CHAPTER 5

POVERTY, INEQUALITY, AND

DEVELOPMENT
 POVERTY AND HAPPINESS

"Resolve not to be poor: whatever you have, spend less. Poverty

is a great enemy to human happiness; it certainly destroys liberty,
and it makes some virtues impracticable, and others extremely
difficult."

- Samuel Johnson
 CHAPTER GOALS

• How can we best measure inequality and poverty?

• What is the extent of relative inequality in developing countries, and how is this
related to the extent of absolute 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?
• Are rapid economic growth and more equal distributions of income compatible
or conflicting objectives for low-income countries?
CHAPTER GOALS

• 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?
5-5

POVERTY AND INCOME INEQUALITY

❖ Poverty is the scarcity or the lack of a certain amount of

material possessions or money; Condition where people's
basic needs for food, clothing, and shelter are not being
met.
❖Income Inequality - The disproportionate distribution of
total national income among households.
Is suicide rate related to poverty?
 TYPES OF POVERTY

• Absolute poverty is synonymous with destitution and occurs when

people cannot obtain adequate resources (measured in terms of
calories or nutrition) to support a minimum level of physical health.

• Relative poverty occurs when people do not enjoy a certain

minimum level of living standards as determined by a government
(and enjoyed by the bulk of the population) that vary from country
to country, sometimes within the same country.
POVERTY AND COVID-19

• It was estimated that the pandemic could push about 49

million people into extreme poverty in 2020.
• Almost half of the projected new poor (23M) will be in
Sub-Saharan Africa, with an additional 16 M in South Asia.
• The number of extreme poor in the poorest countries that
are served by the WB’s International Development
Association is projected to increase by 17M and 22 M of
the projected new poor will be in middle-income countries.
 POVERTY AND COVID-19

Impacts will likely be deeper and longer-lasting

among the poor for several reasons:
• Where they live
• Where they work
• High dependence on public services, particularly health and
education
• Limited savings and lack of access to insurance
 POVERTY AND COVID-19

• The experience of affected countries suggests that the

incidence and impacts of COVID-19 can vary
significantly across space and over time, with urban
areas being the hardest hit initially.
• The risk of disruptions to the food supply and markets
could also be higher in urban areas
• Many of the new poor will likely be found in cities, while
rural areas, which tend to be poorer to start with, will
experience a deterioration in living conditions and a
deepening of poverty.
 POVERTY AND COVID-19

• China’s rural areas - about half of the villages surveyed

experienced income losses averaging 2000-5000 RMB ($282-
$704) per family over the previous month. Villagers are reducing
their spending on food as a result, with significant consequences
for nutrition and long-term human capital development.
• Bangladesh in March showed that 93% of individuals
interviewed experienced income losses averaging 75% over the
previous month, and around 72% lost their jobs or saw their
economic opportunities reduced, increasing the number of
respondents living under the national poverty line from 35% to
89%.
 POVERTY AND COVID-19

Policies needed to mitigate poverty:

• An effective response in support of poor and vulnerable
households will require significant additional fiscal
resources.
• Any support package will need to quickly reach both the
existing and new poor.
• Decision-makers need timely and policy-relevant information
on impacts and the effectiveness of policy responses.
 GENDER EQUALITY AND COVID-19

How COVID-19 affects gender equality outcomes

• The pandemic is likely to increase the unequal
distribution of care work between men and women
within households.
• There is a high risk that gender inequalities will widen
during and after the pandemic and that gains in
women’s and girls’ accumulation of human capital,
economic empowerment, and voice and agency,
painstakingly built over the past decades, will be
reversed.
POVERTY AND COVID-19
 GENDER EQUALITY AND COVID-19

• There is also the unequal distribution of care work

between men and women within households.
• They will now most likely shoulder the increase in
care demands brought about by the closure of
schools, the confinement of elderly people, and
the growing numbers of ill family members.
• There is a high risk that this will prompt many
women worldwide to leave their jobs
HEALTH IMPACTS ON MEN AND WOMEN
AND COVID-19
 POVERTY AND COVID-19

Inequity in Education

• The COVID-19 pandemic has disrupted learning for more than

1.5 billion children and youth.
• Most students around the world are out of school and using
remote learning programs, through the internet, TV, or radio or
combination of these, if they are available.
• Inequity in access to the internet, data packages, and devices to
support remote continuity of education for all learners has
become clearly evident especially to students with disabilities or
diverse/special educational needs.
5-28

MEASURING INCOME DISTRIBUTION

Relative Income Share:

• The ratio of the highest 20% to lowest 40% of the
population
• The higher the ratio, the greater is income inequality
5-29

TYPICAL SIZE DISTRIBUTION OF PERSONAL INCOME

5-30

LORENZ CURVE OF INCOME DISTRIBUTION

• It was developed by Max O. Lorenz in 1905 for representing inequality of the

wealth distribution.

• The curve is a graph showing the proportion of overall income or wealth assumed
by the bottom x% of the people

• Depicts quintile percentage of population vs. cumulative percentage of income

received

• The closer the Lorenz curve to the line of equality, the better is the size
distribution of income
5-31

LORENZ CURVE OF INCOME DISTRIBUTION

Data for the United States in 2000:

Quintile % Income % Cumulative Income
Lowest 20% 3.6 3.6
Second 20% 8.9 12.5
Third 20% 14.9 27.4
Fourth 20% 23.0 50.4
Richest 20% 49.6 100.0
 LORENZ CURVE AND GINI COEFFICIENT

 A Lorenz curve shows cumulative income against population.

 The Gini coefficient measures the degree of income inequality
and ranges from 0 (perfectly equal) to 1 (perfectly unequal).

Gini coefficient = A / (A+B)

0 ➔ Everyone has the same income

1 ➔ Only one person monopolizes wealth,
others have no income.

Actual numbers come in between:

Up to 30%: relatively equal
40% and above: highly unequal
5-33
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

LORENZ CURVE OF INCOME DISTRIBUTION

 5-34

LORENZ CURVE OF INCOME DISTRIBUTION

The greater the curvature of the Lorenz Curve, the greater is the degree of income inequality
5-35

IMPROVED INCOME DISTRIBUTION

5-36

WORSENED INCOME DISTRIBUTION

5-37

CROSSING LORENZ CURVES

 GINI INDEX/COEFFICIENT

• It is a statistical measure of distribution developed by the Italian statistician

Corrado Gini in 1912. It is often used as a gauge of economic inequality,
measuring income distribution or, less commonly, wealth distribution among
a population. The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0
representing perfect equality and 1 representing perfect inequality. Values
over 1 are theoretically possible due to negative income or wealth.
• Income inequality - an extreme concentration of wealth or income in the
hands of a small percentage of a population; described as the gap between
the richest and the rest.
 5-39

GINI COEFFICIENT

❖If everyone has the same income, then it will be 0. If one person
has all the money, it will be 1.
❖It is measured graphically by dividing the area between the perfect
equality line and the Lorenz curve by the total area lying to the right of
the equality line in a Lorenz diagram.
❖The higher the value of the coefficient is, the higher the inequality of
income distribution; the lower it is, the more equal the distribution of
income.
5-40

THE GINI COEFFICIENT

 % Gini Coefficient: Low and Stable, or Declining

Source: World Bank’s combined and standardized Gini data, http://data.worldbank.org/data-catalog/all-the-ginis.

 % Gini Coefficient: High and Persistent, or Rising

Source: World Bank’s combined and standardized Gini data, http://data.worldbank.org/data-catalog/all-the-ginis.

5-43

THE GINI COEFFICIENT

0 < The Gini Coefficient < 1

• 0.41 for U.S.

• 0.30 for Ethiopia

• 0.57 for Brazil

• Gini Coefficient is higher for the OPEC and Middle-income countries

than Low-income countries
5-44

THE GINI COEFFICIENT

Income inequality had a tendency to increase.

1960 1980
LDCs 0.544 0.602
Low income countries 0.407 0.450
Middle-income countries 0.603 0.569
The OPEC 0.575 0.612
5-46

INCOME DISTRIBUTION MEASURES

5-47

INCOME INEQUALITY
 5-48

FUNCTIONAL DISTRIBUTIONS (FACTOR SHARE

DISTRIBUTION OF INCOME)

❖ The distribution of income to factors of production

without regard to the ownership of the factors.

❖ Factors of production - resources or inputs required

to produce a good or a service, such as land, labor,
and capital.
5-49

THEORY OF FUNCTIONAL INCOME DISTRIBUTION

❖Looks at the percentage that labor receives as a whole and

compares this with the percentages of total income
distributed in the form of rent, interest, and profit (i.e., the
returns to land and financial and physical capital).

❖Attempts to explain the income of a factor of production by

the contribution that this factor makes to production.
5-50

FUNCTIONAL INCOME DISTRIBUTION

• Assume a traditional economy in which labor is the only variable

input (capital and land are fixed): Output = Wages + Profits

• Functional income distribution = Wages as a percentage of

Profits

• The higher the ratio, the greater is income equality

 5-51

COMPETITIVE MARKET ASSUMPTIONS

❖ The demand for labor will be determined by labor’s marginal product

(i.e., additional workers will be hired up to the point where the value
of their marginal product equals their real wage).

❖Marginal products, demand for labor will be a declining function of

the numbers employed – diminishing marginal product.
5-52 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

TRADITIONAL, NEOCLASSICAL ASSUMPTIONS

❖ Total national output (which equals total national income)

will be represented by the area 0RELE.
❖ This national income will be distributed in two shares:
❖ 0WEELE going to workers in the form of wages; and
❖ WERE remaining as capitalist profits (the return to
owners of capital).
5-53

FUNCTIONAL INCOME DISTRIBUTION

5-54 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

PROBLEM OF FUNCTIONAL THEORY

❖Does not take into account the important role and influence of
nonmarket forces:
✓ the role of collective bargaining between employers and trade
unions in the setting of modern-sector wage rates, and
✓ the power of monopolists and wealthy landowners to
manipulate prices on capital, land, and output to their own
personal advantage
5-55 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

MEASURING ABSOLUTE POVERTY

❖ The situation of being unable or only barely able to meet the subsistence
essentials of food, clothing, and shelter.
❖ Absolute poverty is sometimes measured by the number, or “headcount,”
H, of those whose incomes fall below the absolute poverty line, Yp. When
the headcount is taken as a fraction of the total population, N, we define
the headcount index, H/N (also referred to as the “headcount ratio”).
❖Headcount index - the proportion of a country’s population living below the
poverty line.
5-56 POVERTY GAP
Average percent of income shortfall below the poverty line.
Over 10.5% in LDCs

• Latin America & Caribbean: about 9%

• Middle East and North Africa: about 1%
• Sub-Saharan Africa: about 15%
• South Asia: 13%
• China, East Asia & Pacific: 8%
5-57

MEASURING POVERTY GAP

• Poverty and income inequality depend on type of economic,

political and institutional arrangements according to which rising
national incomes are distributed among broad segments of a
population.

• A middle-income country may have a higher poverty rate and

poverty gap than a low-income country (South Africa vs. Sri
Lanka)
5-58
MEASURING TOTAL POVERTY GAP

The sum of the difference between the poverty line and actual income levels of all
people living below that line.
5-59

GROWTH AND DISTRIBUTION

The “Inverted-U” Kuznets Curve

• Income inequality increases during the early stages of growth

• Income equality increases during a later stage of growth with

redistribution of income and wealth
5-60

THE KUZNETS CURVE

5-61

EVIDENCE ON KUZNETS CURVE

• Cross country evidence supports the hypothesis

• Time series data show some countries have been

able to grow and improve income distribution at the
same time
5-62

KUZNETS CURVE IN LATIN AMERICAN COUNTRIES

5-63

INCOME INEQUALITY ACROSS TIME

5-64

GROWTH AND INEQUALITY, 1965-1996

5-65
CHANGE IN INEQUALITY
WITH OR WITHOUT GROWTH
5-66

ABSOLUTE POVERTY

• International Poverty Line: $1 per day per person

• The Headcount Ratio: The percentage of people

living below the International Poverty Line
5-67

REGIONAL POVERTY INCIDENCE, 2004

 POVERTY INCIDENCE IN SELECTED COUNTRIES
5-68
5-69

POVERTY INCIDENCE IN SELECTED COUNTRIES

5-70

HUMAN POVERTY INDEX

Human Poverty Index is measured in terms of deprivation of

• Life: years of life expectancy

• Basic education: adult illiteracy

• Basic needs: lack of access to health services , access to safe

drinking water, and number of malnourished children
5-71

CHARACTERISTICS OF POVERTY GROUPS

• Rural population
• Women and children
• Ethnic minorities and indigenous population
5-72

POVERTY: RURAL VS. URBAN

5-73
INDIGENOUS POVERTY IN LATIN AMERICA
5-74

POLICIES OF INCOME DISTRIBUTION

• Remove factor price distortions: Get factor prices right!

• Land redistribution and supportive farm services

• Income redistribution
• Progressive taxation
• Transfer payments
 5-75

POLICIES TO REDUCE POVERTY

• Invest in human and social capital of the poor

• Provision of public goods and social services

• Reduce concentration of economic and political power

5-76
APPENDIX 5.1:
APPROPRIATE TECHNOLOGY AND
EMPLOYMENT GENERATION

• Choice of techniques
• Factor price distortions and appropriate technology
• Possibilities of labor-capital substitution
5-77
CHOICE OF TECHNIQUES:
THE PRICE INCENTIVE MODEL
5-78

AHLUWALIA-CHENERY WELFARE INDEX

• Constructing poverty-weighted index of social

welfare
5-79

INCOME DISTRIBUTION AND GROWTH