements
 CompuEng the MPI
•  The MPI for the country (or region or group) is then computed
•  A convenient way to express the resulEng value is H*A, i.e.,
•  The product of the headcount raEo H (the percent of people living in
mulEdimensional poverty), and the average intensity of deprivaEon A (the
percent of weighted indicators for which poor households are deprived on
average)
•  The adjusted headcount raEo HA is readily calculated
•  HA saEsfies some desirable properEes. Important example -
•  Dimensional monotonicity: If a person already idenEfied as poor becomes
deprived in another indicator she is measured as even poorer - not the
case using a simple headcount raEo
 MulEdimensional poverty tells a different story than
income poverty
•  The results showed that knowing income poverty is not enough
if our concern is with mulEdimensional poverty
•  MulEdimensionally, Bangladesh is substanEally less poor - but
Pakistan substanEally poorer - than would be predicted by
income poverty
•  Ethiopia is far more mulEdimensionally poor, and Tanzania
much less so, than predicted by income poverty
•  Most LaEn American countries e.g. Brazil rank worse on
mulEdimensional poverty than on income poverty; but
Colombia’s income and MPI poverty ranks are about same
 Slovenia
Slovakia
Belarus
Serbia
Kazakhstan
Armenia
Bosnia and Herzegovina
United Arab Emirates
Macedonia, The former Yugoslav Republic of
Georgia
Tunisia
Russian Federation
Albania
Occupied Palestinian Territory
Montenegro
Latvia
Thailand
Uruguay
Moldova, Republic of
Ukraine
Ecuador
Uzbekistan
Jordan
Brazil
Mexico
Argentina
MPI Poor
Czech Republic
Viet Nam
Croatia
Hungary
Dominican Republic
Belize
Kyrgyzstan
Maldives
Azerbaijan
Sri Lanka
Colombia
Syrian Arab Republic
Trinidad and Tobago
Suriname
Egypt
Turkey
Estonia
Guyana
Peru
Morocco
South Africa
Iraq
China
Tajikistan
Paraguay
Philippines
Indonesia
Mongolia
$1.25 a day

Honduras
Nicaragua
Gabon
Swaziland
Bolivia, Plurinational State of
Guatemala
Bhutan
Djibouti
Vanuatu
Ghana
Lao People's Democratic Republic
Sao Tome and Principe
Lesotho
Zimbabwe
Namibia
Congo, Republic of
Nigeria
Pakistan
Nepal
Cambodia
Cameroon
Kenya
Haiti
Togo
Bangladesh
Yemen
India
Cote d'Ivoire
And different policies reduce it.”

Gambia
Mauritania
Chad
Zambia
Tanzania, United Republic of
Afghanistan
“It is different from monetary poverty

Malawi
Madagascar
Timor-Leste
Rwanda
OPHI: “Why Multidimensional Poverty?”

Mozambique
Uganda
Benin
Sierra Leone
Congo, Democratic Republic of the
Senegal
Guinea-Bissau
Central African Republic
Burundi
Somalia
Guinea
Liberia
Burkina Faso
Mali
Ethiopia
Niger
0%
10%
30%
50%
60%
70%
80%
90%

20%
40%
100%

Percentage of the Population

2016 Update from OPHI: “Why MulEdimensional Poverty?”
 Incidence and Intensity by Country; OPHI: “Here we see what intensity adds”

Poorest Countries, Highest MPI

75%

70% Ethiopia Niger

Somalia
65% Guinea-Bissau
Afghanistan
Average Intensity of Poverty (A)

India Mozambique
60% Benin
Nigeria Liberia
55% Burundi

China Lao Congo DR

Guatemala Gambia
50% Nepal
Namibia Tanzania Rwanda
Malawi
45% Brazil Cambodia
Zimbabwe Bangladesh
40% Ghana The size of the bubbles
is a proportional
Indonesia
Tajikistan representation of the total
35% number of MPI poor in
Argentina
each country
30%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Percentage of People Considered Poor (H)
OPHI: MPI also varies greatly across subnaEonal regions within a country – e.g. Cameroon
75%

70%
Incidence: 6.5% to 86.7%
Intensity: 36.4% to 62.3%
65% Extrême-Nord

Nord
Average Intensity of Poverty (A)

60% Cameroon

55% Adamaoua

Est
50% Littoral (Excluding
Douala)
45% Nord-Ouest
Sud-Ouest
Yaoundé Sud Centre (Excluding
40% Ouest Yaoundé)
Douala

35%

30%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Percentage of People Considered Poor (H)
Table 5.6 MulEdimensional Poverty Index, Data for 2007–2011
 Country Survey Year MIP Percent Poor Thousands Poor Poverty Intensity
Table 5.6
Bangladesh 2014 0.196 41.3 65,648 47.4
Brazil 2014 0.021 5.3 10,908 40.6
Update:
Burundi 2010 0.454 80.8 7,642 56.2 MulE-
Bolivia, PlurinaEonal dimensional
State of 2008 0.089 20.5 1,963 43.7
Burkina Faso 2010 0.535 84.0 13,131 63.7 Poverty
Cambodia 2014 0.146 33.0 5,061 44.3 Index,
Colombia 2010 0.022 5.4 2,472 40.9 Data for
Congo, Republic of 2011/12 0.181 39.7 1,702 45.7
Cote d'Ivoire 2011/12 0.310 58.7 12,397 52.8 2008-2015
Dominican Republic 2014 0.034 8.8 919 38.5
Egypt 2014 0.014 3.6 3,186 38.1
Ethiopia 2011 0.564 87.3 78,476 64.6
Ghana 2014 0.156 33.7 9,021 46.2
Guinea 2012 0.459 75.1 8,735 61.1
HaiE 2012 0.248 49.4 5,083 50.3
Honduras 2011/12 0.072 15.8 1,225 45.7
India 2005/06 0.283 53.7 624,593 42.9
Indonesia 2012 0.066 15.5 38,362 52.7
Kenya 2014 0.187 39.9 17,904 47.0
Lao People's
DemocraEc Republic 2011/12 0.174 34.1 2,209 50.9
Liberia 2013 0.374 71.2 3,059 52.5
Mali 2012/13 0.457 77.7 12,885 58.9
Mexico 2012 0.011 2.8 3,418 38.8
Madagascar 2008/09 0.357 66.9 13,707 53.3
Malawi 2013/14 0.265 56.0 9,350 47.4
Mozambique 2011 0.389 69.6 17,412 55.9
Nepal 2014 0.126 28.6 8,054 44.2
Nigeria 2013 0.303 53.2 92,023 56.8
Pakistan 2012/13 0.230 44.2 80,041 52.1
Peru 2012 0.043 10.5 3,167 41.0
Philippines 2013 0.052 11.0 10,745 47.3
Rwanda 2014/15 0.259 53.8 6,101 48.1
Senegal 2014 0.309 56.9 8,348 54.3
Sierra Leone 2013 0.464 81.0 5,005 57.3
South Africa 2012 0.044 11.1 5,865 39.5
Tanzania, United
Republic of 2010 0.332 65.6 29,927 50.7
Timor-Leste 2009/10 0.360 68.1 720 52.9
Uganda 2011 0.367 69.9 23,955 52.5
 Poverty reduction may cause growth
•  Inclusive growth can cause poverty reduction, directly and indirectly
•  Less appreciated: Poverty reduction can cause growth and development, while failure to
address poverty can constrain prospects for development because:
•  Although small, poverty income is part of total income
–  Programs that raise productivity of poor directly even at small scale has direct
contribution to growth; but of course tiny increments because incomes are so low; of
course has an opportunity costs
•  Poor health, nutrition, and education lowers economic productivity of people in poverty,
leading directly and indirectly to slower growth
•  Often, the poor lack access to credit, which constrains growth, e.g.:
–  Lost opportunities for entrepreneurship which may benefit society
–  Leaves them unable to finance their children’s education, also limiting the skilled
labor force needed for development
–  Incentives for high fertility as a source of old-age financial security
•  Higher income for the poor raises demand for locally produced goods
•  Social exclusion/injustice, which is associated with poverty, also likely causes economic
stagnation:
 Social exclusion/injustice, associated with
poverty, likely causes economic stagnation
•  Social exclusion/injustice, which is associated with poverty, also likely causes
economic stagnation in the long run
–  Political and social reform needed to overcome constraints to access to land,
water, basic resource based livelihood opportunities
–  Elite control of natural resources translates to social and political power to
protect elite interests that may be inconsistent with modernization
–  Inadequate voice for the poor who know their public goods needs
–  Other features of a broader social justice agenda which as many have pointed
out is also a foundation of economic efficiency
–  The poor may be susceptible or coercible to participating in civil conflict
–  Among its other benefits improved social justice may positively contribute to
growth
5.5 Economic CharacterisEcs of High-
Poverty Groups
•  Rural poverty
•  Women and poverty
•  Ethnic minoriEes, indigenous populaEons, and
poverty

Table 5.7 Poverty: Rural versus Urban
 Update: Poverty, Rural vs Urban - Percentage below poverty line

Region and Country Survey Year Rural Population Urban Population National Population
(%) (%) (%)
Sub-Saharan
Africa
Benin 2011 39.7 31.4 36.2
Burkina Faso 2014 47.5 13.7 40.1
Cameroon 2014 56.8 8.9 37.5
Malawi 2010 56.6 17.3 50.7
Poverty:
Tanzania 2011 33.3 15.5 28.2 Rural
Uganda 2012 22.4 9.6 19.5 vs
Zambia 2010 77.9 27.5 60.5
Urban
Asia
Bangladesh 2010 25.2 21.3 31.5
India 2011 25.7 13.7 21.9
Indonesia 2014 14.2 8.3 11.3
Uzbekistan 2013 -- -- 14.1
Vietnam 2014 18.6 3.8 13.5

Latin America
Bolivia 2015 -- -- 38.6
Brazil 2014 -- -- 7.4
Dominican Republic 2015 -- -- 32.4
Guatemala 2014 76.1 42.2 59.3
Honduras 2014 65.0 61.0 62.8
Table 5.8 Indigenous Poverty in LaEn America
 Workfare vs Welfare? Basic cost
effecEveness consideraEons
•  Workfare, such as a Food for Work Program, are more likely to
represent a bezer policy than welfare on a current program
efficiency basis when these criteria are met:
–  1. It is harder to screen the poor without a workfare requirement
–  2. Poor workers have lower opportunity cost of Eme (so the
economy loses lizle output when they work in the program)
–  3. Non-poor workers have higher opportunity cost of Eme (so they
are unlikely to parEcipate to get the benefits)
–  4. The fracEon of the populaEon living in poverty is smaller (so the
extra costs of a universal welfare scheme would be high)
–  Note: Each of the above are factors in the efficiency tradeoff:
–  It’s important to keep in mind that all these factors must be
accounted for together in order to determine whether welfare or
workfare is more comparaEvely efficient on these criteria.
 Workfare vs Welfare: Human Capital Factors
•  Another significant factor in a workfare vs welfare choice is that the program
does not reduce incenEves for the poor to acquire human capital
–  Note: This factor is largely addressed to incenEvize school age children to not see future
workfare parEcipaEon as an alternaEve to pu{ng high effort into school and conEnuing
their educaEon; a program design response might be very high work hour requirements for
parEcipaEon as a deterrent – but cannot be so high that those who later need the program
do not parEcipate.
•  This is also a social efficiency design consideraEon, that can save expenditures
when viewed across Eme
•  An addiEonal consideraEon could be the incenEve for adults to build skills –
this might require a different approach to program design
•  A requirement might be parEcipaEon in work acEviEes that also build relevant
skills, or devoEng part of work Eme to training
•  Final note: Another strategy is to add requirements for school azendance if
used over Eme; if necessary, consider providing schooling on workfare site
 Workfare vs Welfare: Other Factors
•  Other significant factors in a workfare vs
welfare choice
–  There are greater net benefits of the program’s work output
–  There is less social sEgma of visible workfare parEcipaEon, so the
poor do not suffer humiliaEon or be deterred from needed work
(otherwise, a discreet welfare transfer may be preferable)
–  AlternaEves available for disabled or others prevented from
taking part in the program
–  Which can bezer encourage farmers and microentrepreneurs to
take favorable business bets (a funcEoning safety net), other
factors considered?
 5.6 Policy OpEons on Income Inequality and Poverty:
Some Basic ConsideraEons

•  Areas of IntervenEon:
–  Altering the funcEonal distribuEon
–  MiEgaEng the size distribuEon
–  ModeraEng (reducing) the size distribuEon at
upper levels
–  ModeraEng (increasing) the size distribuEon at
lower levels

 5.6 Policy OpEons on Income Inequality and Poverty:
Some Basic ConsideraEons

•  Policy opEons
–  Changing relaEve factor prices
–  Progressive redistribuEon of asset ownership
–  Progressive taxaEon
–  Transfer payments and public provision of goods
and services
 5.7 Summary and Conclusions: The Need for a
Package of Policies

•  Policies to correct factor price distorEons

•  Policies to change the distribuEon of assets, power, and access
to educaEon and associated employment opportuniEes
•  Policies of progressive taxaEon and directed transfer payments
•  Policies designed to build capabiliEes and human and social
capital of the poor
•  Some specific programs covered in later chapters include:
condiEonal cash transfers (Chapter 8); agricultural extension
(Chapter 9); and micro-finance (in Chapter 15, and Chapter 11
cases)
 Concepts for Review
•  Absolute poverty •  Foster-Greer-Thorbecke (FGT)
•  Asset ownership index
•  Character of economic growth •  FuncEonal distribuEon of income
•  Decile •  Gini coefficient
•  Disposable income •  Headcount index
•  Factor share distribuEon of •  Income inequality
income •  Indirect taxes
•  Factors of producEon •  Kuznets curve
•  Land reform
 Concepts for Review (conEnued)
•  Lorenz curve •  Size distribuEon of income
•  MulEdimensional poverty index •  Subsidy
(MPI) •  Total poverty gap (TPG)
•  Personal distribuEon of income •  Workfare programs
•  Progressive income tax
•  Public consumpEon
•  QuinEles
•  RedistribuEon policies
•  Regressive tax
 Appendix 5.1: Appropriate Technology and Employment
GeneraEon: The Price IncenEve Model

•  Choice of techniques
•  Factor Price distorEons and appropriate
technology
•  PossibiliEes of Labor-Capital subsEtuEon
Figure A5.1.1 Choice of Techniques: The Price IncenEve Model
 Appendix 5.2: The Ahluwalia-Chenery Welfare Index

•  ConstrucEng poverty-weighted index of social

welfare
Table A5.2.1 Income DistribuEon and Growth in 12 Selected
Countries