CH 5, 6, 7, 8, 10 Reviews
1. Extend of relative inequality?
2. How is this related to extent of poverty?
3. Who are the poor?
4. Who benefits from economic growth?
5. Does rapid growth necessarily cause income inequality?
6. Do the poor benefit from growth?
7. Are high levels of inequality always bad?
8. What policies can reduce poverty?
Measuring inequality and poverty method
− Size distributions (Quintiles, Deciles)
o Deciles – 2 individuals person total personal income
o Quintiles – 4 individual person total personal income
o Kuznets ratio can be measure of inequality from the table
Measure of inequality – ratio of top 20% to bottom 40%. If the ratio is 0.5, it is
perfect equality. Using top 20% to bottom 20%, ratio 1 is perfect equality.
Ex. 20 individual
Top 20% = the 4 highest (last) total 51.
Bottom 40% = the8 lowest (top) total 14.
51/14 = 3.64
− Lorenz curves
o is a graph showing the variation in the size distribution of income from equality
o The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of
o Generally countries with high degrees of inequality have Gini coefficients between 0.5
and 0.7 while countries with a high degree of equality have Gini coefficients between 0.2
− Gini coefficients and aggregate measures of inequality
o Gini coefficients = shaded area A/ total area BCD
− Functional distributions
o How much of the total income went to land, labour and capital?
o Absolute poverty- An individual can at best satisfy their basic needs of food, clothing and shelter.
Minimum level of income- absolute poverty line
Measuring Absolute Poverty
–Headcount Index = H/N.
- H is the number of persons who are poor, N is the population size.
–Total poverty gap
TPG i1YpY i
–Where Y is the absolute poverty line
–Y is income of person I
This measure would tell us how far below the poverty line incomes are and hence how much income it
would take to bring those below the poverty line to the poverty line.
–Average poverty gap
–Where N is population size, TPG is total poverty gap
Note: Normalized poverty gap, NPG = APG/Y p
–Average income shortfall (AIS):
- Where H is number of poor persons, TPG is total poverty gap
Note: Normalized income shortfall, NIS = AISpY
There are many who do not believe assigning a $1 per day or $1.25 per day at PPP is an appropriate basis
to define the poverty line and embrace an alternative measurement of poverty: –The Human Poverty Index (HPI) similar to the HDI
HPI measures poverty based on three key deprivations:
Life expectancy-% of the population unlikely to live beyond 40 years of age
Basic education -% of adults illiterate
Economic provisioning-% of the population w/o safe drinking water & % of children
The HPI tells us the % of the population deprived of the three key deprivations above. A low HPI is
The HPI has recently been replaced by Multidimensional Poverty Index (MPI)
Multidimensional Poverty Index (MPI)
- Living of standards
MPI approach takes account of multiplied or interactive harm (complementarity) done when multiple
deprivations are experienced by the same individual or family
The MPI approach assumes an individual‟s lack of capability in one area can only to a degree be made up
by other capabilities – capabilities are treated as substitutes up to a point but then as complements.
MPI = H*A
The product of the headcount ratio H (the percent of people living in multidimensional poverty)
The average intensity of deprivation A (the percent of weighted indicators for which poor households are
deprived on average).
Dimensional monotonicity: If a person already identified as poor becomes deprived in another indicator
she is measured as even poorer - not the case using a simple headcount ratio.
What’s so bad about inequality?
Hard for the poor to get financing; Limit their investment (among other things). Recall Harrod Domar
Growth Model -“Every economy must have savings turned into Investment - at least to replace
depreciated Capital (Buildings, equipment…).
-Undermines Social Stability and solidarity A gap between the rich and poor with the rich usually in charge in one way or another; The rich will have
no incentives to see reform- They may want to perpetuate self-sustaining policies by lobbying
government or by simply having the power to do so. This can lead to internal conflict; El Salvador and
Iran are examples of countries with high inequality and a history of internal conflict-An impediment to
Philosopher John Rawls‟ “veil of ignorance”
We do not know how we will come into this world. Think about society as a whole -from the perspective
of everyone. Social welfare may decline when Inequality increases.
These statistics will change as development occurs:
Dualistic development and shifting Lorenz curves: some stylized typologies, Gary Fields
– Traditional sector enrichment
Improved Income Distribution under the Traditional-Sector Enrichment Growth Typology
Little or no growth in the modern sector, all the benefits of growth go to the Traditional sector
– Modern sector enrichment
Worsened Income Distribution under the Modern-Sector Enrichment Growth Typology Growth is limited to fixed number of people in the modern sector with the amount of labour and wages
constant in the traditional sector- We move closer to perfect inequality this is why the Lorenz curve shift
out. Latin American and Africa
– Modern sector enlargement
Crossing Lorenz Curves in the Modern-Sector Enlargement Growth Typology
Modern sector enlargement with constant wages in both sectors- Recall the Lewis model.
As modern sector enlargement takes place, Traditional poor now receive a smaller % of total income
(more inequality closer to point 0 in Figure 5.9 while the rich will receive a smaller % of total income as
we move closer to the richest person on the horizontal axis-The new curve L2 will cross the old curve L1.
Under modern sector enlargement theory, inequality may increase first (temporarily)
This leads us to Simon Kuznets‟ Inverted -U hypothesis
• Kuznets‟ inverted-U hypothesis
Inequality will worsen in the early stages of economic growth and improve at later stages.
The “Inverted-U” Kuznets Curve
Theoretically the inverted U is quite plausible but does empirical evidence support an inverted U?
If we focus our attention on a long term relationship between growth and Inequality
Do we see evidence of reduction in inequality with growth? Not really • Growth and inequality
Relationship between Growth and Poverty
o Association between growth and poverty reduction
o When it is inclusive, growth reduces poverty
o Lower extreme poverty may also lead to higher growth
Economic Characteristics of Poverty Groups
• Rural poverty
• Women and poverty
• Ethnic minorities, indigenous populations, and poverty
Policy Options on Income Inequality and Poverty: Some Basic Considerations
– Altering the functional distribution
Changing the relative factor prices and thus the returns to those factors- reducing labour cost and
increasing the cost of capital
Public wage subsidies to employers would reduce the cost of labour preferably to the wages we would
have seen without the influence of trade unions (for example) and cause employers to employ more
• Areas of Intervention
o Altering the functional distribution
o Mitigating the size distribution
o Moderating (reducing) the size distribution at upper levels
o Moderating (increasing) the size distribution at lower levels
• Policy options
o Changing relative factor prices
o Progressive redistribution of asset ownership
o Progressive taxation
o Transfer payments and public provision of goods and services
To reduce inequality and poverty we need a package of policies based on the policy options above.
The Basic Issue: Population Growth and Quality of Life
•Six major issues:
– Will developing countries be able to improve levels of living given anticipated population growth?
– How will developing countries deal with the vast increases in their labor forces?
– How will higher population growth rates affect poverty? – Will developing countries be able to extend the coverage and improve the quality of health care
and education in the face of rapid population growth?
– Is there a relationship between poverty and family size?
– How does affluence in the developed world affect the ability of developing countries to provide
for their people?
World population growth through history
Structure of the world‟s population
– Geographic region
o More than 75% in developing nations
– Fertility and Mortality Trends
o Population growth is measured by the Natural increase (fertility-mortality) and net int‟l
o Fertility rates higher in developing countries, mortality rates also higher but closer to that
of the developed countries because of improvements in health care in the developing
o Net result-higher population growth rates in developing countries with declining fertility
– Rate of population increase
– Birth rates, death rates , Total fertility rates
– Age Structure and dependency burdens
o Population is young in the developing world-about 30% under 15 years of age.
o Youthful Population adds to the dependency burden – must be supported by the working
This leads us to The Hidden Momentum of Population Growth
•The Hidden Momentum of Population Growth
– High birth rates cannot be altered overnight
It may take decades, given the experience of some European Developed countries
– Age structure of LDC populations
The youthful population will also have children in the future (estimated at 2 per family on average)
causing further increases in the population.
The Demographic Transition
All developed nations have experienced the same pattern of population growth:
• Stage I: High birthrates and death rates
• Stage II: Continued high birthrates, declining death rates
• Stage III: Falling birthrates and death rates, eventually stabilizing The Causes of High Fertility in Developing Countries: The Malthusian and Household Models
•The Malthusian population trap
– The idea that rising population and diminishing returns to fixed factors result in a low levels of
living (population trap)
Population increasing at a geometric rate while ability to produce goods and services increasing at
an arithmetic rate leaving us at an equilibrium where we are at or slightly above subsistence.
We need to control the population size.
Modern day Malthusians
Preventive checks- birth control or positive checks- starvation, disease, wars can enable
developing countries to rise above subsistence per capita income
•Criticisms of the Malthusian Model
– Impact of technological progress
– Currently no positive correlation between population growth and levels of per capita income in
– Microeconomics of family size; individual and not aggregate variables
•The Microeconomic Household Theory of Fertility
•The Demand for Children in Developing Countries
– First two or three as “consumer goods”
– Additional children as “investment goods”:
– Work on family farm, microenterprise
– Old age security motivation
•Some empirical evidence
– High female employment and education associated with lower fertility levels
•Implications for development and fertility
Birth rates among the poor likely to fall with the following changes:
– Women‟s Education, role , and status
– Female nonagricultural wage employment
– Rise in family income levels by employment of husband and wife & by income redistribution
from rich to poor
– Reduction in infant mortality through better health care
– Development of old-age and social security
– No need to have children for old age security income – Expanded schooling opportunities
Parents can have better educated children as opposed to more children
The Consequences of High Fertility:
Some Conflicting Opinions
•Population growth isn‟t a real problem
– The real problem is not population growth but the following,
o Development will lead to higher standard of living, greater self-esteem and freedom to
choose and ultimately control population increases
o Without development, what might happen to birth control efforts?
• World resource depletion and environmental destruction
o Developed countries which make up a small part (less than 25 %) of the world population
but consume approximately 80% of the world resources should cut back their
• Population Distribution
o Relative to the resources, there is over populated (the urban areas of most developing
countries) and under populated (parts of sub Saharan Africa and Brazil)
o Distribution of space problem
o Reducing rural to urban migration might help.
• Subordination of women
o Lack of economic opportunity-we need to empower women
o Increases in population will be slower.
• Overpopulation is a deliberately contrived false issue
o Rich nations trying to restrict development in poor nations to maintain their status in the
world.-like the dependency theory of under development
• Population growth is a desirable phenomenon
o Population growth is needed for development-there must be demand
o Recall rural areas often under populated
o With social fractionalization we often see a tendency to have larger families-we may
need to protect such religious or racial customs
o Military and political power dependent on a large young population
•Population Growth is a real problem
– Extremist arguments
Population growth –underdevelopment (population bomb)
Drastic measures to control population size-even sterilization
– Theoretical arguments
Population Poverty Cycles and the need for family planning Population growth reduces savings, draws down G revenue and keeps standard of living low (poverty)
Family planning services needed.
– Empirical arguments,
Seven negative consequences of population growth
• Lower economic growth
• Poverty and Inequality
• Adverse impact on education
o Family size and low income reduce the prospects of quality education
• Adverse impact on health
o High fertility harms the health of mothers and children
• Food issues
o Recall Malthus
o We need technological progress or else
• Impact on the environment
o Urban congestion, air pollution, forest encroachment, soil erosion, depletion of fish and
• International migration
o Consequences of developing countries population growth
o What if the highly skilled leave?
Goals and Objectives:
Toward a Consensus
•Despite the conflicting opinions, there is some common ground on the following
– Population is not the primary cause of lower living levels
– It‟s not numbers but quality of life
– Population intensifies underdevelopment
•Some Policy Approaches
– Attend to underlying socioeconomic conditions that impact development
– Family planning programs should provide education and technological means to regulate fertility
– Developed countries have responsibilities too
Some Policy Approaches
•What developing countries can do
– Persuasion through education
– Family planning programs
– Manipulate incentives and disincentives for having children
– Coercion may not be a good option – Raise the socioeconomic status of women
– Increase employment opportunities for women
•What the Developed Countries Can Do Generally
– Address resources use inequities
– More open migration policies
•How Developed Countries Can Help Developing Countries with Their Population Programs
Research into technology of fertility control
Financial assistance for family planning programs
The Migration and Urbanization Dilemma
As a pattern of development, the more developed the economy, the more urbanized
But many argue developing countries are often excessively urbanized or too-rapidly urbanizing
This combination suggests the migration and urbanization dilemma
Urbanization: Trends and Projections
The Role of Cities
Agglomeration economies: Urbanization (general) economies, localization (industry or sector)
Saving on firm-to-firm, firm-to-consumer transportation
Firms locating near workers with skills they need
Workers locating near firms that need their skills
Firms benefit from (perhaps specialized) infrastructure
Firms benefit from kn