Chapter 5

Poverty,
Inequality, and
Development

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

The Growth Controversy:
Seven Critical Questions
• What is the extent of relative inequality, and
how is this related to the extent of poverty?
• Who are the poor?
• Who benefits from economic growth?
• Does rapid growth necessarily cause
greater income inequality?
• Do the poor benefit from growth?

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-2

The Growth Controversy:
Seven Critical Questions
• Are high levels of inequality always bad?
• What policies can reduce poverty?

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-3

Measuring Inequality and
Poverty
• Measuring Inequality
– Size distributions (quintiles, deciles)
– Lorenz curves
– Gini coefficients
– Functional distributions

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-4

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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-5

Figure 5.1 The Lorenz Curve

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-6

Figure 5.2 The Greater the Curvature of the
Lorenz Line, the Greater the Relative
Degree of Inequality

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-7

Figure 5.3 Estimating the Gini
Coefficient

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-8

Figure 5.4 Four Possible Lorenz
Curves

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-9

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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-10

Measuring Inequality and
Poverty
• Measuring Absolute Poverty
– Headcount Index
– Total poverty gap

TPG  i 1 (Yp  Yi )
H

– Where Yp is the absolute poverty line

– Yi is income of person I

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-11

Figure 5.6 Measuring the Total
Poverty Gap

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-12

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. All rights reserved. 5-13

Measuring Inequality and
Poverty
• Measuring Absolute Poverty
– Foster-Greer-Thorbecke measure


1  Yp  Yi  H
P    
N i 1  Yp 

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-14

Measuring Inequality and
Poverty:
• Measuring Absolute Poverty
– The Human Poverty Index (HPI)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-15

Poverty, Inequality, and Social
Welfare
• What’s so bad about inequality?
• 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)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-16

Figure 5.7 Improved Income
Distribution under the Traditional-
Sector Enrichment Growth Typology

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-17

Figure 5.8 Worsened Income
Distribution under the Modern-Sector
Enrichment Growth Typology

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-18

Figure 5.9 Crossing Lorenz Curves in
the Modern-Sector Enlargement
Growth Typology

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-19

Poverty, Inequality, and Social
Welfare
• Kuznets’ inverted-U hypothesis

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-20

Figure 5.10 The “Inverted-U”
Kuznets Curve

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-21

Table 5.2 Selected Income
Distribution Estimate

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-22

Table 5.3 Income and Inequality in
Selected Countries

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-23

Figure 5.11 Kuznets Curve with
Latin American Countries
Identified

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-24

Figure 5.12 Plot of Inequality Data
for Selected Countries

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-25

Poverty, Inequality, and Social
Welfare
• Growth and inequality

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-26

Figure 5.13 Long-Term Economic
Growth and Income Inequality, 1965-
1996

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-27

Figure 5.14 Change in Inequality in
Selected Countries, with or without
Growth

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-28

Absolute Poverty: Extent and
Magnitude
• Extreme Poverty
– $1-a-day headcount shows some progress
– Incidence of extreme poverty is uneven

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-29

Table 5.4 Regional Poverty
Incidence, 2004

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-30

Table 5.5 Poverty Incidence in
Selected Countries

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-31

Table 5.5 Poverty Incidence in
Selected Countries (continued)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-32

Absolute Poverty: Extent and
Magnitude
• Growth and poverty
– Impact on per capita growth
– Limited saving and investment by rich in poor
countries
– Impact on productivity
– Lack of home demand
– Incentives for public participation in the
development process

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-33

Economic Characteristics of
Poverty Groups
• Rural Poverty
• Women and poverty (See chapter 8 for
more detail)
• Ethnic minorities, indigenous populations,
and poverty

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-34

Table 5.6 Poverty: Rural versus
Urban

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-35

Table 5.7 Indigenous Poverty in
Latin America

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-36

The Range of Policy Options:
Some Basic Considerations
• Areas of intervention
– Altering the functional distribution
– Mitigating the size distribution
– Moderating (reducing) the size distribution at
upper levels
– Moderating (increasing) the size distribution at
lower levels

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-37

The Range of Policy Options:
Some Basic Considerations

• Policy options
– Changing relative factor prices
– Progressive redistribution of asset ownership
– Progressive taxation
– Transfer payments and public provision of
goods and services

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-38

Summary and Conclusions: The
Need for a Package of Policies
• Policies to correct factor price distortions
• Policies to change the distribution of assets,
power, and access to education and
associated employment opportunities
• Policies of progressive taxation and directed
transfer payments
• Policies designed to build capabilities and
human and social capital of the poor

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-39

Case Study: Bangladesh

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-40

Concepts for Review

• Absolute poverty • Factor-price distortions

• Asset ownership • Factor share
• Character of economic distribution of income
growth • Factors of production
• Deciles • Foster-Greer-
• Disposable income Thorbecke (FGT) index
• Elasticity of factor • Functional distribution
substitution of income

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-41

Concepts for Review (cont’d)

• Gini coefficient • Lorenz curve

• Headcount index • Neoclassical price-
• Human Poverty Index incentive model
• Income inequality • Personal distribution of
income
• Indirect taxes
• Poverty gap
• Kuznets curve
• Progressive income
• Land reform
tax

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-42

Concepts for Review (cont’d)

• Public consumption • Size distribution of

• Quintiles income
• Redistribution policies • Subsidy
• Regressive tax • Workfare programs

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-43

Appendix 5.1: Appropriate Technology and
Employment Generation: The Price
Incentive Model

• Choice of techniques
• Factor Price distortions and appropriate
technology
• Possibilities of Labor-Capital substitution

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-44

Figure A5.1.1 Choice of Techniques:
The Price Incentive Model

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-45

Appendix 5.2: The Ahluwalia-
Chenery Welfare Index

• Constructing poverty-weighted index of

social welfare

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-46

Table A5.2.1 Income Distribution and
Growth in the Twelve Selected
Countries

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-47