JOSE RIZAL UNIVERSITY

Economic Development
Chap. 4. Poverty, Inequality, and
Development

Professor: Dr. Ronaldo A. Poblete, CFMP

 Critical Questions as to the Relationship
between Economic Growth, Income
Distribution & Poverty

• 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?

 Critical Questions as to the Relationship
between Economic Growth, Income
Distribution & Poverty
• Are high levels of inequality always bad?

• What policies can reduce poverty?

 Measuring Inequality & Poverty
 Measuring Inequality:
 Personal or size distribution of income
deals with the individual persons or
households and the total income they
receive
 Functional or factor share distribution of
income uses the share of total national
income that each of the factors of
production receives
 Measuring Inequality
 Personal or size distribution of
income
 Quintilesand Deciles
 Lorenz Curve

 Gini Coefficients

 Coefficient of Variation (CV)

 Measuring Inequality
 Quintiles and Deciles
 Divide the population into successive
quintiles or deciles according to
ascending income levels and then
determine the proportion of N.I received
by each income group
 Common measure of income inequality is
the ratio of incomes received by the top
20% and bottom 40% of the population
Table 4.1 Typical Size Distribution of Personal
Income in a Developing Country by Income
Shares—Quintiles and Deciles
 Measuring Inequality

 Lorenz curves
• Show the actual quantitative
relationship between the percentage
of income recipients and the
percentage of total income they
received during a time period (year)
• Depict the variance of the size
distribution of income from perfect
equality
Figure 4.1 The Lorenz Curve
 Figure 4.2 The Greater the Curvature of the
Lorenz Line, the Greater the Relative Degree of
Inequality
Figure 4.3 Estimating the Gini
Coefficient
Figure 4.4 Four Possible Lorenz
Curves
 Measuring Inequality
 Coefficient of Variation (CV)
 Is sample SD divided by the sample mean also
satisfies the properties of anonymity, scale
independence, population independence, and
transfer principles

 Functional distribution
 Influence of non-market forces minimizes the
application of this measure

 All inequality measures are measuring

relative income
Figure 4.5 Functional Income Distribution
in a Market Economy: An Illustration
 Measuring Absolute Poverty
 A situation where a population or sections
of the population are able to maintain
minimum levels of living (IPL)

 Absolute poverty is measured using

• Headcount (H)
• Headcount Index (H/N)
• Total Poverty Gap (total income shortfall)
• FGT Index has desirable properties of a
poverty measure
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
TPG   (Yp  Yi )
H

 Total poverty gap: i1

 Where Yp is the absolute poverty line; and Yi


the income of the ith poor person
Figure 4.6 Measuring the
Total Poverty Gap
 Measuring Absolute Poverty

 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
 Measuring Absolute Poverty
 Measuring Absolute Poverty
 Average income shortfall (AIS):
TPG
AIS 
H

 Where H is number of poor persons

 TPG is total poverty gap

 Note: Normalized income shortfall, NIS
= AIS/Yp
 Measuring Absolute Poverty
Measuring Absolute Poverty (continued)
The Foster-Greer-Thorbecke (FGT) index:
H Y Y 

1
P    p i


N i 1  Yp 
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
 Measuring Absolute Poverty

Measuring Absolute Poverty

The Human Poverty Index (HPI)
P2 measure is used as a standard poverty
measure by the World Bank and most UN
agencies
The Human Poverty Index (HPI) is used by
the UNDP and measures poverty as three
key deprivations- survival, knowledge, and
economic provisions
 Poverty, Inequality, and Social
Welfare
 What’s so bad about high inequality?
 Dualistic development and shifting
Lorenz curves: some stylized
typologies
• Traditional sector enrichment
• Modern sector enrichment
• Modern sector enlargement
Figure 4.7 Improved Income Distribution
under the Traditional-Sector Enrichment
Growth Typology
Figure 4.8 Worsened Income Distribution
under the Modern-Sector Enrichment
Growth Typology
Figure 4.9 Crossing Lorenz Curves in the
Modern-Sector Enlargement Growth
Typology
 Poverty, Inequality and Social
Welfare
 Kuznets’ Inverted-U Hypothesis
Table 4.2 Selected Income
Distribution Estimate
Table 4.3 Income and Inequality in
Selected Countries
Figure 4.11 Kuznets Curve with Latin
American Countries Identified
Figure 4.12 Plot of Inequality Data for
Selected Countries
 Poverty, Inequality, and Social
Welfare
 Growth and
inequality

Figure 5.13 Long-Term

Economic Growth and
Income Inequality, 1965-
1996
Figure 4.14 Change in Inequality in
Selected Countries, with or without
Growth
 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
 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
Table 4.4 Regional Poverty
Incidence, 2004
Table 4.5 Poverty Incidence in
Selected Countries
Table 5.5 Poverty Incidence in
Selected Countries
 Absolute Poverty: Extent &
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
 Economic Characteristics of
Poverty Groups

• Rural Poverty
• Women and poverty
• Ethnic minorities, indigenous
populations, and poverty
Table 4.6 Poverty: Rural versus
Urban
Table 4.7 Indigenous Poverty in
Latin America
 The Range of Policy Options:
Some Basic Considerations
Areas of intervention
1. Altering the functional distribution

2. Mitigating the size distribution

3. Moderating (reducing) the size

distribution at upper levels
4. Moderating (increasing) the size
distribution at lower levels
 The Range of Policy Options:
Some Basic Considerations

 Policy options
 Altering the Functional Distribution of Income
through Policies to Change relative factor prices
 Modifying the Size Distribution through
Progressive redistribution of asset ownership
 Reducing the Size Distribution at the Upper
Levels through Progressive Income and Wealth
Taxes
 Direct Transfer payments and public provision
of goods and services