Poverty, Inequality, and Development · GDP Growth and the Poor ... What is the difference between Poverty ... –Better early childhood development –Better neighborhood schoolsAuthors:

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

Chapter 5

Poverty,

Inequality, and

Development

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 5-2

The Growth Controversy:

Critical Questions

1. What is the difference between Poverty

and Inequality? How is each measured?

2. Does Growth in GDP/capita benefit the

Poor?

3. Does Growth increase Inequality?

4. Is Inequality “Bad?”

5. What Policies reduce Poverty?


Defining Poverty

• Income below a specified level, e.g.

$1.25/day

• Headcount or Percentage of Population

• Adjusted for Inflation and PPP

• Absolute Standard: Does NOT change

as average income changes


US Poverty Rate


US Median Household Income


Defining Inequality

• Relative Measures

• How Much Income one Group has Relative

to another Group, e.g. Income of Richest

20% relative to Income of Poorest 40%

• Gini Coefficient, which is derived from a

• Lorenz curve


Lorenz Curve

1. Rank households (persons) from lowest

income to highest

2. X-axis: Cumulative percentage of persons

3. Y-axis: Cumulative percentage of income

4. Gini coefficient: Area between diagonal

and Lorenz curve multiplied by 2


Table 5.1 Typical Size Distribution of

Personal Income in a Developing Country by

Income Shares—Quintiles and Deciles


Figure 5.1 The Lorenz Curve


Figure 5.3 Estimating the Gini

Coefficient


Figure 5.2 The Greater the Curvature of the

Lorenz Line, the Greater the Relative

Degree of Inequality

Geni Coefficients The Economist, January 26, 2013



Your Turn!

• Suppose the poverty line is $1 per day

• There are five people, each of whom initially has an income of $0.50 per day

• Each year one (more) person moves to the city and makes $2 per day.

• Calculate for each year t = 0,1,…5: Poverty rate (%), total income, poor share of income, share top 20%/bottom 40%, plot Lorenz curve, Gini coefficient


Poor: $0.50/day; Rich: $2/day

Year H(poor) Pov(%) Ytotal PoorSh 20%/40%

0 5

1 4

2 3

3 2

4 1

5 0



Critical Questions



2. Does GDP/capita Growth benefit the

Poor?





GDP Growth and the Poor

• www.gapminder.org Vertical = poverty

• World Income Distribution p.59

• Conclusion: Higher average income

(GDP/capita) is strongly associated with

lower absolute poverty:

– Across countries at a point in time

– Within countries over time

http://www.gapminder.org/



Critical Questions




Poor? YES!





Figure 5.10 The “Inverted-U”

Kuznets Curve


Figure 5.11 Kuznets Curve with

Latin American Countries

Identified


Figure 5.12 Plot of Inequality Data

for Selected Countries


Figure 5.13 Long-Term Economic

Growth and Income Inequality, 1965-

1996



Critical Questions




Poor? YES.

3. Does Growth increase Inequality? NO.




What’s so Bad about

Inequality?

• For a given level of GDP/capita, more

Inequality => lower living standards for the

poor.

• But, as GDP/capita increases, absolute

poverty declines (even if inequality is

constant or increasing)

• From standpoint of poor, THEIR incomes

are of primary importance.

What’s so Bad about

Inequality?

• In China, Inequality has Risen at the same

time that 100’s of millions of people have

been lifted out of abject poverty

• What is important, Poverty or Relative

Income?

• Should we be concerned about the well-

being of the low- and middle-income groups,

or about how much more the rich have?

Ethics - 1

• “Thou shalt not covet thy neighbor’s

house, thou shalt not covet thy

neighbor’s wife, nor his manservant,

nor his maidservant, nor his ox, nor his

ass, nor any thing that is thy

neighbor’s.” The Bible, Exodus 20:17

Ethics - 2

• Equality of Opportunity vs. Equality of Outcome

• Is the “Economic Race” Fair?

• Some believe that Tax Cuts and Bailouts for Rich Bankers have created Unfairness

• But more fundamentally …

Intergenerational Mobility

• Choose “better” Parents =>

– “Better” genetics (health, IQ)

– Better early childhood development

– Better neighborhood schools

– Better educational attainment

– Better connections in the job market

• Greater opportunity

Role of Parental Background

http://www.economist.com/node/21564417 Oct 13, 2012

http://www.economist.com/node/21564417

http://www.economist.com/node/21564417



Critical Questions




Poor?





Table 5.6 Poverty: Rural versus

Urban


Table 5.7 Indigenous Poverty in

Latin America


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


What’s Missing Here?

• The problem of poverty is (mostly) the

problem of low per capita income.

• The “solutions” suggested by the book are

mainly redistribution from rich to poor.

• They may result in immediate relief.

• But the long term solution is to make people

more productive, ie engender economic

growth.

Montana Poverty Report Card December 2011

George Haynes and Doug Young

Migrant Mother by Dorothea Lange. Image #33706, Illustrator #0013 Image by JVPD at http://ClipartOf.com/33706

Poverty Rate Montana vs. U.S.

Poverty Rates by Age

18.6

12.2

9.8

19.6

14.1

9.2

0

5

10

15

20

25

Less than 18 18 - 64 65 and older

Pe

rce

nt

of

Po

pu

lati

on

USA MT

Poverty Rate Montana Counties, 2009

Montana Indian Reservations

Poverty and American Indian

Population Percentage

Poverty and Employment

Poverty and Low Education

8.8

21.9

40.9

0

10

20

30

40

50

Married-CoupleFamilies

Male HouseholderNo Wife Present

Female HouseholderNo Husband Present

Perc

en

t in

Po

vert

y

US Poverty Rates by Family Type

Census Bureau for 2011

Poverty and Single Female

Families with Children

0%

5%

10%

15%

20%

25%

30%

1959 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Perc

en

t o

f A

ll F

am

ilie

s w

/ K

ids

Single Parent Families

Percent of All Families

Female Head

Male Head

Determinants of Poverty

Coefficient = e.g. ΔPoverty Rate/ΔAmerican Indian, holding other factors constant

Dependent Variable: POVERTY_RATE_ACS

Variable Coefficient t-Statistic p-value

Constant 16.38 2.84 0.007

American Indian, % 0.13 3.68 0.001

Employment, % -0.13 -1.76 0.085

Adults, less than high school education, % 0.42 4.20 0.000

Single female household with children, % 0.27 2.39 0.021

Adjusted R-squared 0.64

Conclusions about Montana

• Youth and Elderly

• American Indian

• Single Female Households with Children

• Low Educational Attainment

• Employment

– Farm

– Manufacturing

– Mining

– Wood Products

Sectors of Employment are

NOT Important at County Level

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Poverty, Inequality, and Development · GDP Growth and the Poor ... What is the difference between Poverty ... –Better early childhood development –Better neighborhood schoolsAuthors: