Chap 5

Chapter 5
Human Welfare
Development
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5.1 Economic growth – human
welfare
• Human development focuses on the
richness of human lives rather than on the
richness of economies [1]
• Income growth is an important means to
development, rather than an end in itself.
[1] Human Development Report 2016, p.2

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Human development for
everyone
Source: Human Development Report 2016 4-3

Human welfare development
• Income inequality and Poverty

• Gender inequality
• Education and Health
• Economics and the Environment

5.2 Income inequality and
Poverty
5.2.1 Concepts
• Income inequality: The disproportionate
distribution of total national income among
households (Todaro & Smith, 2011, p. 205)
• Absolute poverty: The situation of being
unable or only barely able to meet the
subsistence essentials of food, clothing, and
shelter (Todaro & Smith, 2011, p. 211)

5.2.2 Measuring Income
Inequality and Poverty
5.2.2.1 Measuring Income Inequality
– Size distributions
– Lorenz curves
– Gini coefficients
– Functional distributions

The Lorenz Curve

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

Estimating the Gini Coefficient


40.5
32.4
27.0
1 3 6 10
Four Possible Lorenz Curves

5.2.2 Measuring Income
Inequality and Poverty
5.2.2.2 Measuring Absolute Poverty
– Headcount Index
– Total poverty gap
TPG  i 1 (Yp  Yi )
H
– Where Yp is the absolute poverty line

– Yi is income of person

Measuring the Total Poverty
Gap

Measuring Absolute Poverty
– Average poverty gap
TPG
APG 
N
– Where N is number of persons
– TPG is total poverty gap
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Measuring Absolute Poverty
– The Human Poverty Index (HPI) &

Multidimensional Poverty Index (MPI)
(See the HDR technote)
– MPI was developed in 2010 to replace HPI

5.2.3 Poverty, Income
Inequality, and Social Welfare
• What’s so bad about inequality?
• Dualistic development and shifting Lorenz
curves: some stylized typologies
– Traditional sector enrichment (see Figure 4.6)
– Modern sector enrichment (see Figure 4.7)
– Modern sector enlargement (see Figure 4.8)

Improved Income Distribution under
the Traditional-Sector Enrichment
Growth Typology

Worsened Income Distribution under
the Modern-Sector Enrichment Growth
Typology

Crossing Lorenz Curves in the
Modern-Sector Enlargement Growth
Typology

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

Selected Income Distribution
Estimate

Income and Inequality in Selected
Countries

Kuznets Curve with Latin
American Countries Identified

Growth
and
inequality
25
Change in Income Inequality in
Selected Countries, with or without
Growth

Data of Absolute Poverty
• Extreme Poverty
– $1-a-day headcount shows some progress
– Incidence of extreme poverty is uneven
– WB: $1.25-a-day headcount.

Regional Poverty Incidence, 2004

Regional Poverty
Source: World Development Indicators 2014

Regional Poverty

Economic Characteristics of
Poverty Groups
• Rural Poverty
• Women and poverty (See chapter 8 for
more detail)
• Ethnic minorities, indigenous populations,
and poverty

Poverty: Rural versus Urban

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

The Range of Policy Options:
Some Basic Considerations
• Policy options
– Changing relative factor prices
– Progressive redistribution of asset ownership
– Progressive taxation
– Transfer payments and public provision of
goods and services

5.3 Gender inequality
• Women are more likely than men to suffer

from low human development (Human
Development Report 2016, p.54)
• Measurement:
– Gender Inequality Index (GII) (UNDP) – HDR
technote1
– Gender Gap Index (World Economic Forum –
WEF) -
https://www.weforum.org/agenda/2017/11/the-gender-gap-actually-got-wor
se-in-2017
/
4-35
Gender Inequality Index
Human Development Report 2016, p. 215 4-36

Gender Gap Index
• the difference between women and men as
reflected in social, political, intellectual,
cultural, or economic attainments or
attitudes.
• Issued since 2006

Gender Gap Index
Source: WEF (2018), retrieved from

https
://www.weforum.org/agenda/2017/11/t
he-gender-gap-actually-got-worse-in-2
017
/
4-38
Gender Gap Index

The Gender Gap: Youth
Literacy Rate, 2008

The Gender Gap: Women and
Education
• Young females receive less education than young
males in nearly every LDC
• Closing the educational gender gap is important
because,
– The rate of return on women’s education is higher than
that of men in developing countries
– It increases productivity and lowers fertility
– Educated mothers have a multiplier impact on many
generations
– It can break the vicious cycle of poverty and inadequate
schooling for women

The Gender Gap: Women, Health
and Education
• Consequences of gender bias in health and

education
– Economic incentives and their cultural setting
– “Missing Women” mystery in Asia

Female-Male Ratios in Total Population
in Selected Communities

5.4 Education and Health
The Central Roles of Education and Health

• Health and education are important
objectives of development
• Health and education are also important
components of growth and development
• Education and Health as Joint Investments
for Development

Improving Health and Education: Why
Increasing Incomes Is Not Sufficient
• Increases in income often do not lead to

substantial increases in investment in
children’s education and health
• Better educated mothers tend to have
healthier children
• Significant market failures in education and
health require policy action

Investing in Health and Education:
The Human Capital Approach
• Initial investments in health or education

lead to a stream of higher future income
• The present discounted value of this stream
of future income is compared to the costs of
the investment
• Private returns to education are high, and
may be higher than social returns

Age-earnings Profiles by Level of
Education: Venezuela, 1989

Age-earnings Profiles by Level
of Education: US, 2014
4-48
Financial Trade-Offs in the
Decision to Continue in School

Rates of Return to Investment in
Education by Level of Education,
Country, Type, and Region Then

Rates of Return to Investment in
Education by Level of Education Now
As the
education
systems
expand,
primary school
becomes
compulsory
and universal,
making it
difficult or
impossible to
estimate
returns to
education

Educational Systems and
Development
• The Political Economy of educational supply
and demand: the relationship between
employment opportunities and educational
demands
• Social versus private benefits and costs

Figure 6.4 Private versus Social
Benefits and Costs of Education: An
Illustration

Educational Systems and
Development
• Distribution of education
– Lorenz curves for the distribution of education
• Education Inequality and Poverty

Lorenz Curves for Education in India
and South Korea, 1990

Gini Coefficients for Education in
85 Countries, 1990

Health Systems and
Development
• Measurement and distribution

Life Expectancy in Various World
Regions

Under-5 Mortality Rates in Various
World Regions

Maternal mortality ratio

Children’s Likelihood to Die in Selected
Countries

Health Systems and
Development
• Disease burden
• HIV/AIDS
• Malaria
• Other “Neglected Tropical Diseases”

Regional HIV and AIDS

Health Systems and
Development
• Health and Productivity
– Is there a connection?
• Health Systems Policy

– Great variability in the performance of health
systems at each income level

Figure 6.11 Adult Stature by Birth
Cohort

Figure 6.12 Wages, Education, and
Height of Males in Brazil and the
United States

5.5 Economics and the Environment
• Market failures lead to too much

environmental degradation
• In this chapter
– To examine the economic causes and
consequences of environmental crises
– To explore potential solutions to the cycle of
poverty and resource degradation

Economics and the Environment
• Eight basic issues

– Sustainable development
– Environment - population and resources
– Environment – poverty
– Environment – economic growth
– Environment – rural development
– Environment – urbanization
– Environment – global economy
– Environment - the nature and pace of greenhouse gas
8-68
Sustainable Development and
Environmental Accounting
• Sustainability: “meeting the needs of the

present generation without compromising
the needs of future generations.”3
• Sustainable development: A pattern of
development that permits future generations
to live at least as well as the current
generation, generally requiring at least a
minimum environmental protection
World Commission on Environment and Development, Our Common Future (New York: Oxford University Press, 1987), p. 4.
3

• Environmental accounting: The

incorporation of environmental benefits and
costs into the quantitative analysis of
economic activities.
• Environmental capital: The portion of a
country’s overall capital assets that directly
relate to the environment— Ex: forests, soil
quality, ground water, etc.

• Sustainable net national income (NNI*): An environmental
accounting measure of the total annual income that can be
consumed without diminishing the overall capital assets of a
nation (including environmental capital).
NNI* = GNI - Dm - Dn
Dm: depreciation of manufactured capital assets,
Dn : depreciation of environmental capital
• Better measurement: NNI** = GNI - Dm - Dn - R – A
R: expenditure to restore environmental capital (forests, fisheries, etc.)
A: expenditure to avert destruction of environmental capital (air
pollution, water and soil quality, etc.)
8-71
Economics and the Environment
Other Basic Issues
• Population, Resources, and the Environment

• Poverty and the Environment
• Growth versus the Environment
– Environmental Kuznets
– “Green growth”
• Rural Development and the Environment
– sustainable farming methods
– Land-augmenting investments
• Urban Development and the Environment
• The Global Environment and Economy
• The Nature & Pace of Greenhouse Gas–Induced Climate Change
8-72
Economic Models of Environment
Issues
Privately Owned Resources

– Total net benefit : The sum of net benefits to all consumers.
– Marginal cost :The addition to total cost incurred by the
producer as a result of increasing output by one more unit.
– Producer surplus: Excess of what a producer of a good
receives and the minimum amount the producer would be
willing to accept because of a positive-sloping marginal cost
curve.
– Consumer surplus: Excess utility over price derived by
consumers because of a negative-sloping demand curve.
– Scarcity rent : The premium/additional rent charged for the
use of a resource/good that is in fixed/limited supply.
8-73
Issues

– Present value: The discounted value at the present time of a
sum of money to be received in the future.
– Marginal net benefit: The benefit derived from the last unit
of a good minus its cost
– Property rights: The acknowledged right to use and benefit
from a tangible/intangible entity that may include owning,
using, deriving income from, selling, and disposing.
– Perfect property rights markets are characterized by:
Universality, Exclusivity or “excludability”, Transferability,
Enforceability

Static Efficiency in Resource Allocation
8-75
Optimal Resource Allocation over Time
8-76
Issues
Common Property
Resources
A resource that is
collectively or
publicly owned and
allocated under a
system of
unrestricted access,
or as self-regulated
by users
8-77
Issues
Public Goods and Bads: Regional Environmental

Degradation and the Free-Rider Problem
• Externality: Any benefit or cost borne by an individual
economic unit that is a direct consequence of another’s
behavior.
• Internalization: The process whereby external
environmental or other costs are borne by the producers or
consumers who generate them, usually through the
imposition of pollution or consumption taxes.

Issues

• Public good: An entity that provides benefits to all
individuals simultaneously and whose enjoyment by one
person in no way diminishes that of another.
• Public bad: An entity that imposes costs on groups of
individuals simultaneously.
• Free-rider problem: The situation in which people can
secure benefits that someone else pays for.

Issues
8-80
Policy Options in Developing
and Developed Countries
Developing countries
• Proper Resource Pricing
• Community Involvement
• Clearer Property Rights and Resource Ownership
• Programs to Improve economic alternatives of the Poor
• Raising the Economic Status of Women
• Industrial Emissions Abatement Policies
• Proactive Stance toward Climate Change and
Environmental Degradation

Developed countries can do for developing countries
• Trade Policies
• Debt Relief
– Debt-for-nature swap: The exchange of foreign debt
held by an organization for a larger quantity of domestic
debt that is used to finance the preservation of a natural
resource or environment in the debtor country.
• Development Assistance

Developed countries can do for global environment
• Emission Controls
• Research and Development
• Import Restrictions

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Chapter 5

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[1] Human Development Report 2016, p.2

Source: Human Development Report 2016 4-3

• Income inequality and Poverty

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– Where Yp is the absolute poverty line

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– Average poverty gap

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– The Human Poverty Index (HPI) &

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• Women are more likely than men to suffer

Human Development Report 2016, p. 215 4-36

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Source: WEF (2018), retrieved from

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• Consequences of gender bias in health and

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The Central Roles of Education and Health

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• Increases in income often do not lead to

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• Initial investments in health or education

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