University of Puthisastra

Economics Development Class

Lecture 4: Poverty, Inequality &
Development

Professor: Hong Muyheng

November 08, 2016

(Week 4)
Review Week 3

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• Development is both:
1. Possible to achieve
2. Extremely difficult to complete
• You Know why?

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• Because Coordination failure b/n:
1. Group of firms
2. Workers
3. Firms and workers
4. Consumers
5. Government

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 Solving Underdevelopment
• What is Coordination failure approach?
• The state of affair in which the inability of agents to
coordinate their behavior (choices) lead to an
outcome (equilibrium) that leave all agents worse off
than all alternative situation that is also an
equilibrium.
• O-ring model: an economic model in which
production functions exhibit strong
complementarities among inputs and which has
broader implication.
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Situation of Underdevelopment
• Big Push Model: A performance economy wide, and
typically public policy-led effort to initiate or
accelerate economic development across a broad
spectrum of new industries and skills.

• You know why people still poor?

• Because they still deeply living in Underdevelopment
Trap or Poverty Trap.

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 2. Underdevelopment
• The coordination problems can be illustrated
by:
1. Where-to-meet dilemma
2. Prisoner’s dilemma
• Now it is time to compete.
• Who can tell me what is the meaning of both
two techniques above? Once each only.
• You will get extra credit up to 3 credits.

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• Where-to-meet dilemma: A situation in which all
parties would be better off cooperating than
competing but lack information about how to do so.
If cooperation can be achieved, there is no
subsequent incentive to defeat or cheat.
• Prisoners’ dilemma: A situation in which all parties
would be better off cooperation than competing but
once cooperation has been achieved, each party
would gain the most by cheating, provided that other
stick to cooperative agreements- thus causing any
agreement to unravel.

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Let’s Prisoners Dilemma Play Game
• Axelrod (1984) a game for two players. Each round in
the game consists of each player choosing whether
to cooperate ("C") or not ("N"). The payoff for each
player depends on the actions of both players,
according to table 1.
Action of Player 1 Action of Player 2 Score Player 1 Score Player 2
C C 3 3
N N 1 1
C N 0 5
N C 5 0

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Round Which di you How much did Total Score
choose an C you win this for each
or a N? round? round
record choice

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SO WHAT IS YOUR FINAL SCORE?

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 Win As Much As You Can
• Direction: There are four players in each group. Each
player receives two small cards one marked with an
‘X’ and the other marked with a ‘Y’. The objective of
the game is for each player to win as many
hypothetical dollars as possible during the ten rounds
of play. The pay-off depends upon the mix of choices
selected by the players in the group. Since there are
four players in each group, five combination of
choices and five pay-offs are possible.

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Win As Much As You Can
Outcome Bonus
4 X’s = Lost 1$ each

3 X’s = Win 1$ each

1 Y = Lose 3$
2 X’s = Win 2$ each
2 Y’s = Lose 2$ each
1 X = Wins 3$
3 Y’s = Lose 1$ each
4 Y’s = Win 1$ each

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 Win As Much As You Can
Round Which di you How much did How much did Total Score
choose an X you win this you lose this for each
or a Y? record round? round? round
choice
1
2
3
4
5
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7
8
9
10
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Preliminary Case 2:
Pakistan and
Bangladesh

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 Group Discussion!
• Form of a group of 5: Share the part and then do
presentation.
• The group will got 3 credit for this activities.
• The Best team will get 5 credits.
• Each group have 20mns to prepare.
• Each team has 7 minutes to present.
• Good luck!!!!

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Week 4
Go!

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Preliminary Case 3: Education
and Economic Learnt in South
Korea and Argentina
Page 133-135

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 Ch5: Poverty, Inequality, and
Development
1. Measuring Inequality & Poverty
2. Poverty, Inequality, and Social Welfare
3. Absolute Poverty: Extend & Magnitude
4. Eco. Characteristics of High-Poverty Groups
5. Policy Options on Income Inequality and
Poverty

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1. Measuring Inequality & Poverty
• What is the meaning of inequality?
• The condition of being unequal; lack of equality;
disparity among the people or the disproportionate
distribution of total national income among
households.
• Inequality can exist every where.
• You know why?
1. Government’s actions
2. Economic of choices
3. Income distribution etc.
• So how to measure Inequality? 19
1. Measuring Inequality & Poverty
• The economists emphasize two methods to measure
inequality.
1. Personal or Size of Distribution of income
2. The functional or distributive factor share
distribution of income
• Personal Distribution of Income: individual or
household about their total incomes.
• This method focus on Size class of persons.
• Ex. The share of total income accruing to the poorest
specific percentage of a population without regard to
the sources of that incomes.
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1. Measuring Inequality & Poverty
• Personal Income count the locational (urban, rural)
and occupational sources of income (e.g. agriculture,
manufacturing, commerce, services).
• This income count others sources also such as
interest, profits, rents, gifts, or inheritance.
• So example Mr. C and Mr. Y both receive the same
personal income, they classifies as group doesn’t
matter Mr. C work as doctor 15 hours a day while Mr.
Y collect interest on his inheritance.
• Economists arranged all individual by ascending
personal incomes and then divide the total
population into district, group, or size. 21
1. Measuring Inequality & Poverty
• So the common method is divide the population into
successive Quintile (fifths) or Deciles (tenths)
according to ascending income levels
• And then determine what proportion of the total
national income is received by each income group.
• Now see the example of Typical Size distribution of
personal income in a developing country by income
share-Quintiles and Deciles.

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1. Measuring Inequality & Poverty
• What is Quintile (fifths)?
• A 20% proportion of any numerical quantity. A
population divided into quintiles would be divided
into five groups of equal size.
• What is Deciles (tenths)?
• A 10% proportion of any numerical quantity. A
population divided into deciles would be divided into
ten groups of equal size.

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 Table 5.1 Typical Size Distribution of Personal Income in a
Developing Country by Income Shares—Quintiles and Deciles

Copyright © 2009 Pearson Addison-Wesley.

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All rights reserved.
1. Measuring Inequality & Poverty
• Functional (Factor Share) of Distribution of Income:
• Attempt to explain the share of total national income
that each of the factors of production (land, labor,
and capital) receives.
• It looks of percentage that labor received compare
with percentage of total income in the form of rent,
interest, and profit.
• This method want to see about equilibrium of the
function.
• Let’s see the Figure 5.5

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Figure 5.5 Functional Income Distribution in a
Market Economy: An Illustration

Copyright © 2009 Pearson Addison-Wesley.

5-26
All rights reserved.
1. What is the meaning of
absolute poverty?

A situation of people
being unable to the Foods, Clothing,
minimum levels of income

Healthcare, Shelter, Other essentials

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1. Measuring Inequality & Poverty
• What is the meaning of absolute poverty?
• A situation of people being unable to the minimum
levels of income, food, clothing, healthcare, shelter,
and other essentials.
• To measure poverty, we use Total Poverty Gap (TPG)
• Measuring Absolute Poverty
– Headcount Index
TPG  i 1 (Yp  Yi )
H

– Where Yp is the absolute poverty line

– Yi is income of person I
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Measuring Inequality and Poverty
• Measuring Absolute Poverty
– Average poverty gap

TPG
APG 
H
– Where H is number of persons
– TPG is total poverty gap

Copyright © 2009 Pearson Addison-Wesley.

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All rights reserved.
Figure 5.6 Measuring the Total Poverty Gap

Copyright © 2009 Pearson Addison-Wesley.

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All rights reserved.
 2. Economic Characteristic of High-
Poverty Groups
• Seeing the big picture of poverty is not enough.
• Before we formulate effective policies and program
to attack poverty, we need specific knowledge of
these high-poverty groups:
1. Rural Poverty
2. Women and Poverty
3. Ethnic Minority, Indigenous Populations, and
Poverty

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 2. Economic Characteristic of High-
Poverty Groups
• Rural Poverty: We might can say most of the poor
living in the rural area.
• Because they highly engaged in agriculture and
associated activities.
• Most of them are women, children than adult males.
• In developing nations, small farmers or low-paid
farmworkers are very poor.
• For example, In Asia and Africa, about 80% of all
target poverty group are located in the rural area.
• See the Table 5.6 about Poverty Rural vs Urban.

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Table 5.6 Poverty: Rural versus Urban

Copyright © 2009 Pearson Addison-Wesley.

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 2. Economic Characteristic of High-
Poverty Groups
• Women and Poverty:
• Women make up a substantial majority of the world’s
poor.
• A disproportionate number of the ultra-poor live in
households headed by women while there is no male
wage earners.
• And income disparity b/n male and female-headed
households is large.
• For example, in urban women are much less likely to
obtain formal employment in private companies or
public agencies.
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 2. Economic Characteristic of High-
Poverty Groups
• Ethnic minority, indigenous populations & Poverty:
• 40% of world size population contains five sizable
ethnic population which one or more facing political,
economic, and social discrimination.
• Recently, civil war and domestic conflict foster them
to large composition of poverty.
• For example, 300 million indigenous people over
5000 different groups in more than 70 countries
suffer from poverty problem.
• See the table 5.8 about indigenous poverty in Latin
America.
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Table 5.7 Indigenous Poverty in Latin America

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 3. Welfare
• To evaluated Human Poverty Index (HPI), we look
through:
1. % of people expected to die before age 40,
2. Adult literacy,
3. Access to safe water,
4. Health services,
5. Weight deficit of children less than five.
• In 2006, UNDP introduces new MPI
(Multidimensional Poverty Index) to evaluate poverty
Index that focus on 10 dimension.
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Calculation Poverty Index

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Example: MPI of Nepal in 2006

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3. Policy Options on Income Inequality
and Poverty
• Developing countries aim to reduce poverty and
excessive inequalities in their distribution of income.
• So what kind of economic policies and other policies
of gov’t might help to reduces those problems?
1. Altering the functional distribution
2. Mitigating the size of distribution
3. Moderating (reducing) the size distribution at the
upper levels
4. Moderating (increasing) the size distribution at the
lower levels
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Preliminary Case 4: Institutions,
Inequality, and Incomes of
Ghana and Cote Di-Voire
Page 250-255
Comparing Economic Development
and Income inequality between
these countries, which one better
and why?
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 Homework 2
Choose a topic you like here! By Making a group
of 3-4!

1. Do you care economy or environment? Why?

2. In your opinion, Which one of above two
should be go first and why?
3. Do you care economic development or the
poor? Why?
4. If you force to choose Economic, what and
who will suffer from your choice?
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THANKS YOU!
សូមអរគុណ!

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