Economic Development

Thirteenth Edition

Chapter 5
Poverty, Inequality, and
Development

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Distribution and Development:
Eight Critical Questions
1. How can we best measure inequality and poverty?
2. What is the extent of relative inequality in developing
countries; how is this related to the extent of poverty?
3. Who are the poor, and what are their economic
characteristics?
4. What determines the nature of economic growth—that is,
who benefits from economic growth, and why?

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Distribution and Development: Eight Critical
Questions (Continued)
5. 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?
6. 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?
7. What is so bad about extreme inequality?
8. What kinds of policies are required to reduce the magnitude
and extent of absolute poverty?

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 A Capabilities and Distribution-Based Social
Welfare Framework
• Placing Chapter 5 in the development and capabilities framework of
Chapter 1…
• Generally, we may think of welfare as a function, W = W(Y, E, H, M,
Other…),
• Where Y=standard of living, E=Education, H=Health, M=Empowerment,
and Other represents additional factors representing important
capabilities
• Income, health, education indicators are averages; but distribution also
matters
• In chapters 3 and 4, we focus most on Y (income, or permanent income
from wealth, or broadly living standards), through frameworks such as:
– Growth models
– More complex constraints on growth including coordination failures
– Growth diagnostics
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
 A Capabilities and Distribution-Based Social
Welfare Framework (Continued)
• In chapters 3 and 4, we used average incomes, Y, as the outcome
variable
• Here, we first consider distribution of Y, expanding from averages to
address:
– (Relative) Inequality of Income
– (Absolute) Income Poverty
• In the first part of Chapter 5, our welfare framework becomes:
W = W(Y, I, P)
• Then we study multidimensional poverty with three deprivations: in
health, education, and income (or assets)
• In Chapter 8 we examine health and education inequality;
• In Chapter 9, we examine land inequality

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Measuring Relative Inequality
• Size distributions (quintiles, deciles)
• Lorenz curves
• Gini coefficients and other aggregate measures of
inequality

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Desirable Properties for Measures of
Relative Inequality
• 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
• 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), and some others

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

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

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Figure 5.1
The Lorenz Curve

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

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Figure 5.3
Estimating the Gini Coefficient

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Calculating the Gini Coefficient: Numerical
Examples
• Expression: G = A/(A+B)

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Suggested Exercise: Calculating the Gini

• Half the people have “1”

• The other half have “2”
• What is the Lorenz curve?
• How can you use this to compute the Gini?

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 A Brief Review: Desirable Properties for
Inequality Measures
• Anonymity: Does not depend on who has higher income
• Scale independence: Does not depend on size of the economy
– Suggested exercise: what happens if everyone’s income goes up by 25%?
• Population independence: not based on number of recipients
• Transfer principle - transfer income from a richer to a poorer
person, resulting distribution is more equal
– What if transfers so much that these people “trade places?”
• Gini coefficient satisfies all four properties; but so does the CV
and some others
• This can leave ambiguity in direction of change in inequality:
– (As we will see, remains ambiguity when it comes to combining inequality
concerns with other concerns)

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Figure 5.4
Four Possible Lorenz Curves

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Desirable Properties for Poverty Measures
• Desirable properties for poverty measures:
– Anonymity
– Population independence
– Monotonicity
– Distributional sensitivity
• Plus, the Focus Principle (Amartya Sen):
– A good poverty measure will be based only on the incomes
(wellbeing) of the poor, not the nonpoor
• As we will see, P2 has these properties

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Monotonicity and Distributional Sensitivity
• Monotonicity principle: If you add income to someone below the poverty line,
all other incomes held constant, poverty falls
– There is a “less decisive” version, called weak monotonicity, which requires that
poverty can be “no greater than” it was (the main version of the principle above is
sometimes called strong monotonicity for clarity)
• Distributional sensitivity principle: if you transfer income from a poor person
to a richer person (even if the “richer” person is also below the poverty line),
the resulting economy is deemed strictly poorer.
• These principles clarify what is lacking in some widely used measures
• Looking ahead, the headcount ratio (fraction below the poverty line) satisfies
anonymity and population independence, but not full monotonicity; and it
fails on distributional sensitivity
• The simple headcount (number who are poor) fails even to satisfy the
population independence principle
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
 5.2 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; H/N is the
fraction who are poor
• Does not meet desirably properties and accordingly
is likely to cause incentive problems:

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Unintended Policy Incentives of Using
Headcount Measures
• When agencies are told their mission includes poverty reduction…
• Measuring poverty by headcount or fraction poor creates incentive to
report improvements in these measures; this plausibly focuses efforts
toward those closer to poverty line
• Circumstantial evidence:
– Incumbent politicians frame poverty progress in terms of headcount or fraction –
staff would anticipate and want favorable results - by this measure - to report
– Government policy exhibits “urban bias,” e.g. emphasizing job creation for the poor
in cities - who are closer to the poverty line
– Reports: NGOs work near main roads, or district towns, easier-to-reach; if so,
people assisted are less poor on average
– MFIs have focused commonly on the richest of the poor
– The MDG of “halving poverty” sent a signal: regions and countries compared in UN
reports on this measure, without mention of P2 or usually to any other indicator

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 5.2 Measuring Absolute Poverty

• Total poverty gap:

– Where Yp is the absolute poverty line; and Yi the income of
the ith poor person

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Figure 5.5
Measuring the Total Poverty Gap

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 5.2 Measuring Absolute Poverty
• Average poverty gap (APG):

– Where N is number of persons in the economy

– TPG is total poverty gap
– Note: normalized poverty gap, NPG = APG/Yp

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 5.2 Measuring Absolute Poverty (Continued)

• Measuring Absolute Poverty

– Average income shortfall (AIS):

– Where H is number of poor persons

– TPG is total poverty gap
– Note: Normalized income shortfall, NIS = AIS/Yp

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 5.2 Measuring Absolute Poverty (Continued)

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

– N is the number of persons, H is the number of poor

persons, and  ≥0 is a parameter
– When  =0, we get the headcount index measure
– When  =2, we get the “P2” measure

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Measuring Poverty: Alternative Expression
for P1 - the “normalized poverty gap”
• Start with definition of P1 from P formula
• With some algebra we find: P1 = (H/N)*(NIS)
– (To find this, first multiply the basic P1 formula by (H/H); then,
take out constant Yp; then apply definition of TIS and collect
terms)
• Interpretation: P1 is per capita poverty gap = headcount
ratio (H/N) times normalized income shortfall (AIS)
among the poor
• That is, poverty goes up whenever either the fraction of
people in poverty goes up, or the fractional income
deficits go up
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
 Measuring Poverty: Numerical Example for P1
• 8-person economy with the following income
distribution: (.6,.6,.8,.8,2,2,6,6)
• The poverty line is 1.
• You can always calculate P1 using the full P formula,
summing individually;
Or, using the simplified P1 formula (H/N)*(NIS), we can
calculate P1 as:
P1 = (H/N)*[TIS/(H*Yp)] =
(1/2)*[(1.2)*/(4*1)] = (1/2)*(.3) =.15

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Measuring Poverty:
Numerical Example using P2
• Consider an 8-person economy with the following income
distribution: (.6,.6,.8,.8,2,2,6,6)
• The poverty line is again 1.
• Question: What is the level of poverty?
• You want to answer using a measure that has the desirable
properties for a poverty measure
• You can never go wrong by answering using P2
• Using the formula (from equation 5.3 in the text, with =2), we can
calculate P2 as:
P2 = (1/8)[.42 + .42 + .22 + .22] =
(1/8)[.16 + .16 +.04 + .04] = .4/8 = .05

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 An Alternative Expression for P2
• Uses inequality among the poor
P2 = [H/N]{NIS2 + (1 - NIS)2 (CVP)2}
• This form helps us see intuitively how each property
is present
• BTW, similar in spirit to the Sen measure “S”:
S = [H/N]{NIS + (1 – NIS) (GP)}

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Measuring Poverty: Using P2
• Intuitively, the four key properties are present because for P2:
• Measure is Anonymous, by construction;
• The Population Principle holds because one divides the result
by population;
• Monotonicity holds because adding income to any of the poor
will decrease P2 by lowering one of the squared income
shortfalls;
• Distributional sensitivity holds because squaring poverty gaps
ensures that income provided to a poorer person will reduce P2
more than the same income provided to a less poor person.

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Preview: Measuring Poverty - Income or
Multidimensional Indicators?
• Given that we are measuring poverty with income, we have good
measures that, like P2, satisfies desirable properties
• If must have a single indicator, income has advantages e.g. clarity,
flexibility
• But in general is measuring income sufficient?
• Following Amartya Sen’s capability approach, it is apparent that,
in general, poverty needs to be conceptualized – and so
measured – in a multidimensional way
• The new MPI is the best-known effort to do so – we return to it
soon…

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Poverty, Inequality, and Social Welfare
• What’s So Harmful for Economic Development about
Extreme 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 © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 What’s So Harmful about Extreme Inequality?
3 Factors
• Extreme income inequality leads to economic inefficiency.
– Smaller fraction of population qualifies for credit e.g. for business or
school
– Overall rate of saving in the economy tends to be lower: Highest rate
of marginal savings usually found among the middle classes.
– Inequality may lead to an inefficient asset allocation
e.g. overemphasis on higher education at the expense of quality
universal primary education
– High inequality of land ownership inefficient because most efficient
scales for farming are family and medium-size farms.
– The result can be a lower average income and a lower rate of
economic growth when inequality is high.
– Moreover, these factors in turn often beget still more inequality
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
 What’s So Harmful about Extreme Inequality?
3 Factors (Continued)
• Extreme disparities undermine social stability and
solidarity
– High inequality strengthens political power of the rich, and
thus concentrates economic and social bargaining power
– High inequality facilitates rent seeking
• Finally, extreme inequality is generally viewed as unfair.
– John Rawls’ thought experiment: uncertainty behind the “veil
of ignorance.”

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Table 5.2
Selected Income Distribution Estimates

Source: Based on World Bank, World Development Indicators, 2010. (Washington, D.C.: World Bank, 2010), tab. 2.9.

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Table 5.3
Income and Inequality in Selected Countries

Source: Data from World Bank, World Development Indicator Tables, 2018 (Washington, D.C.: World Bank, 2018), tabs. WV.1 and 1.3, accessed 16 June 2019.

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Poverty, Inequality, and Social Welfare
• 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)
– Note: there is an “interaction effect” between modern sector
enlargement and enrichment (if someone moving to the
modern sector also gets the modern sector “raise” received by
those already in that sector…)
– An implication of modern sector enlargement (but not other
processes): Kuznets’ Inverted-U relationship
– That is, an inverted-U is consistent with modern sector
enlargement growth, but not traditional or modern sector
enrichment growth Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
Figure 5.6
Improved Income Distribution under the
Traditional-Sector Enrichment Growth Typology

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Figure 5.7
Worsened Income Distribution under the
Modern-Sector Enrichment Growth Typology

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Figure 5.8
Crossing Lorenz Curves in the Modern-Sector
Enlargement Growth Typology

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 5.3 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

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Figure 5.9
The “Inverted-U” Kuznets Curve

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Figure 5.10
Kuznets Curve with Latin American Countries
Identified

Source: Fields, Gary S. (2001), Distribution and Development: A New Look at the Developing World, Cambridge, M.A.: MIT Press, ch. 3, p. 46. © 2001 Massachusetts Institute of Technology, by permission
of The MIT Press.

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Figure 5.11
Plot of Inequality Data for Selected Countries

Source: Gary S. Fields, Distribution and Development: A New Look at the Developing World (Cambridge, Mass.: MIT Press, 2001), ch. 3, p. 44. © 2001 Massachusetts Institute of Technology, by permission
of The MIT Press.

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 5.4 Absolute Poverty: Extent and Magnitude.

• Progress on Extreme Poverty

– Clear progress on $1.25-a-day headcount
– Less clear progress on $2.00-per-day headcount (see
Figure 5.14)
– Incidence of extreme poverty is uneven
• Relationship between Growth and Poverty
– Association between growth and poverty reduction
– When it is inclusive, growth reduces poverty
– Lower extreme poverty may also lead to higher growth

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Regional Poverty Incidence, 2013
Region Headcount Ratio Poverty Gap Squared Poverty Gap (%)
(%)
Regional Aggregation
at $1.25 per Day
East Asia and the Pacific 0.53 0.17 0.06
Europe and Central Asia 0.67 0.18 0.14
Latin America and the 3.16 1.74 1.36
Caribbean
Middle East and North Survey Data is too low, result is suppressed
Africa Coverage the
South Asia 2.0 0.28 0.07
Sub-Saharan Africa 22.59 7.57 3.62
Total 4.63 1.49 0.75
Regional Aggregation
at $2 per Day
East Asia and the Pacific 4.34 0.82 0.27
Europe and Central Asia 2.46 0.66 0.30
Latin America and the 5.83 2.75 1.91
Caribbean
Middle East and North Survey Data is too low, result is suppressed
Africa Coverage the
South Asia 17.98 3.47 1.02
Sub-Saharan Africa 43.59 17.26 9.17
Total 16.11 4.27 2.02

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Figure 5.12
Global and Regional Poverty Trends, 1981–2015
Global and Regional Poverty Trends, 1981-2015
People living on less than $1.9 per 2500
day, Other High Income Countries

People living on less than $1.9 per

day, Middle East & North Africa
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1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2010 2011 2012 2013 2015

( based on 2011 PPP & $1.9/day poverty line)

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Income Poverty Incidence at $1.25 per day, and Gini Coefficient,
Selected Countries, 2010–2014 data
Country Year Per Capita Monthly Income (2011 Headcount Ratio Poverty Gap Squared Poverty Gini Index
PPP) (%) (%) Gap (%) (%)
Bangladesh 2010 109.03 2.17 0.28 0.06 32.13
Benin 2011 82.42 27.64 7.33 2.85 43.44
Brazil 2014 563.57 2.15 1.11 0.84 51.48
Burkina Faso 2014 83.83 12.64 2.14 0.55 35.30
China- Rural 2013 290.41 0.44 0.10 0.05 33.97
China-Urban 2013 373.40 0.15 0.07 0.06 36.69
Cote d’Ivoire 2008 119.31 14.17 4.57 2.10 43.18
Guatemala 2014 257.19 3.17 1.01 0.49 48.66
Honduras 2014 236.33 7.76 3.08 1.85 50.64
India- Rural 2011 95.84 4.23 0.62 0.16 31.13
India- Urban 2011 146.66 2.08 0.28 0.07 39.01
Indonesia- Rural 2014 133.13 0.59 0.05 0.01 31.91
Indonesia- Urban 2014 191.32 0.79 0.08 0.01 42.77
Madagascar 2012 46.66 58.82 23.34 12.17 42.65
Mexico 2014 341.5 1.02 0.22 0.07 48.21
Mozambique 2008 59.56 46.16 17.28 8.84 45.58
Nicaragua 2014 288.89 1.53 0.49 0.25 47.05
Nigeria 2009 75.86 31.56 10.66 5.00 42.97
Pakistan 2013 134.53 0.45 0.04 .01 30.69
Peru 2014 424.12 0.87 0.22 .09 44.14
Philippines 2012 174.01 2.62 0.40 .10 43.04
Rwanda 2013 82.57 34.84 10.6 4.46 50.44
Senegal 2011 95.98 16.64 4.84 2.16 40.29

Source: World Development Indicators

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
 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.

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 MPI Indicators
• Health - two indicators with equal weight - whether any child has
died in the family, and whether any adult or child in the family is
malnourished –weighted equally (each counts as one-sixth toward
the maximum deprivation in the MPI)
• Education - two indicators with equal weight - whether no
household member completed 5 years of schooling, and whether
any school-aged child is out of school for grades 1 through 8 (each
counts one-sixth toward the MPI)
• Standard of Living, equal weight on 6 deprivations (each counts as
1/18 toward the maximum): lack of electricity; insufficiently safe
drinking water; inadequate sanitation; inadequate flooring;
unimproved cooking fuel; lack of more than one of 5 assets –
telephone, radio, TV, bicycle, and motorbike

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Interaction of the deprivations?
• Building the index from household measures up to the
aggregate measure (rather than using already-aggregated
statistics), MPI approach takes account of multiplied or
interactive harm (complementarity) done when multiple
deprivations are experienced by the same individual or family
• The MPI approach assumes an individual’s lack of capability in
one area can only to a degree be made up by other capabilities
– capabilities are treated as substitutes up to a point but then as
complements

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 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

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Multidimensional poverty tells a different
story than income poverty
• The results showed that knowing income poverty is not enough if
our concern is with multidimensional poverty
• Multidimensionally, Bangladesh is substantially less poor - but
Pakistan substantially poorer - than would be predicted by income
poverty
• Ethiopia is far more multidimensionally poor, and Tanzania much
less so, than predicted by income poverty
• Most Latin American countries e.g. Brazil rank worse on
multidimensional poverty than on income poverty; but Colombia’s
income and MPI poverty ranks are about same

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Multi-dimensional Poverty Index, Data from 2008–2015
Country Survey Year MIP Percent Poor Thousands Poor Poverty Intensity
Bangladesh 2014 0.196 41.3 65,648 47.4
Brazil 2014 0.021 5.3 10,908 40.6
Burundi 2010 0.454 80.8 7,642 56.2
Bolivia, Plurinational
State of 2008 0.089 20.5 1,963 43.7
Burkina Faso 2010 0.535 84.0 13,131 63.7
Cambodia 2014 0.146 33.0 5,061 44.3
Colombia 2010 0.022 5.4 2,472 40.9
Congo, Republic of 2011/12 0.181 39.7 1,702 45.7
Cote d'Ivoire 2011/12 0.310 58.7 12,397 52.8
Dominican Republic 2014 0.034 8.8 919 38.5
Egypt 2014 0.014 3.6 3,186 38.1
Ethiopia 2011 0.564 87.3 78,476 64.6
Ghana 2014 0.156 33.7 9,021 46.2
Guinea 2012 0.459 75.1 8,735 61.1
Haiti 2012 0.248 49.4 5,083 50.3
Honduras 2011/12 0.072 15.8 1,225 45.7
India 2005/06 0.283 53.7 624,593 42.9
Indonesia 2012 0.066 15.5 38,362 52.7
Kenya 2014 0.187 39.9 17,904 47.0
Lao People's
Democratic Republic 2011/12 0.174 34.1 2,209 50.9
Liberia 2013 0.374 71.2 3,059 52.5
Mali 2012/13 0.457 77.7 12,885 58.9
Mexico 2012 0.011 2.8 3,418 38.8
Madagascar 2008/09 0.357 66.9 13,707 53.3
Malawi 2013/14 0.265 56.0 9,350 47.4
Mozambique 2011 0.389 69.6 17,412 55.9
Nepal 2014 0.126 28.6 8,054 44.2
Nigeria 2013 0.303 53.2 92,023 56.8
Pakistan 2012/13 0.230 44.2 80,041 52.1
Peru 2012 0.043 10.5 3,167 41.0
Philippines 2013 0.052 11.0 10,745 47.3
Rwanda 2014/15 0.259 53.8 6,101 48.1
Senegal 2014 0.309 56.9 8,348 54.3
Sierra Leone 2013 0.464 81.0 5,005 57.3
South Africa 2012 0.044 11.1 5,865 39.5
Tanzania, United
Republic of 2010 0.332 65.6 29,927 50.7
Timor-Leste 2009/10 0.360 68.1 720 52.9
Uganda 2011 0.367 69.9 23,955 52.5
Viet Nam 2013/14 0.029 7.1 6,584 40.7
Yemen 2013 0.236 45.9 11,713 51.4

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

“Why Multidimensional Poverty?”

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Poverty reduction may cause growth
• Inclusive growth can cause poverty reduction, directly and indirectly
• Less appreciated: Poverty reduction can cause growth and development, while
failure to address poverty can constrain prospects for development because:
• Although small, poverty income is part of total income
– Programs that raise productivity of poor directly even at small scale has
direct contribution to growth; but of course tiny increments because
incomes are so low; of course has an opportunity costs
• Poor health, nutrition, and education lowers economic productivity of people
in poverty, leading directly and indirectly to slower growth
• Often, the poor lack access to credit, which constrains growth, e.g.:
– Lost opportunities for entrepreneurship which may benefit society
– Leaves them unable to finance their children’s education, also limiting the
skilled labor force needed for development
– Incentives for high fertility as a source of old-age financial security
• Higher income for the poor raises demand for locally produced goods
• Social exclusion/injustice, which is associated with poverty, also likely causes
economic stagnation:
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
 Social exclusion/injustice, associated with
poverty, likely causes economic stagnation
• Social exclusion/injustice, which is associated with poverty, also likely
causes economic stagnation in the long run
– Political and social reform needed to overcome constraints to access
to land, water, basic resource based livelihood opportunities
– Elite control of natural resources translates to social and political
power to protect elite interests that may be inconsistent with
modernization
– Inadequate voice for the poor who know their public goods needs
– Other features of a broader social justice agenda which as many
have pointed out is also a foundation of economic efficiency
– The poor may be susceptible or coercible to participating in civil
conflict
– Among its other benefits improved social justice may positively
contribute to growth
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
 5.5 Economic Characteristics of High-Poverty
Groups
• Rural poverty
• Women and poverty
• Ethnic minorities, indigenous populations, and poverty
• Disproportionately children

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Poverty, Rural vs Urban - Percentage below poverty line
Region and Survey Year Rural Population Urban Population National Population
Country (%) (%) (%)
Sub-Saharan
Africa
Benin 2011 39.7 31.4 36.2
Burkina Faso 2014 47.5 13.7 40.1
Cameroon 2014 56.8 8.9 37.5
Malawi 2010 56.6 17.3 50.7
Tanzania 2011 33.3 15.5 28.2
Uganda 2012 22.4 9.6 19.5

Poverty:
Zambia 2010 77.9 27.5 60.5

Asia Rural
Bangladesh
India
2010
2011
25.2
25.7
21.3
13.7
31.5
21.9
vs
Indonesia 2014 14.2 8.3 11.3 Urban
Uzbekistan 2013 -- -- 14.1
Vietnam 2014 18.6 3.8 13.5

Latin America
Bolivia 2015 -- -- 38.6
Brazil 2014 -- -- 7.4
Dominican 2015 -- -- 32.4
Republic
Guatemala 2014 76.1 42.2 59.3
Honduras 2014 65.0 61.0 62.8
Mexico 2014 62.4 50.5 53.2
Peru 2015 -- -- 21.8

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Table 5.6
Indigenous Poverty in Latin America

Sources: Data for the left side of the table from Psacharopoulos, George, and Patrinos, Harry A. (1994), ‘Indigenous people and poverty in Latin America,’ Finance and Development, 31: 41, used with
permission; data for the right side of the table from Gillette Hall and Harry A. Patrinos, eds., Indigenous Peoples, Poverty, and Human Development in Latin America, 1994–2004 (New York: Palgrave Macmillan,
2006).

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 The Functional Distribution of Income
• “Functional” income distribution is based on shares of national
income of each factor of production (labor, capital, and land)
• Focuses on (wage) share of labor as a whole, in contrast to
distributions as rent, interest, and profit
• Specific individuals may receive income from all sources; but the
functional approach is not based on individuals
• Traditional neoclassical approach: assumes competition; supply
and demand curves assumed to determine prices of each factor
• Each factor is then paid what it contributes to national output:
• Supply of, and demand for, labor determine market wages
• The (average) wage multiplied by total employment is a measure
of total wage payments, also called the total wage bill
• Figure 5.12 provides a simple diagrammatic illustration for labor
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
Figure 5.13
Functional Income Distribution in a Market
Economy: An Illustration

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Labor and Inclusive Development:
The Quality of Jobs
• Most people receive income primarily from labor, that
is, from the work that they do
• Approximately 3.3 billion people currently work
• But having work does not mean having a wage
• In most developing countries, a minority of labor
income is from conventional “jobs”
• Close to half engaged in self-employment
• Wage labor often low-productivity work, with irregular
incomes

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 The Broad Importance of High- Quality Jobs
• Work is the way most people get most of their income,
and where they spend much of their time
• The type of work a person does largely constrains their
possibilities of getting future higher income
• Broadly, jobs help people gain and maintain capabilities
• Skills and attitudes people develop at jobs affect [how
others perceive] their capabilities in other spheres
• People with jobs that develop multiple capabilities are
more engaged in civic affairs
• Thus, high inequality in labor markets can serve to
magnify other forms of inequalities
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
 Policies and Programs
• Policy can:
‒ Reduce constraints on job creation, such as
building needed infrastructure,
‒ Ensure incentives do not hinder quality job
creation
‒ But reforming some laws – and even more so
norms – is more difficult
‒ Example: those discouraging women from working
‒ Programs for employment when jobs are scarce
can help, but need careful design and
implementation
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
 5.6 Policy Options on Income Inequality and
Poverty: 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 © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 5.6 Policy Options on Income Inequality and
Poverty: Some Basic Considerations (Continued)
• Policy options
– Changing relative factor prices
– Progressive redistribution of asset ownership
– Progressive taxation
– Transfer payments and public provision of goods and
services
• A focus on workfare vs welfare programs

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Workfare vs Welfare? Basic cost effectiveness
considerations
• Workfare, such as a Food for Work Program, are more likely to
represent a better policy than welfare on a current program
efficiency basis when these criteria are met:
1. It is harder to screen the poor without a workfare requirement
2. Poor workers have lower opportunity cost of time (so the economy
loses little output when they work in the program)
3. Non-poor workers have higher opportunity cost of time (so they
are unlikely to participate to get the benefits)
4. The fraction of the population living in poverty is smaller (so the
extra costs of a universal welfare scheme would be high)
Note: Each of the above are factors in the efficiency tradeoff:
– All these factors must be accounted for together to determine
whether welfare or workfare is comparatively more efficient

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Workfare vs Welfare: Human Capital Factors
• Another significant factor in a workfare vs welfare choice is that the program
does not reduce incentives for the poor to acquire human capital
– Note: This factor is largely addressed to incentivize school age children to not see
future workfare participation as an alternative to putting high effort into school
and continuing their education; a program design response might be very high
work hour requirements for participation as a deterrent – but cannot be so high
that those who later need the program do not participate.
• This is also a social efficiency design consideration, that can save expenditures
when viewed across time
• An additional consideration could be the incentive for adults to build skills –
this might require a different approach to program design
• A requirement might be participation in work activities that also build relevant
skills, or devoting part of work time to training
• Final note: Another strategy is to add requirements for school attendance if
used over time; if necessary, consider providing schooling on workfare site

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Workfare vs Welfare: Other Factors
• Other factors to take into account in a workfare vs
welfare choice
– There are greater net benefits of the program’s work output
– There is less social stigma of visible workfare participation, so
poor are not humiliated or deterred from needed work
(otherwise, a discreet welfare transfer may be preferable)
– Alternatives available for disabled or others prevented from
taking part in the program
– Which can better encourage farmers and microentrepreneurs
to take favorable business bets (a functioning safety net),
other factors considered?

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Applying Insights from Behavioral Economics
to Address Poverty
• Research findings: “Cognitive Tax of Poverty”
• Impact of poverty on anxiety and mental illness
• Implications for program design

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 A Hidden “Cognitive Tax of Poverty”
• Cognitive challenges increase with stress
• For the poor, sources of stress include financial worries, persistent noise, air
pollution, disrupted sleep, chronic pain
• Stress and environment-linked deficits in cognitive functions include focused
internal and external attention, inhibitory control, cognitive flexibility, planning
• Example: farmers in India perform worse during financial stress before harvest
than after harvest – equivalent to about ten IQ points
• “Bandwidth” problem: Focus on urgent financial problems leaves less cognitive
capability for other activities that would help break out of poverty, such as
– preventive health care
– adherence to drug regimens
– promptness for appointments
– attentiveness to their children
– management of family finances
– general work productivity
• Result: more difficult for poor to take actions to improve their conditions

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Implications for poverty program design
• “Choice architecture”: Cognitive dimension in programs to help the poor
• Cognitive burden research shows importance of assistance for improving
capabilities of people to make good decisions
• Priority of timing programs and activities for when cognitive load on the poor is
likely to be lower
• Make interviews required for assistance less threatening and challenging
• Simplifying application forms and helping people fill them out
• Clarifying and improving roles of counselors
• Better nutrition improves cognitive (and physical) functioning
• Importance of addressing high incidence of anxiety, depression, and other
mental illness among the poor
• More emphasis on early development, non-cognitive skills
• The importance of being reminded – both explicit (e.g. sending SMS/texts), and
implicit (e.g. where assistance is available)
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
Conclusion: 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 to build capabilities and human and social capital of the poor
• Effects of minimum wage laws are more nuanced than once thought
• Policies to address cognitive burden of poverty
• Some of the specific programs examined in later chapters:
• Conditional and unconditional cash transfers (Chapter 8)
• Agricultural extension (Chapter 9)
• Nutrition (Chapters 8, 9, and Chapter 11 case studies)
• Microfinance (Chapter 15, and Chapter 11 case studies)

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Concepts for Review
• Absolute poverty • Foster-Greer-Thorbecke
• Asset ownership (FGT) index
• Character of economic • Functional distribution of
growth income
• Decile • Gini coefficient
• Disposable income • Headcount index
• Factor share distribution of • Income inequality
income • Indirect taxes
• Factors of production • Kuznets curve
• Land reform

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 Concepts for Review (Continued)
• Lorenz curve • Size distribution of income
• Multidimensional poverty • Subsidy
index (MPI) • Total poverty gap (TPG)
• Personal distribution of • Workfare programs
income
• Progressive income tax
• Public consumption
• Quintiles
• Redistribution policies
• Regressive tax

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

 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 © 2020, 2015 Michael P. Todaro and Stephen C. Smith

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

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Appendix 5.2
The Ahluwalia-Chenery Welfare Index
• Constructing poverty-weighted index of social
welfare

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith

Table A5.2.1
Income Distribution and Growth in 12 Selected
Countries

Sources: International Bank for Reconstruction and Development/The World Bank: Redistribution with Growth: An Approach to Policy. Copyright © 1974 by The World Bank. Reprinted with permission.
Note: For further details, see Montek S. Ahluwalia, and Hollis Chenery, “The Economic Framework,” in Hollis Chenery, et al. (ed.), Redistribution with Growth, Oxford University Press, London, 1974.

Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith