Lecture 3 - Sept. 15, 2013 - Development Economics - Asim Jahangir

Development Economics
Lecture 3| Sept. 15, 2013

|Development Economics| Asim
Jahangir
Agenda
• Poverty & Inequality
• Population Growth
THE INTERPLAY OF POVERTY &
INEQUALITY
You remember this graph?
Measuring Income Distribution
Relative Income Share:
• The ratio of the highest 20% to lowest

40% of the population
• The higher the ratio, the greater is income

inequality
Copyright © 2009 Pearson

Addison-Wesley. All rights 5-8
reserved.
Typical Size Distribution of Personal Income

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Lorenz Curve of Income Distribution
• Depicting:
quintile percentage of population vs.
cumulative percentage of income received
• The closer the Lorenz curve to the line of

equality, the better is the size distribution of
income

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Data for the United States in 2000:
Quintile % Income % Cumulative Income

Lowest 20% 3.6 3.6
Second 20% 8.9 12.5
Third 20% 14.9 27.4
Fourth 20% 23.0 50.4
Richest 20% 49.6 100.0

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The greater the curvature of the Lorenz Curve, the greater is the
degree
Copyright ©of
2009income
Pearson inequality
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Improved Income Distribution

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Worsened Income Distribution

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Crossing Lorenz Curves

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The Gini Coefficient

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0 < The Gini Coefficient < 1
• 0.41 for U.S.

• 0.30 for Ethiopia
• 0.57 for Brazil
• Gini Coefficient is higher for the OPEC and

Middle-income countries than Low-
income countries
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Income inequality had had a tendency to
increase.
1960 1980
LDCs 0.544 0.602
Low income countries 0.407 0.450
Middle-income countries 0.603 0.569
The OPEC 0.575 0.612

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Income Distribution Measures

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Income Inequality

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Functional Income Distribution
• Assume a traditional economy in which labor is
the only variable input (capital and land are
fixed): Output = Wages + Profits
• Functional income distribution = Wages as a
percentage of Profits
• The higher the ratio, the greater is income
equality

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Functional Income Distribution

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Poverty Gap
Average percent of income shortfall below
the poverty line. Over 10.5% in LDCs
Or …
Poverty Gap is the amount of income needed to
bring every person above the poverty line
• Latin America & Caribbean: about 9%
• Middle East and North Africa: about 1%
• Sub-Saharan Africa: about 15%
• South Asia: 13%
• China, East Asia & Pacific: 8%
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Measuring Poverty Gap
• Poverty and income inequality depend on type
of economic, political and institutional
arrangements according to which rising national
incomes are distributed among broad segments
of a population
• A middle-income country may have a higher
poverty rate and poverty gap than a low-income
country (South Africa vs. Sri Lanka)

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Measuring Total Poverty Gap

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Growth and Distribution
The “Inverted-U” Kuznets Curve
• Income inequality increases during the early

stages of growth
• Income equality increases during a later stage

of growth with redistribution of income and
wealth

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The Kuznets Curve

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Evidence on Kuznets Curve
• Cross country evidence supports the
hypothesis
• Time series data show some countries

have been able to grow and improve
income distribution at the same time

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Kuznets Curve in Latin American

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Income Inequality Across Time

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Growth & Inequality, 1965-1996

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Change in Inequality
with or without Growth

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Absolute Poverty
• International Poverty Line: $1 per day per
person
• The Headcount Ratio: The percentage of

people living below the International Poverty
Line

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Regional Poverty Incidence, 2004

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Human Poverty Index
Human Poverty Index is measured in terms of

deprivation of
• Life: years of life expectancy
• Basic education: adult illiteracy
• Basic needs: lack of access to health services , access

to safe drinking water, and number of malnourished
children
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Characteristics of Poverty Groups
• Rural population
• Women and children
• Ethnic minorities and indigenous population

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Poverty: Rural vs. Urban

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Indigenous Poverty in Latin America

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Policies of Income Distribution
• Remove factor price distortions: Get factor prices
right!
• Land redistribution and supportive farm services
• Income redistribution
– Progressive taxation
– Transfer payments

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Policies to Reduce Poverty
• Invest in human and social capital of the poor
• Provision of public goods and social services
• Reduce concentration of economic and political

power

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Income Distribution and Growth

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POPULATION AND DEVELOPMENT
Estimated World Population Growth

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World Population Growth, 1750-2050

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World Population Growth Rates and Doubling
Times

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World Population Distribution by Region,
2003 and 2050

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World Population Distribution

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Fertility Rate for Selected Countries 1970 and
2006

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Population Pyramids
• LDCs population pyramid is truly pyramid-

shaped with 40% younger than 19 years and
less than 5% over 65. Of the youth, 2 billion are
19 and younger and 400 million between 15-19
• MDCs population structure is more like a

cylinder with many middle-aged and elderly
individuals
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Population Pyramids:
Ethiopia vs. U.S., 2005

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Hidden Momentum of Population Growth
• Family planning takes many years to achieve two-child

family and eventually replacement fertility because
today’s children are future parents
• In Nigeria, If family planning began in 1990

• Two-child family may achieve in 2035 (45 years)
• Replacement fertility would eventually reach in 2150
(115 years)

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Hidden Momentum of Population Growth

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The Demographic Transition
• Stage I: High birthrates and death rates
• Stage II: Continued high birthrates; declining

death rates because of improved medicine
• Stage III: Falling birthrates and death rates,

eventually stabilizing due to improved medicine
and decline in the fertility rate
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Demographic Transition in
Western Europe

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Demographic Transition in LDCs

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The Malthusian Trap
• Population grows at a geometric ratio (e.g.,
1, 2, 4, 8, 16, 32, etc.)
• Food supply increases at an arithmetic ratio

(e.g., 1, 2, 3, 4, 5, etc.)
• Hence, hunger, starvation, and death shall follow
• Remedy is to keep population growth in check

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The Malthusian Trap
Growth rate (%)
5 Growth
4
B Population growth rate C
Trap
3 Trap
1
A
Growth Income per capita
0
Y 0 Y1 Y2 Y3 Y4
-1
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Criticism of The Malthusian Trap
• Rapid income growth due to technological

advancement
• Greater food production due to land-intensive

technology and application of modern farm
inputs
• Economic growth faster than population growth,

resulting in the rise of per capita income over
time
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Criticism of The Malthusian Trap
Growth rate (%)
5 Income growth rate
Population growth rate

3
0
Income per capita
-1
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Cross-National Evidence
• Many LDCs have been able to lower population
growth rate while increasing income per capita
(e.g., China, Sri Lanka, Chile, Singapore)
• Still, there are countries with low or even

negative rate of economic growth, but high rate
of population growth (e.g., Kenya. Congo,
Philippines, Colombia, Venezuela)

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Microeconomic Theory of Fertility
Demand for Children Equation
Cd = f (Y , Pc, Px, tx), x = 1,..., n

Where
Cd is the demand for surviving children
Y is the level of household income
Pc is the “net” price of children
Px is price of all other goods
tx is the tastes for goods relative to children

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Demand for Children Equation
Cd = f (Y , Pc, Px, tx), x = 1,..., n

Under neoclassical conditions, we would expect:
¶Cd ¶Cd
>0 >0
¶Y ¶Px
¶Cd ¶Cd
<0 <0
¶Pc ¶tx

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• In LDCs, the demand for children is high

because the cost of raising children is low and
they add to the family’s workforce to generate
income
– In LDCs, children are “investment goods”

– In MDCs, children are “consumer goods”

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Policies of Fertility Reduction
• Improve female education, and economic and

social role and status
• Provide of female non-agricultural wage

employment
• Rise in family income

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Policies of Fertility Reduction
• Reduction in infant mortality, hence demand for

replacement children
• Provide old-age income security
• Expand schooling opportunities
• Establish family planning programs

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Consequences of High Fertility
Population growth isn’t a real problem. The problems are

• Poverty and lack of development
• World resource depletion and environmental

destruction
• Uneven distribution of population
• Subordination of women

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Consequences of High Fertility
• Slow or negative growth of per capita income

• Increased poverty and inequality
• Inadequate educational and health-care services
• Food shortage and hunger
• Environmental decay and loss of natural resources
• International migration

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Some Policy Approaches
What can LDCs do to reduce fertility?
• Improve economic and social equality
• Invest in female education and job creation
• Educate people about negative consequences of high
fertility rate and provide family planning programs
• Provide incentives to reduce rural-urban migration
and brain drain

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Countries Adopting Family-Planning Programs,
1960-1990

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Some Policy Approaches
How can MDCs help LDCs reduce fertility?
• Improve international economic relations
• Research into technology of fertility control

• Financial assistance for family planning
programs

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Lecture 3 - Sept. 15, 2013 - Development Economics - Asim Jahangir

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Development Economics

Lecture 3| Sept. 15, 2013

Relative Income Share:

• The ratio of the highest 20% to lowest

• The higher the ratio, the greater is income

Copyright © 2009 Pearson

Copyright © 2009 Pearson

• The closer the Lorenz curve to the line of

Copyright © 2009 Pearson

Data for the United States in 2000:

Quintile % Income % Cumulative Income

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

• 0.41 for U.S.

• Gini Coefficient is higher for the OPEC and

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

The “Inverted-U” Kuznets Curve

• Income inequality increases during the early

• Income equality increases during a later stage

Copyright © 2009 Pearson

Copyright © 2009 Pearson

• Time series data show some countries

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

• The Headcount Ratio: The percentage of

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Human Poverty Index is measured in terms of

• Life: years of life expectancy

• Basic education: adult illiteracy

• Basic needs: lack of access to health services , access

• Women and children

• Ethnic minorities and indigenous population

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

• Land redistribution and supportive farm services

Copyright © 2009 Pearson

• Invest in human and social capital of the poor

• Provision of public goods and social services

• Reduce concentration of economic and political

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

Copyright © 2009 Pearson

• LDCs population pyramid is truly pyramid-