Chapter 5

Poverty,
Inequality, and
Development

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

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

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

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

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Figure 5.1 The Lorenz Curve

A graph depicting the

variance of the size
distribution of income
from perfect equality.

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

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Figure 5.3 Estimating the Gini
Coefficient
An aggregate numerical
measure of income inequality
ranging from 0 (perfect
equality) to 1

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Figure 5.4 Four Possible Lorenz
Curves

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Coefficient of variation

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

The distribution of income to

factors of production without
regard to the ownership of
the factors.

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 Measuring Inequality and Poverty: Measuring
Absolute Poverty

Headcount Index

It doesn’t indicate that how poor the poor are?

Total poverty gap

- Where Z is the absolute poverty line
–Yi is income of person i
The extent to which individuals fall below the poverty line as a proportion
of the poverty line.

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Figure 5.6 Measuring the Total
Poverty Gap

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Measuring Inequality and
Poverty
• Measuring Absolute Poverty
– Average poverty gap

TPG
APG 
H
– Where H is number of persons
– TPG is total poverty gap

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

– Perfect targeting Gi(Max) or Min targeting Z

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Calculating poverty gap

• The sum of these poverty gaps gives the minimum cost of

eliminating poverty, if transfers were perfectly targeted.

• The measure does not reflect changes in inequality among the poor.

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Squared poverty gap (“poverty severity”)
index

It takes into account severity of inequality among the poor (power can be
greater than 1)

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Measuring Inequality and
Poverty:

• Measuring Absolute Poverty

– Multidimensional poverty index

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Poverty, Inequality, and Social
Welfare
• What’s so bad about inequality?
• Dualistic development and shifting Lorenz
curves: some stylized typologies
– Traditional sector enrichment
– Modern sector enrichment
– Modern sector enlargement

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

All of the benefits of growth are

divided among traditional-sector
workers

Higher income, a more equal

relative distribution of income, and
less poverty.

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

• Growth is limited to fixed number of

people in the modern sector

• Numbers of workers and their wages

held constant in the traditional sector.

A less equal relative distribution of

income, and no change in
poverty.

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

Economy develops maintaining

constant wages in both sectors

•Absolute poverty is reduced curve

will cross

•Inequality may improve or worsen

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

A graph reflecting the relationship between a country’s

income per capita and its equality of income distribution.

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Figure 5.10 The “Inverted-U”
Kuznets Curve

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Table 5.3 Income and Inequality in
Selected Countries

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Figure 5.12 Plot of Inequality Data
for Selected Countries

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

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Table 5.5 Poverty Incidence in
Selected Countries

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Table 5.5 Poverty Incidence in
Selected Countries (continued)

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

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Economic Characteristics of
Poverty Groups
• Rural Poverty
• Women and poverty
• Ethnic minorities, indigenous populations,
and poverty

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Table 5.6 Poverty: Rural versus
Urban

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

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

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