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* QUESTIONS to be addressed:
1. what is the extent of relative inequality in developing countries and how to measure it?
2. who are the poor and what are their characteristics?
3. How are economic growth and inequality related, does rapid growth increase or reduce
inequality?
4. Do the poor benefit from growth and how much?
5. Is inequality bad? Can arguments against inequality be made from purely efficiency
perspective?
6. Policies related to inequality and absolute poverty.
Functional inequality
* sometimes important to know not only the size of income a person has, but its factor share
distribution (functional inequality). E.g. what fraction of income labor vs. capital receive.
* gives additional, more detailed information on inequality in a country. May be important for
policy: e.g. if a person receives a certain income as unemployment pay vs. working at
minimum wage, etc.
POVERTY – measurement
* the inequality measures give idea about relative poverty (how much income people in a
country have relative to each other)
* here: absolute poverty – the number of people unable to satisfy some basic needs
*basic idea: define a “poverty line” (PL) – minimum amount of income (PPP adjusted) that
can be used to compare poverty internationally; typically $1 a day or $2 a day.
Headcount (the nr of people below the PL) and headcount index (ratio) – the proportion of
people below PL from the whole population.
* headcount – H (e.g. 5 mln people), headcount index is H / N (e.g. 10%)
* why poverty line? Simple. But there are issues: e.g. it matters if most people are right below
it, or far from it (policy bias can result from that, explain)
* to measure the amount of poverty more precisely (instead of the binary measure of being
below or above the PL) we use another measure: total poverty gap (TPG)
* TPG measures the total amount of income necessary to lift everyone below the PL to that line
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Human poverty index (introduced by UNDP)
* want to broaden the usual “income poverty” definition (e.g. the $1 a day PL by the World
Bank); analogous to the human development index
* UNDP argues poverty should be measured in terms of three deprivations:
- of life (the % of people unlikely to live beyond 40 years of age)
- of basic education (the % of adults who are illiterate)
- of overall economic provisioning (% of people without access to safe water + % of
children underweight for their age)
* creates a measure both different from the standard PL and also from HDI;
*Some examples: Cote d’Ivoire 26 places worse if poverty measured by HPI than in income;
Morocco 37 places worse; i.e. for these countries poverty is bigger problem than income
measures indicate;
* in contrast, Nigeria, Nicaragua, Bolivia, Tanzania perform better on HPI.
* most people agree that absolute poverty is bad and should be eradicated (e.g. in all religions,
all gov’t policies); Do you agree?
* but how about inequality? Should relative inequality be a concern? (above the poverty line)
1. economic efficiency: income inequality can lead to inefficiencies
Example 1: credit markets – a poor person with a great business idea but no collateral – the
idea will never be implemented – a loss to society;
Example 2: education; if costly (and there always is an opportunity cost even if no fees) poor
parents may not educate their smart children who may otherwise become doctors, inventors,
etc. – loss to society.
Example 3: the saving rate – if many poor overall saving rate in the economy can be very low
(less domestic resources to invest in the economy)
Example 4: farming - large farms run by hired labor may be unproductive due to incentive
problems; smaller, family-run farms usually more productive. However, large farms can be
even more productive by using machines.
NOTE: for most of the above to be true we need some type of credit or other market
inefficiency; if all markets are perfect, inequality would not matter (give examples).
* higher levels of inequality may undermine political and social stability; inequality makes the
rich richer, raises their power and can yield to outcomes that further exacerbate inequality.
* high inequality can facilitate rent seeking (incl. excessive lobbying, political donations,
bribery, cronyism). Resources devoted to such activities are unproductive! Again – economic
inefficiency.
* hard to make reforms and changes: the ‘losers’ are typically the rich who have the power.
* on the other hand, lots of poor can also lead to populist (redistributionary) policies that are
also bad for the economy in the longer run (e.g. certain land reforms, nationalizations,
unaffordable social policies).
* with more inequality focus of politics is mostly on redistribution rather than increasing the
‘size of the pie’. (more in ch. 11)
Rawls’ ‘veil of ignorance’ criterion: what level of inequality would you vote for before being
born. Most people vote for some intermediate amount.
EMPIRICAL EVIDENCE
Who are the poor? (look at micro level before looking at policy)
1. rural – poor are disproportionately located in rural areas (Table 5.6) – about 80% of people
below PL are in rural areas (mostly in subsistence agriculture – 2/3)
* but often urban bias in terms of development policy
* seems focus on rural areas and agriculture in particular is necessary
2. women -
- women and children experience harshest deprivation, more likely to be undernourished, less
likely to receive medical services, clean water, sanitation, etc.; less access to education, formal
sector employment, social security
- poorest segments in LDCs are in women-headed households.
- women paid less for same tasks but also effectively precluded (banned) from high-earning
occupations
- legislation and social customs often preclude women from owning property, businesses,
signing contracts;
* this inequality also exists within households
- strong intra-household bias against women in nutrition, medical care, education, inheritance
e.g. in India girls are 4 times more likely than boys to suffer from acute malnutrition; 40 less
likely to be taken to hospital when ill.
- these gender biases are possible reason for high sex ratios (#men to #women) in some
countries (“the missing women”) - HICs .95-.98 (many LICs – 1.02-1.08) China = 1.06; India
= 1.06; Kuwait = 1.39; Canada = .98; USA = .97; France = .95; Japan = .96;
* why?
- much work performed by women is unremunerated / intangible (parenting, housework)
- often socially unacceptable for women to contribute to money earning – leads to their low
bargaining power in the family
- programs: mostly oriented to men (agricultural extension services; job training)
* much more needs to be done focusing on women (education, microfinance)
3. ethnic minorities
* seems obvious but important implication is that growth can help (see more below)
POLICIES
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