Poverty, inequality and Development

Dr. Thida Htoo

Pro-rector
Meiktila University of Economics

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 Distribution and Development

• How can we best measure inequality and poverty?

• What is the extent of relative inequality in
developing countries; how is this related to the
extent of poverty?
• Who are the poor, and what are their economic
characteristics?
• What determines the nature of economic growth—
that is, who benefits from economic growth, and
why?
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• Are rapid economic growth and more equal income distribution
compatible or conflicting objectives?: Is rapid growth achievable
only at a cost of greater income inequality or can lessening
income disparities contribute to higher growth rates?
• 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?
• What is so bad about extreme inequality?
• What kinds of policies are required to reduce the magnitude and
extent of absolute poverty?
• What has been learned about the psychological dimensions of poverty,
and how can this research help us design and implement more effective
poverty programmes?

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 Measuring Inequality

• Measuring Inequality
– Size distributions
– Lorenz curves
– Gini coefficients and aggregate measures of
inequality
– Functional distributions

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

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 The Lorenz Curve

graph
depicting the
variance of the
size distribution
of income
from perfect
equality.

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

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 Estimating the Gini Coefficient

The higher the value

of the coefficient, the higher the
inequality of income distribution;

the lower it is, the

more equal the distribution of
income.

Ranging
from 0 (perfect equality) to
1 (perfect inequality).

Gini coefficient for countries with

highly unequal income distributions
typically lies between 0.50 and
0.70

countries with relatively equal

distributions, it is on the order of
0.20 to 0.35
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 Four Possible Lorenz Curves
the economy corresponding
to the upper Lorenz curve is more
equal than that of the lower curve

economy A may unambiguously

be said to be more equal than
economy D.

Whenever two Lorenz curves

cross, such as curves B and C,

curve B represents a more equal

economy, since the poorest are
richer, even though the richest are
also richer (and hence the middle
class is “squeezed”).

an economy with a stronger

middle class is inherently more
equal, and those observers might
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select economy C.
 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
• Total poverty gap:

– Where Yp is the absolute poverty line; and Yi the

income of the ith poor person

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 Desirable Properties 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 (distribution)
• Population 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), resulting new income distribution is more
equal.
• Gini coefficient satisfies all four properties; so does the
coefficient of variation (CV): sample standard deviation divided by the
• sample mean, is another measure of inequality that also satisfies the four
criteria.

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 Measuring the Total Poverty Gap

Even though in both country A and country B, 50% of the population falls below the same poverty line, the TPG in country
A is greater than in country B. Therefore, it will take more of an effort to eliminate absolute poverty in
country A.

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 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

– normalized poverty gap: size of the income deficit per

individual in a given population

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• Measuring Absolute Poverty
– Average income shortfall (AIS): on average by how
much a poor person's income falls below the PL
TPG
AIS =
H

– where H is number of poor persons

– TPG is total poverty gap

– Note: Normalized income shortfall,

NIS = AIS/Yp
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Measuring Poverty: Income or Multidimensional?

• Following Amartya Sen’s capability approach, it is

apparent that, in general, poverty needs to be
conceptualized – and so measured – in a
multidimensional way
• return to this with the new MPI
• To fill this gap, Sabina Alkire and James Foster have
extended the FGT index to multiple dimensions

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

– 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 captures the
severity of poverty
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 The P2 poverty measure
 known as the squared poverty gap index,
 a standard of income poverty measure used by the World
Bank and other agencies, and it is used in empirical work
on income poverty
 because of its sensitivity to the depth and severity of
poverty.
 Mexico uses the P2 poverty measure to allocate funds for
education, health, and welfare programmes for the poor in
accordance with the regional intensity of poverty.
 creating incentives for officials to focus efforts on the poor
who are closest to the poverty line—because that is the
easiest and cheapest way for them to demonstrate
progress.

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 The Multidimensional Poverty Index (MPI)

• Identification 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
multidimensionally poor.
• MPI focuses on deprivations in health, education, and
standard of living; and each receives equal (that is one-
third of the overall total) weight.

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 MPI Indicators

• Health - nutrition and child mortality.

 First, a household is designated as deprived in nutrition if
there is a child who is either stunted or underweight; for
family members aged 15 and older, body mass index (BMI)
cutoffs are the indicators for the nutrition dimension
 Second, a household is considered deprived if any child has
died in the family in the five-year period preceding the
survey (though when the available household survey lacks
information about when the child died, the indicator is a child
death that occurred at any time in the past).
• The nutrition and mortality components are given equal
weight, so each counts as one-sixth (i.e., half of the 1/3
weighting for health) toward the maximum possible
deprivation in the MPI.
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 The education dimension also has two, equally weighted
parts.
 First, regarding school attainment, a household is
designated as deprived if no member at least 10 years
old has completed 6 years of schooling (the typical
duration of primary school).
 Second, regarding attendance, a household is deprived if
any child is not attending school up to the age at which
students finish eighth grade (class 8).
 each of the two components of the education dimension
 then count as one-sixth toward the maximum possible
deprivation.

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 In terms of standard of living, equal weight is placed on
six deprivations (each counting one-eighteenth toward the
maximum possible total deprivation score in the MPI):
 lack of electricity;
 insufficiently safe drinking water;
 inadequate sanitation;
 inadequate housing (either roof or walls made of
“rudimentary” materials and/or floor made of “natural
materials,” including dirt);
 unimproved cooking fuel;
 lacking ownership of more than one of the following
assets—telephone, radio, television, refrigerator,
computer, animal cart, bicycle, motorbike or similar
vehicle and does not own a car or truck.

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 Computing the MPI

• The MPI for the country (or region or group) is then computed
• A convenient way to express the resulting value is H*A, i.e.,
• The product of the headcount ratio H (the percent of people living
in multidimensional poverty), and the average intensity of
deprivation A (the percent of weighted indicators for which poor
households are deprived on average).
• The adjusted headcount ratio HA is readily calculated
• HA satisfies some desirable properties. Important example -
• Dimensional monotonicity: If a person already identified as poor
becomes deprived in another indicator she is measured as even
poorer - not the case using a simple headcount ratio.

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Calculating deprivation in this way, individuals are then identified as
“multidimensionally poor” when their family is deprived by a “weighted
sum” of 33% or more (those with deprivation scores in the 20% to
33% range are considered vulnerable to multidimensional poverty).

Finally, the actual MPI for the country (or region or group) is computed
with the adjusted headcount ratio; a convenient way to express the
resulting value is
 the product of the headcount ratio, HM (the percentage of people
living in multidimensional poverty)
 the average intensity of deprivation, A (the percentage of weighted
indicators for which poor households are deprived on average).
 The adjusted headcount ratio, HMA, is a special case of the broader
class of multidimensional poverty measures developed by Sabira
Alkire and James Foster introduced earlier;
 HMA is readily calculated, and it also satisfies some desirable
properties

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 Multidimensional poverty tells a different
story than income poverty

• Brazil and Mexico have very low MPI levels of just 0.016 and 0.025
respectively, while the world’s most impoverished country for which
data were available to compute the MPI, Niger, has an MPI value of
0.591, which actually represents a significant improvement over its
2013 score of 0.642.
• In addition to Niger, eight other countries had an MPI higher than
0.450, all in sub-Saharan Africa: Burkina Faso, Central African Republic,
Chad, Ethiopia, Madagascar, Mali, Somalia, and South Sudan
• Countries outside Africa with high levels of multidimensional poverty for
their regions include Afghanistan (with an MPI of 0.273), Cambodia
(0.158), Haiti (0.231), Lao PRD (0.211), Myanmar (0.176), Nepal
(0.154), Pakistan (0.228), Timor-Leste (0.211), and Yemen (0.241).
• The prospect for ending poverty depends critically on two factors: first,
the rate of economic growth—provided it is undertaken in a shared and
sustainable way—and second, the level of resources devoted to poverty
programmes and the quality of those programmes.

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 What is it About Extreme Inequality That’s So Harmful
to Economic Development?

• Why should we be concerned with inequality among those above the poverty line?
• There are three major answers to this question.
First,
 extreme income inequality leads to economic inefficiency. because
 at any given average income, the higher the inequality, the smaller the fraction of the
population that qualifies for a loan or other credit.
 relative poverty is the lack of collateral.
 When low-income individuals cannot borrow money, they generally cannot adequately
educate their children or start and expand a business.
 with high inequality, the overall rate of savings in the economy tends to be lower,
because the highest rate of marginal savings is usually found among the middle classes.
• Although the rich may save a larger dollar amount, they save a smaller fraction of their
incomes, and they almost always save a smaller fraction of their marginal incomes.

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 Landlords, business leaders, politicians, and other rich elites are known to
spend much of their incomes on imported luxury goods, gold, jewellery,
expensive houses, and foreign travel or to seek safe havens abroad for their
savings in what is known as capital flight.
 not add to the nation’s productive resources;
 substantial drains on these resources.
 In short, the rich do not generally save and invest significantly larger
proportions of their incomes (in the real economic sense of productive domestic
saving and investment) than the middle class or even the poor.
 inequality may lead to an inefficient allocation of assets.
 high inequality leads to an overemphasis on higher education at the expense of
quality universal primary education, which not only may be inefficient but is also
likely to beget still more inequality in incomes.
 high inequality of land ownership leads to inefficiency because the most
efficient scales for farming are family and medium-size farms.
 The result of these factors can be a lower average income and a lower rate of
economic growth when inequality is high
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• The second reason to be concerned with inequality above the poverty line
is that
 extreme income disparities undermine social stability and solidarity.
 high inequality strengthens the political power of the rich
 Strengthen their economic bargaining power.
 This power will be used to encourage outcomes favourable to themselves.
 High inequality facilitates rent seeking, including actions such as excessive
lobbying, large political donations, bribery, and cronyism.
 When resources are allocated to such rent-seeking behaviours, they are
diverted from productive purposes that could lead to faster growth.
 Even worse, high inequality makes poor institutions very difficult to improve,
 because the few with money and power are likely to view themselves as worse
off from socially efficient reform,

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high inequality may also lead the
 poor to support populist policies that can be self-defeating.
 Countries with extreme inequality, such as El Salvador and Iran, have
undergone upheavals or extended civil strife that have set back
development progress by decades.
 associated with pathologies such as higher violent crime rates.
 the focus of politics often tends to be on supporting or resisting the
redistribution of the existing economic pie rather than on policies to
increase its size

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• Finally, extreme inequality is generally viewed as unfair. \
 would you vote for an income distribution that was more equal or less
equal than the one you see around you?
 If the degree of equality had no effect on the level of income or rate of
growth, most people would vote for nearly perfect equality.
 Of course, if everyone had the same income no matter what, there
would be little incentive to work hard, gain skills, or innovate.
 As a result, most people vote for some inequality of income outcomes, to
the extent that these correspond to incentives for hard work or
innovation.
 most vote for less inequality than is seen in the today.

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• For all these reasons, we will write welfare, W, as
W = W(Y, I, P)
where
• Y = income per capita and enters our welfare function
positively,
• I = inequality and enters negatively,
• P = absolute poverty and also enters negatively.

• we need to consider all three elements to achieve an

overall assessment of welfare in developing countries.

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 Dualistic Development and Shifting Lorenz Curves: Some
Stylised Typologies

• What’s So Bad about Extreme Inequality?

• Dualistic Development and Shifting Lorenz
Curves: Some Stylized Typologies
– Traditional-sector enrichment
– Modern-sector enrichment
– Modern-sector enlargement

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 Improved Income Distribution under the
Traditional-Sector Enrichment Growth
Typology

In the traditional-sector enrichment

typology,
 growth results in higher income,
a more equal relative distribution
of income, and less poverty
 Traditional-sector enrichment
growth causes the Lorenz curve
to shift uniformly upward and
closer toward the line of equality,

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 Worsened Income Distribution under the Modern-Sector
Enrichment Growth Typology

In the modern-sector enrichment

growth typology,
 growth results in higher incomes,
a less equal relative distribution
of income, and no change in
poverty.
 Modern-sector enrichment
growth causes the Lorenz curve
to shift downward and farther
from the line of equality

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 Crossing Lorenz Curves in the Modern-
Sector Enlargement Growth Typology

 Absolute incomes rise and absolute poverty is

reduced,
 this style of growth experience is predominant,
inequality is likely first to worsen in the early
stages of development and then to improve.
 the poor who remain in the traditional sector have
their incomes unchanged, but these incomes are
now a smaller fraction of the larger total, so the
new Lorenz curve, L2, lies below the old Lorenz
curve, L1
 Each modern-sector worker receives the same
absolute income as before, but now the share
received by the richest income group is smaller, so
the new Lorenz curve lies above the old one at the
higher end of the income distribution scale.
 Therefore, somewhere in the middle of the
distribution, the old and new Lorenz curves must
cross

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 Poverty, Inequality, and Social Welfare

• Kuznets’ Inverted-U Hypothesis

• The inverted-U is consistent with modern
sector enlargement growth, but not
traditional or modern sector enrichment
growth

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 The “Inverted-U” Kuznets Curve

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 Income and Inequality in Selected
Countries

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 Absolute Poverty: Extent and Magnitude

• Progress on Extreme Poverty

 $1-a-day line was first set in 1987 dollars
 $1.08 in 1993 US Purchasing Power Parity
 $1.25 at 2005 US purchasing power in 2008
 readjusted to $1.90

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 Absolute Poverty: Extent and Magnitude

• Poor health, nutrition, and education lowers economic

productivity of people in poverty, leading directly and
indirectly to slower growth
• Higher income for the poor raises demand for locally
produced goods
• the poor lack access to credit, which constrains
entrepreneurship, children’s education, and fertility
reduction
• Social exclusion/injustice associated with poverty also
leads to bad government policies that can reduce
growth

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Economic Characteristics of High-Poverty Groups

• Children and Poverty

• Women and poverty
• Ethnic minorities, indigenous populations, and
poverty

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 Women and poverty
 poor and malnourished and less likely to receive medical services, clean water,
sanitation, and other benefits
 prevalence of female-headed households, the lower earning capacity of women, and
their limited control over their spouses’ income
 Less access to education, formal-sector employment, social security, and government
employment programmes.
 Unstable financial resources/ less access to the resources necessary to generate stable
incomes
 ultrapoor live in households headed by women
 the larger the household is, the greater the strain on the single parent and the lower the
per capita food expenditure.
 large earnings differentials between men and women.
 less likely to obtain formal employment in private companies or public agencies
 frequently restricted to illegal, low-productivity jobs
 minimum wage and safety legislation may be flagrantly ignored
 little or no access to government-sponsored services such as piped water, sanitation,
and health care,
 household members are more likely to fall ill and are less likely to receive medical
attention
 Gender biases in household resource allocation significantly reduce the rate of survival
among female infants.
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  Development policies that increase the productivity differentials between
men and women are likely to worsen earnings disparities as well as further
erode women’s economic status within the household.
 Since government programmes to alleviate poverty frequently work almost
exclusively with men, they tend to exacerbate these inequalities.
 In urban areas, training programmes to increase earning potential and
formal-sector employment are generally geared to men, while agricultural
extension programmes promote male-dominated crops, frequently at the
expense of women’s vegetable plots.
 development efforts can actually increase women’s workload while at the
same time reduce the share of household resources over which they
exercise control.
 Consequently, women and their dependents remain the most economically
vulnerable group in developing countries.

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 welfare of women and children is strongly influenced by
 the design of development policy underscores the importance of
integrating women into development programmes.
 To improve living conditions for the poorest individuals, women
must be drawn into the economic mainstream.
 This would entail increasing female participation rates in
educational and training programmes, formal-sector employment,
and agricultural extension programmes.
 precautions be taken to ensure that women have equal access to
government resources provided through schooling, services,
employment, and social security programmes.
 Legalising informal-sector employment where the majority of the
female labour force is employed would also improve the
economic status of women.

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 The consequences of declines in women’s relative or absolute
economic status have both
 ethical and long-term economic implications.
 In the long run, the low status of women is likely to translate into
slower rates of economic growth.
 Because the educational attainment and future financial status of
children are much more likely to reflect those of the mother than
those of the father.

 Thus, the benefits of current investments in human capital are

more likely to be passed on to future generations if women are
successfully integrated into the growth process.
 And considering that human capital is an essential prerequisite
for growth, education and enhanced economic status for women
are critical to meeting long-term development objectives.

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 Feminist development economists have often expressed it,
 official poverty programmes cannot simply “add women and
stir.”
 Women-centred poverty strategies often require us to
challenge basic assumptions.
 The harsher conditions for women and women’s crucial role in
a community’s escape from poverty mean that
 involvement of women cannot be left as an afterthought but
will be most effective if it is the first thought—and the
consistent basis for action—when addressing poverty

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 Poverty: Rural versus Urban

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 Growth and Poverty
Are the reduction of poverty and the acceleration of growth in conflict? Or are they
complementary?
 The concentrated efforts to lower poverty would slow the rate of growth
 countries with lower inequality would experience slower growth.
 if there were redistribution of income or assets from rich to poor, even through progressive
taxation, savings would fall.
 the poor tend to spend additional income on improved nutrition, education for their children,
improvements in housing conditions, and other expenditures that represent investments rather
than consumption.

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  There are at least five reasons why policies focused toward reducing
poverty levels need not lead to a slower rate of growth—and indeed
could help to accelerate growth.

First, widespread poverty creates conditions in which

the poor have no access to credit, are unable to finance their children’s
education, and, in the absence of physical or monetary investment
opportunities, have many children as a source of old-age financial security.
lack of credit denies people living in poverty opportunities for
entrepreneurship that could otherwise help to spur growth.
These factors cause per capita growth to be less than what it would be if
there were less poverty.

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 (2) the rich in many contemporary poor countries are generally not noted
for their frugality or for their desire to save and invest substantial
proportions of their incomes in the local economy.
(3) Third, the low incomes and low levels of living for the poor can lower
their economic productivity and thereby lead directly and indirectly to a
slower-growing economy.
 Strategies to raise the incomes and levels of living of the poor will
therefore contribute not only to their material well-being but also to the
productivity and income of the economy as a whole.
(4) raising the income levels of the poor will stimulate an overall increase
in the demand for locally produced necessity products such as food and
clothing, whereas the rich tend to spend more of their additional incomes
on imported luxury goods.
 Rising demand for local goods provides a greater stimulus to local
production, local employment, and local investment.
 Such demand thus creates the conditions for rapid economic growth and
a broader popular participation in that growth.
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 (5) a reduction of mass poverty can stimulate healthy economic
expansion by acting as a powerful material and psychological incentive to
widespread public participation in the development process.
 wide income disparities and substantial absolute poverty can act as
powerful material and psychological disincentives to economic
progress.
 create the conditions for an ultimate rejection of progress by the
masses,
 promoting rapid economic growth and reducing poverty are not
mutually conflicting objectives.
 Countries where poverty has been reduced the most tend to have had
sustained growth; at the same time, growth does not guarantee poverty
reduction. From 1980–2005, China experienced the highest growth
rate in the world and also the most dramatic reductions in poverty.
 Policies actively encouraged modern-sector enlargement.
 China has worked with the World Bank and other development
agencies to improve its poverty reduction programmes and has built
on its long-standing efforts to provide at least minimal education and
health care for its people as a firm foundation for long-term progress.
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 Labour, the Functional Distribution of Income, and Inclusive
Development
 There are only two factors of production: capital, (fixed
factor), and labour (variable factor).
 Under competitive market assumptions, DL will be a declining
function of the numbers employed (negatively sloped labour
demand curve DL (determined by MP)
 upward-sloping labour supply curve SL,
 the equilibrium wage =WE and the equilibrium level of
employment = LE .
 Total national output = 0REL E .
 0WEELE = wages
 WERE = capitalist profits (the return to owners of capital
 Income is distributed by function—labourers are paid wages,
owners of land receive rents, and capitalists obtain profits
 traditional neoclassical functional theory is diminished by its
failure to take into account the important role and influence of
nonmarket forces such as power in determining these factor
prices—for example, monopsony power of employers,
collective bargaining between employers and trade unions in
setting modern-sector wage rates, and monopoly power of
wealthy landowners and other elites to manipulate prices on
capital, land, and output to their own personal advantage.

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 • Labour and Inclusive Development
Work is
 fundamental to economic development in several ways.
 the way most people get most of their income,
 the type of work a person does largely constrains their possibilities of
getting higher income in the future.
• More broadly, a job is
 an important way that people gain and maintain capabilities.
 People spend a high percentage of their time working at their jobs
• For example, skills and attitudes that people develop at their jobs play a
significant role in how people perceive their abilities and preferences in
other spheres of life.
• People with jobs that develop multiple capabilities are more engaged in
civic affairs.
• Thus, high inequality in labour markets can serve to magnify other forms
of inequalities.

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 • The availability of work cannot be taken for granted.
• Growth alone may not generate jobs—at least not good-quality jobs.
• Some jobs may facilitate economic development; others may offer little more than
current income without prospect of future gains, and may even prove unsustainable.
• Most people appear to prefer a stable job with a regular salary over micro
entrepreneurship,
• There are approaches to assist microentrepreneurs, such as microfinance combined with
other services but longer term, one of the best ways to assist them is to help support job
creation.
• Good government policy can facilitate creation of quality jobs; while poorly designed
or implemented policies can hinder quality job creation.
• A major policy challenge is to determine which types of job creation efforts would have
the greatest net benefits given a country’s current level of economic development and
other constraints.
• Building and maintaining infrastructure is largely a matter of political will.
• But when the constraint is law and social norms that prevent women from working
outside, effective remedies require broad engagement of society over time, in addition
to legislation and enforcement.
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 Policy Options on Income Inequality and Poverty: Some
Basic Considerations

1. 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
2. Altering the Functional Distribution of Income Through Relative Factor
Prices: Minimum Wage and Capital Subsidy Debates
3. Modifying the Size Distribution Through Increasing Assets of the Poor
4. Progressive Income and Wealth Taxes
5. Direct Transfer Payments and the Public Provision of Goods and Services
6. Applying Insights from Behavioral Economics to Address Poverty

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