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1) Poverty remains widespread despite economic growth in many countries, with over 1.4 billion people living in poverty globally.
2) Poverty tends to be self-perpetuating as children of the poor often remain poor, and is concentrated in tropical countries where diseases are more common and agriculture is less productive.
3) Measures of poverty include headcount ratios and poverty gaps, while inequality is often measured using the Gini coefficient or comparing income shares of the richest and poorest groups.
1) Poverty remains widespread despite economic growth in many countries, with over 1.4 billion people living in poverty globally.
2) Poverty tends to be self-perpetuating as children of the poor often remain poor, and is concentrated in tropical countries where diseases are more common and agriculture is less productive.
3) Measures of poverty include headcount ratios and poverty gaps, while inequality is often measured using the Gini coefficient or comparing income shares of the richest and poorest groups.
1) Poverty remains widespread despite economic growth in many countries, with over 1.4 billion people living in poverty globally.
2) Poverty tends to be self-perpetuating as children of the poor often remain poor, and is concentrated in tropical countries where diseases are more common and agriculture is less productive.
3) Measures of poverty include headcount ratios and poverty gaps, while inequality is often measured using the Gini coefficient or comparing income shares of the richest and poorest groups.
Poverty & Income Distribution Poverty and Income Distribution • Despite substantial economic growth in many countries, poverty remains widespread. • Estimates vary but at least 1.4 billion people live in poverty worldwide (about 25% of the world’s population) • The gap between the richest and poorest countries has grown. Poverty and Income Distribution
• Poverty tends to perpetuate itself since the children of the poor
tend to remain poor.
• This is sometimes called the “vicious circle” of poverty.
• Poverty tends to be concentrated in countries that are in the
“tropics”.
• This has led some to believe in a “climate” theory of
development. Poverty and Income Distribution
• The “climate theory” receives support when it is
recognized that these regions in the tropics have greater difficulties with diseases and also with achieving rapid growth in agricultural productivity.
• Singapore, Thailand and Mexico are several exceptions
to this rule.
• Nevertheless, the evidence is strong (Figure 9.1).
Measures of Poverty • There are several ways to measure poverty.
• The head count ratio is the simplest and most widely
used (q/n) where q is the number of people below the poverty line and n is the population size.
• Other measures include the poverty gap.
Measures of Poverty Some Issues in Measurement:
• Absolute v Relative Poverty?
• Which poverty line or ‘threshold’ to use?. • What is the depth of poverty? How is that measured? • Household poverty or individual poverty? this issue is particularly relevant when some household members are systematically deprived of food and shelter – often girls and women. Measures of Inequality • Inequality is pertains to the ‘fairness’ in the distribution of income in the population
• In other words, the gap between the rich and the poor
• What is ‘fair’ and ‘not fair’ is highly subjective
Measures of Inequality • Objective measures satisfy certain criteria:
(i) independence of scale and the size of the population.
(ii) It should also be sensitive to transfers of income
within the income distribution at all income levels. Measures of Inequality
(iii) An additional desirable feature is decomposability –
that is, the measure can be broken into several different components.
The range, mean absolute deviation and coefficient
of variation and the variance of the logarithm of income are some measures of income distribution that have been used. Measures of Inequality • The so-called Kuznets income ratio is also popular – the ratio of the income shares of the poorest 20% and richest 20% of the population.
• The most widely used measure, however, is the Gini
coefficient, which varies between 0 and 1. Measures of Inequality • The Lorenz curve is a graphical representation of the relationship between the cumulative share of income and the cumulative share of the population (Figure 9.2).
• The Gini coefficient can be derived from the Lorenz
curve. It is the ratio of the area between the 45° line and the Lorenz curve to the total area in the triangle formed by the X and Y axes and the 45° line. Trends in Poverty and Inequality • Using a poverty line of US$ 1.00 per day and US$2.00 per day, the World Bank has compiled a number of poverty measures for countries around the world (Table 9.1).
• By continent: Africa is the worst off, followed by Asia and
then Latin America Trends in Poverty and Inequality • In Asia: of the 9 countries shown in Table 9.1 & using the $1.00 a day cut off, only India has a HCR > 30% i.e. 30 percent of the population is in poverty
• In Africa: there were 3 countries out of 7 sampled have
HCRs greater than 30% (all three were in fact over 55%!)
• In Latin America: there were 4 out of 10 countries
sampled have HCRs greater than 30% Trends in Poverty
• Within Asia, dramatic reductions in poverty occurred in
the last 30 years (see Table 9.2 & 9.3).
• Poverty alleviation outcomes have been most impressive
in East Asia, in many countries in Southeast Asia and Sri Lanka.
• There has been less progress in all other South Asian
countries. Trends in Social Indicators & Income Distribution • Social indicators have improved in East Asia and Southeast Asia – reductions in illiteracy, higher life expectancy and lower infant mortality (Table 9.4).
• Income distribution has improved in some Asian
countries • Income is generally better distributed in Asia than in Latin America (Table 9.5). Trends in Income Inequality • Another way to look at the distribution of income is by considering the income shares of the lowest and highest 20 percent of the population (Figure 9.6).
• Of the countries in this table, the richest 20 percent of
the population has at least a 35 percent share in the nation’s income.
• Inequality is worst in Vietnam and Malaysia, where
almost 50% of the nation’s income accrue to the richest quintile of the population Poverty Elasticity
• The rate of change in poverty divided by the rate of
change in income defines the elasticity of poverty with respect to income, Ep.
Ep = rate of change in poverty
rate of change in income Poverty Elasticity • In many Asian countries, these elasticities are less than 1.
• Poverty elasticity in Asia is thus inelastic suggesting that
a substantial increase in income is needed to reduce the rate of poverty. The Kuznets Curve
• “How does income inequality change as income
changes?” • The Simon Kuznets’ Curve says that inequality follows an inverted U shape – inequality is low at low levels of income, then deteriorates rapidly as income increases (with development); inequality levels improve again at higher levels of income. • This inverted U shape is explained by the greater variation in incomes that come about during the early phases of industrialization Kuznets Curve
• There is virtually no evidence of a Kuznets curve for
countries that have a large number of observations, with the exception of England, which did have an upsurge in inequality during the industrial revolution. Kuznets Curve • For a cross-section of developing countries, there is greater evidence of an “inverted U” shape for income distribution.
• This may be because of Latin America, where incomes
are average and income inequality is large.
• When Latin America countries are removed from the
study, no “inverted U” is observed. Kuznets Curve • The issue of worsening inequality as a necessary condition for growth is still unresolved.
• What we do know is that lifting rates of growth is an
effective way to deal with poverty.
• We also know that income distribution changes only
slowly over time. Kuznets Curve • Furthermore, a dramatic shift in income distribution would be required to achieve the same impact on poverty reduction as a doubling of the rate of economic growth.
• Therefore it may be better to pursue growth objectives
just so long as they do not have a strong negative impact on income distribution. Inequality and Openness • World Bank data suggests that the intensity of trade (trade openness) and income distribution are inversely related.
• This suggests that there may be a “virtuous cycle”
going on in East Asia.
• Human capital has been developed and income
distributions improved within the context of an open and dynamic export based orientation. Inequality and Openness • The World Bank study also suggests that having a substantial natural resource base may serve to inhibit the rate of growth.
• While the level of average education is about the same
in Latin American and Asia, it may be that resource based economies have not been able to fully utilize human capital in new and dynamic industries requiring skill and know how. Inequality and Openness
• Trade openness allows Asian economies to take
advantage of externalities in marketing and distribution that help exporters lower costs. The Unequal Burden of Poverty • Women, children, the elderly and ethnic minorities are more likely to be poor than other groups.
• Children are poorer mainly because the poor have larger
families.
• The elderly are poor because there is no social safety
net in most developing countries. The Unequal Burden of Poverty • Ethnic minorities are poor because of discrimination and because they are usually based in rural areas.
• If you are a female, single parent from an
ethnic minority or a girl born into such a family, your chances of being poor are extremely high. The Unequal Burden of Poverty
• Why are people poor? No stock of human and/or
physical capital, and discrimination. • Lower education and health are main reasons for higher poverty among women. • Those who have skills and capital are more productive and are paid higher wages (or allocated more resources) in line with marginal productivity theory. The Unequal Burden of Poverty • Within households, those who are denied resources are generally the least productive within the family – elderly, females and children.
• Many of the decisions to share resources
within a family and in society in general are in basic agreement with the principles of allocation of resources. Aspects of Rural Poverty
• Poverty is usually associated with the lack of ownership
of productive assets.
• Lack of physical resources in rural areas relates primarily
to land and agriculture.
• Education and educational opportunities are also low in
rural areas and this inhibits mobility out of agriculture. Aspects of Rural Poverty
• With little knowledge, the rural poor have difficulty in
adopting new technology.
• Medical problems among the rural poor - stemming from
limited access to clean water and good sanitation - can sap resources. Aspects of Urban Poverty
• Migrants from rural areas to the city
constitute the bulk of the urban poor.
• Lack of human capital is the main reason
for poverty in urban areas.
• Poverty rates are lower in urban areas,
despite the influx of migrants from the countryside (Table 9.6). Aspects of Urban Poverty • Poor in urban areas are primarily self- employed or working in small scale establishments.
• These include food stalls, selling lottery
tickets, newspapers and cigarettes, repairing cars and bicycles, street side shoe repair, operate pedicabs and motorized tricycles, garbage collection and recycling. Labor Absorption & Employment • Most Asian labor markets are characterized by “market dualism”.
• Wages are much higher in the formal sector than in the
informal sector.
• Most of the poor are precluded from the formal sector
because of a lack of skill. Labor Absorption & Employment • Despite the experience of the miracle economies, industrialization alone cannot be relied on to solve the unemployment problem in the poorest countries.
• There has to be job growth in other sectors as well,
including the service sector and in agriculture. Labor Absorption & Employment • Restrictive wage practices that lift the minimum wage above the acceptable subsistence wage will serve to further limit employment growth.
• Discrimination against those having highest rates of
poverty – women, minorities and the elderly who want to work – has to be reduced. Policies to Further Reduce Poverty • Removal of distortions that stimulate capital intensive production technology such as subsidies and tax breaks, preferential tariffs and undervalued exchange rates.
• Redistribution of physical assets, insofar as politically
feasible, including land and physical capital including buildings and equipment. Policies to Further Reduce Poverty • Give the poor better access to education, on the job training and short training courses to develop specific skills.
• Implement a progressive tax program without loopholes
for the rich and also a tax on intergenerational transfer of wealth.
• Increase subsidies and direct transfers to the poor.
Specific Policies to Address Rural Poverty • Uplift the status of women including more emphasis on truck farming and livestock and more education.
• Relax tenancy regulations allowing tenancy to expand
and to be legalized.
• Expand the availability of rural credit within a market
framework. Avoid expensive schemes that lend money to the already rich absentee landlord. Specific Policies to Address Rural Poverty • Encourage labor migration out of unproductive areas to urban areas or overseas.
• Provide additional appropriate rural infrastructure such
as roads in farming areas.
• Make sure exchange rates are not overvalued, where
these tax exports and subsidize imports. Specific Policies to Address Rural Poverty • Establish property rights where possible – particularly for tenants who can sell these rights and use it to borrow in formal credit markets at favorable rates. Specific Policies to Address Urban Poverty • Accelerate economic growth.
• Provide a higher level of social services by careful
targeting – Kerala province of India and Sri Lanka are good examples.
• Provide more economic opportunities for slum dwellers
or “squatters”- who comprise at least a third of urban residents in Asia Specific Policies to Address Urban Poverty • Finally, develop a more rational land use policy in urban areas that does away with rent controls, do away with large military encampments in urban areas and provides a reasonable amount of land for the poor to relocate. Summary