Topic 3: Social advancements and

Development
• Human development Index
• Measurement of Poverty and Inequality
• Economic characteristics of poverty groups
• Why is inequality a problem?
• Relationship between growth and inequality
• Relationship between growth and poverty
 Reading materials
• Michael Todaro et al 2012. Chapter 2, 5
• Perkins et al, 2006. Chapter 6
• Dollar and Aart, 2002. Growth is good for the poor. Journal of
Economic Growth, Vol. 7, Issues 3;
• Krishna, 2004. Escaping the poverty and becoming poor: who
gains, who loses and why? World Development, 32:1.
• Bowman and Marianne, 1999. Should the Kuznets curve be relied
on to produce equalizing growth? Evidence from Post-1950
development. World Development, 25:1.
• Robert, 2011. Global trends in income inequality: what is
happening and should we worry? Challenge, Sep-Oct. (reading
this reference is required).
 Human Development Index
• HDI as a holistic measure of living levels (The HDI was
created to emphasize that people and their capabilities
should be the ultimate criteria for assessing the
development of a country, not economic growth alone)
 The HDI sets a minimum and a maximum for each dimension, called goalposts, and then shows where each country
stands in relation to these goalposts, expressed as a value between 0 and 1.
 The education component of the HDI is now measured by mean of years of schooling for adults aged 25 years and
expected years of schooling for children of school entering age. (a).Mean years of schooling is estimated based on
educational attainment data from censuses and surveys available in the UNESCO Institute for Statistics database and
Barro and Lee (2010) methodology. (b). Expected years of schooling estimates are based on enrolment by age at all
levels of education and population of official school age for each level of education. Expected years of schooling is
capped at 18 years. The indicators are normalized using a minimum value of zero and maximum values are set to the
actual observed maximum value of mean years of schooling from the countries in the time series.
 The life expectancy at birth component of the HDI is calculated using a minimum value of 20 years and maximum
value of 83.4 years. This is the observed maximum value of the indicators from the countries in the time series, 1980–
2010. Thus, the longevity component for a country where life expectancy birth is 55 years would be 0.552. That is, (55
– 20)/(83.2 – 20) = 35/63.2 = 0.552
 For the wealth component, the goalpost for minimum income is $100 (PPP) and the maximum is $107,721 (PPP), both
estimated during the same period, 1980-2011.
4
Goalposts for the Human Development Index in this Report

Dimension Observed Maximum Minimum

Life Expectancy 83.2 (Japan,2010) 20
Mean Years of Schooling 13.2 (US, 2000) 0
Expected Years of Schooling 20.6 (Australia, 2002) 0
Combined Education Index 0.951 (NZ, 2010) 0
Per Capita Income (PPPs) 108,211 (UAE, 1980) 163 (Zimbabwe, 2008)

Having defined the minimum and maximum values, the sub-indices are calculated as follows:

Dimension index
Actual Index  MinimumValue

MaximumValue  MinimumValue
For education, the equation is applied to each of the two subcomponents, then a geometric
mean of the resulting indices is created and finally, the equation is reapplied to the geometric
mean of the indices, using 0 as the minimum and the highest geometric mean of the resulting
indices for the time period under consideration as the maximum.

5
Human Development Index 1 1 1
The HDI is the geometric mean of the three dimension indices: I 3
xI 3
xI 3
LIFE Education INCOME

The expression above embodies imperfect substitutability across all HDI dimensions. It thus addresses one of the most
serious criticisms of the linear aggregation formula, which allowed for perfect substitution across dimensions. Some
substitutability is inherent in the definition of any index that increases with the values of its components.
Example: China
Indicator Value
Life expectancy at birth (years) = 73.5
Mean years of schooling (years) = 7.5
Expected years of schooling (years) = 11.4
GNI per capita (PPP US$) = 7,263
Note: Values are rounded.

Life expectancy index =(73.5 – 20)/(83.2 – 20) = 0.847

(a) Mean years of schooling index = (7.5 – 0)/(13.2 – 0) = 0.568

(b) Expected years of schooling index = (11.4 – 0)/(20.6 – 0) = 0.553

Education index =
0.568 x 0.553  0
 0.589
0.951  0
Income index =
ln(7, 263)  ln(163)
 0.584
ln(108, 211)  ln(163)
Human Development Index (HDI) =
3 0.847 x 0.589 x 0.584  0.663 6
 Inequality and economic development
• Measures of inequality in income distribution

• Relationship of inequality in income distribution and economic

growth

• Inequality in income distribution between countries and in each

country

• Gender inequality
Equity or Equality?
BASIS FOR COMPARISON EQUITY EQUALITY

Meaning Equity is the virtue of being just, Equality is described as a state, where
even-handed and impartial. everyone is at the same level.

What is it? Means End

Distribution Fair Even

Recognizes Differences, and attempts to Sameness and treats everyone as equal.

counteract unequal individual
opportunities.

Ensures People have what they need. Providing everyone, the same things.
 Measuring Inequality
• Personal or size distribution of income
• Quintiles and Deciles
• Lorenz Curve
• Gini Coefficients
• Income gap index
• The “40” criterion of World Bank
 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
 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
Measuring Income Inequality

The Lorenz Curve

• Is a diagram to explain income inequality in a country.

• Is based on two pieces of information, income and population.

• Information is required on both and then formed into two variables that
reflect the cumulative value of income and the population.

• On the horizontal axis we sort the cumulative population in the ascending

order of income, with the lowest income first followed by the second lowest
and so on. Hence the first 20% of the population will necessarily be the
poorest 20% of the entire population.

• NOTE: Of importance here is to understand that incomes of peoples must

be placed in ascending order with the poorest first, followed by second
poorest………..up to the richest household/family/person in the country.
Lorenz Cure
 Measuring Inequality
• Gini coefficient
• 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 curve diagram
• Ranges in value from 0 (perfect equality) to 1
(perfect inequality)
• Satisfies the properties of anonymity, scale
independence, population independence, and
transfer principles
GINI index
GINI is a measure of statistical dispersion
intended to represent the income
distribution of a nation's residents, and is
the most commonly used measure of
inequality
The Gini coefficient measures the
inequality among values of a frequency
distribution. The Gini coefficient is
usually defined mathematically based on
the Lorenz curve
G = A / (A + B)
0<G<1
If the GINI index is more than 0.4, then a
society is considered as unequal. More
specific, when the index ranging from 0.4 to
0.5, a society is considered as fairly unequal,
and if it rise to more than 0.5 this society is
highly unequal
 Income gap index
• This criterion reflects how much unequal that results of economic
growth be distributed. This index is measure by the ratio between
the income of the 20% richest people (households) and the 20%
poorest people (households).
• Based on international specification, if the mentioned index is
more than 10, a society is highly unequal. If it ranging from 8 to
10, this society is immediately unequal. If this index is lower than
8, this society is slightly unequal.
 The “40” criterion of World Bank
• This criterion measure inequality base on the proportion
of the income of 40% poorest people (household) in a
society.
• According to this, if the proportion is below 12%, a
society is highly unequal. If it ranging from 12% to 17%,
this society is fairly unequal. When it rise up to more
than 17%, this society has a low inequality.
 Relationship between economic growth and income inequality

Inverse U curve: The Kuznets

curve is a hypothetical curve
that graphs economic
inequality against income per
capita over the course of
economic development
(which was presumed to
correlate with time) - the
inverse-U shaped pattern of
inequality
 Kuznets’ Inverted- U Hypothesis
• In the early stages of growth, distribution of
income will tend to worsen, where as later
stages it will improve
• Reasons for the inverted- U curve
• Evidence on the inverted U- hypothesis
 Relation between economic growth and inequality

• Does growth affect the level of inequality?

• No consensus
• Does initial inequality affect growth?
• Negative relation between growth and initial inequality in
income (refer to Why is inequality bad?)
• Positive relation between growth and initial inequality (only
Forbes found this relation)
• Initial inequality in assets and human capital negatively affects
growth (as it hurts the poor the most)
• The main flow of causation appears to be initial inequality
hampering growth and not the other way round.
 Why is inequality bad?
• Extreme inequality leads to economic
inefficiency and curtails growth
• Extreme inequality undermines social
stability and solidarity
• Extreme inequality is viewed as unfair
Inequality in income distribution between
countries
Vietnam’s Gini index during the period 2002-
2012
 Poverty and economic development
• Measures of poverty

• Relationship of poverty and economic growth

What is poverty
• Poverty at the individual and/or household level represents a serious constraint on
economic activity.
• A lack of economic opportunities feeds into poverty.
• These lack of opportunities can be re enforced by income inequality.
• Poverty can be both absolute and relative
Absolute Poverty: Those people who do not have adequate nutritional intake per
day, or do not have adequate shelter or clothing in order to survive are deemed to
be in absolute poverty.

Is traditionally measured by introducing largely ad hoc poverty lines. E.g. the

World Bank reports the number of people in countries below a $1 or $2 a day as a
proportion of the total population.
Poverty Measures

Absolute Poverty Lines

Poverty line measures signal to researchers where poverty is and becomes the first
place to start in analyzing poverty in a certain country, within a certain economic
group etc…..

Examples of Poverty Lines:

(1) $1 a day and $2 a day lines that the World Bank and United Nations
Development Programme (UNDP) use.

(2) Calories per capita or per household

Both measures are absolute in that people can be lifted out of poverty if they can
increase income or calories and poverty can be eradicated.
 Absolute Poverty Lines
Type Description
Food Energy Intake  Based on observed
relation between
calorie intake and
total household
expenditure
Cost of Basic Needs  Identifies bundle of
goods necessary to
meet basic needs,
then estimates cost
World Bank US$1 /  US$370 / year
day
Features
 PL may vary by sub-
groups of population
e.g. by region
 Most common
method
 Identification of
basic needs may not
be strghtfwd
 Eases comparison
across countries
 Zero cost of
calculation
 Conversion to local
currency problematic

Measurement of Poverty 31
Poverty Measures
• We may want to measure poverty directly instead of looking at Y
and inequality together
• The most commonly used poverty measures are:
Head Count Index
Poverty Gap
Proportional Poverty Gap
Squared Poverty Gap

Measurement of Poverty 32
Head Count Index
• HCI = (# poor) / (population)

• Measures the “incidence” of poverty

• i.e. it tells us “How many poor”

Measurement of Poverty 33
 Head Count Index
• Simplest and most commonly used measure
• Limitations:
Does not account for depth of poverty; i.e. it does not tell us how far below
the poverty line the poor are.
• Advantages:
Simple to understand, straightforward interpretation.
Additive across populations.

Measurement of Poverty 34
Absolute Poverty Gap
• PG = (# Poor) * (Y shortfall)
• PG = (Z-Yi) ;
• where Z is PL, Yi is income of person i
• It tells us the total Y shortfall of the poor; i.e. the absolute amount
that would be needed to raise all the poor up to the poverty line.

Measurement of Poverty 35
Absolute Poverty Gap

Poverty Gap
Y

PL

Population
(poorest to richest)
Measurement of Poverty 36
Absolute Poverty Gap

Y Y
Poverty
Gap

PL PL

Population Population

Relatively large Relatively small

poverty gap poverty gap

Measurement of Poverty 37
Proportional Poverty Gap
• PPG = (1/N){(Z-Yi)/Z}
• Measures the “depth” of poverty
• It gives some weight to how far below the poverty line a poor
individual is
• If a poor person’s income fall, the HC won’t change, but the PPG will increase
to reflect the increase in the depth of poverty
• 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.

Measurement of Poverty 38
Squared Poverty Gap(Foster-Greere
Thorbecke)
• PPG = (1/N){(Z-Yi)/Z}2
• Measures the “severity” of poverty
• Squares the difference between the poverty line and each
household’s income
• provides much greater weight to the poorest of the poor because the
farther the HH from the poverty line, the greater the weight it is given

Measurement of Poverty 39
 The Multidimensional Poverty Index (MPI)
• (MPI) identifies multiple deprivations at the household
and individual level in health, education and standard of
living
• It was launched in 2010 in the Human Development
Report, and updated in 2011
• The MPI methodology can be adapted for national
poverty measures – using indicators and cutoffs for each
policy context.
MPI Dimensions Weights &
Indicators
Identification: Who is poor?

A person is multidimensionally poor if they are

deprived in 33% of the dimensions.
(censor the deprivations of the non-poor)

33%
How do you calculate the MPI?
• The MPI uses the Alkire Foster method:
Formula: MPI = M0 = H × A

• H is the percent of people who are identified as poor, it

shows the incidence of multidimensional poverty.
• A is the average proportion of weighted deprivations people
suffer at the same time. It shows the intensity of people’s
poverty – the joint distribution of their deprivations.
The MPI is appropriate for ordinal data, and satisfies properties like subgroup consistency,
dimensional monotonicity, poverty & deprivation focus. MPI is
like the poverty gap measure – but looks at breadth instead –
what batters a person at the same time.
Indicators used
The following ten indicators are used to calculate the MPI:
•Education (each indicator is weighted equally at 1/6)
1.Years of schooling: deprived if no household member has completed six years of
schooling
2.Child school attendance: deprived if any school-aged child is not attending school up
to class 8
•Health (each indicator is weighted equally at 1/6)
3.Child mortality: deprived if any child has died in the family in past 5 years
4.Nutrition: deprived if any adult or child for whom there is nutritional information is
stunted[4]
•Standard of Living (each indicator is weighted equally at 1/18)
5.Electricity: deprived if the household has no electricity
6.Sanitation: deprived if the household’s sanitation facility is not improved (according to
MDG guidelines), or it is improved but shared with other households
7.Drinking water: deprived if the household does not have access to safe drinking water
(according to MDG guidelines) or safe drinking water is more than a 30-minute walk
from home roundtrip
8.Floor: deprived if the household has a dirt, sand or dung floor
9.Cooking fuel: deprived if the household cooks with dung, wood or charcoal
10.Assets ownership: deprived if the household does not own more than one of: radio,
TV, telephone, bike, motorbike or refrigerator and does not own a car or truck
example
Country X consists of persons A, B and C. The following table shows the deprivation on
each of the 10 indicators for persons A, B and C.
"0%" indicates no deprivation in that indicator, while "100%" indicates deprivation in that indicator.

Factor H for country X is: (1+1+0)/3 = 0.667

Factor A for country X is: (33.33% + 50.00%)/2 = 0.417

Thus the MPI of this country is : 0.667 X 0.417 = 0.278

Indicator Weight Person A Person B Person C
1 1/6 0% 0% 0%
2 1/6 0% 0% 0%
3 1/6 100% 100% 0%
4 1/6 0% 100% 0%
5 1/18 0% 100% 100%
6 1/18 0% 100% 100%
7 1/18 0% 0% 100%
8 1/18 100% 100% 100%
9 1/18 100% 0% 100%
10 1/18 100% 0% 0%
Weighted score 33.33% 50.00% 27.78%
MPI poor MPI poor Not MPI poor (<
Status
(≥ 33%) (≥ 33%) 33%)
Who are the Poor?

The poor of any country share similar characteristics.

In developing countries the poor tend to be Black, female,

young, rural, unskilled and perhaps semi-skilled (this is
determined by the nature of economic growth, trade
liberalization policy, subsidies etc…).

The factors that determine who is poor include socio-economic

institutions, e.g. Indian caste system, apartheid, racism (still in
Malaysia).
 Characteristics of Poverty Groups
• Rural poverty
• Women and poverty
• Ethnic minorities and poverty
The relationship between economic growth
and poverty reduction
• Elasticity of growth to poverty reduction (GEP): This index illustrate
how much in percent that poverty rate be changed when income per
capita increase 1 percent.
• GEP = %∆ poverty rate/ %ΔY (where Y is GNI/capita)
• If the index is a negative number, the pace of economic growth is
inversely proportional to poverty rate, meaning economic growth has
an advantageous impact on poverty reduction, and vice versa.
 Relation between economic growth and poverty

• Traditionally, it was considered that there is trade-off between

growth and poverty.
• Why are similar rates of growth associated with different rates
of poverty reduction?
• Redistribution of growth benefits reduces poverty
• Initial inequality in income enhances poverty
• Sectoral composition of growth (agriculture versus modern, rural versus
urban)
• Efforts to reduce poverty lead to higher growth and higher
growth leads to reduction in poverty.
Discussion
• Why they are poor?
• What is the policy solutions for poverty alleviation
 Gender equality
• Gender vs Sex
Sex
"Sex" generally refers to biological differences.
The differences between male and female sexes are anatomical and
physiological. "Sex" tends to relate to biological differences.
Gender
Gender tends to denote the social and cultural role of each sex within a
given society
The World Health Organization (WHO) defines gender as: "Gender
refers to the socially constructed characteristics of women and men,
such as norms, roles, and relationships of and between groups of
women and men. It varies from society to society and can be changed."
Gender equity, gender equality and
women’s empowerment
• Gender equity is the process of being fair to women and men
• Gender equality requires equal enjoyment by women and men of socially-
valued goods, opportunities, resources and rewards.
Gender equality does not mean that men and women become the same; only
that access to opportunities and life changes is neither dependent on, nor
constrained by, their sex. Achieving gender equality requires women’s
empowerment to ensure that decision-making at private and public levels, and
access to resources are no longer weighted in men’s favour, so that both women
and men can fully participate as equal partners in productive and reproductive
life.
Gender equality is achieved when women and men enjoy the same rights and
opportunities across all sectors of society, including economic participation and
decision-making, and when the different behaviours, aspirations and needs of
women and men are equally valued and favoured.
• The empowerment of women focuses on identifying and redressing power
imbalances and giving women more autonomy to manage their own lives
 Gender equality
• Indicators of gender equality
• GDI &GEM
- The new GDI measures gender gaps in human development
achievements by accounting for disparities between women and men in
three basic dimensions of human development - health, knowledge and
living standards using the same component indicators as in the HDI. The
GDI is the ratio of the HDIs calculated separately for females and males
using the same methodology as in the HDI. It is a direct measure of
gender gap showing the female HDI as a percentage of the male HDI
- The Gender Empowerment Measure (GEM) is an index designed to
measure of gender equality. based on estimates of women's relative
economic income, participations in high-paying positions with economic
power, and access to professional and parliamentary positions. The GEM
was designed to measure "whether women and men are able to actively
participate in economic and political life and take part in decision-
making"