lecture 11 eco311 inequality and poverty 1

8/6/2019 Lecture 11 ECO311 Inequality and Poverty 1

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Growth and Development

Growth, Poverty & IncomeDistribution


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Context

In the 1970s there was growingdisillusionment concerning growth.

Developed nations: Quality of life is the

issue. Environmental concerns

Equity, social justice

Developing nations: should a few rich

people or a large pool of people bringabout the growth? Inequality of distribution was the key question

for them.


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Size Distribution

The personal or size distribution of income isthe most common measure.

This tells us how much income a person orhousehold receives.

The process or way it is earned is not thekey issue. This income could be fromemployment, earnings from interest,dividend, rents and inheritance.

We ignore the location (urban or rural) andoccupational source (agriculture ormanufacturing).


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Size Distribution of Income


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Size Distribution of Income

A Common measure of income inequality is the ratioof income received by the bottom 40% to the top 20%of the population. This is the ratio of the extreme poorand extreme rich of the society.

In our case it is 1:3.7 or 0.28. A more frequent instrument is the Lorenz Curve. The

number of income recipients are plotted in thehorizontal axis in cumulative percentages. The verticalaxis is the cumulative percentage of population.

A very convenient method of measuring incomeinequality is the Gini Coefficient. It is the ratio of thearea between perfect equality and Lorenz Curve to thearea of the half-square in which the Lorenz Curve islocated.


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Size Distribution: LorenzCurve


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Dualistic Development and some

Stylized Typologies

Modern sector enlargement growthtypology Size of the economy increases with constant

wage in both sectors.

Modern sector enrichment growthtypology Growth of a limited number of people in the

modern sector, with number or workers andwage held constant in the traditional sector.

Traditional sector enrichment growthtypology Growth benefits are equally distributed among

traditional sector


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Functional Distribution

The second common measure of income inequalityis the functional or factor share distribution ofincome. In this approach they attempt to explainshare of total national income that each factor of

production receives. Instead of looking at different individual or entities,

the theory inquires into the percentage that laborreceives as a whole and compares this withpercentage of total income distributed in the formof rent, interest and profit.

A factor can receive income from all sources.


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Poverty

Economists rely on income, consumption, and to some extenton welfare as proxies in measuring poverty. At times poverty issynonymously used with the phrase well being.

Economic concept of well being stems from the issue ofwhether someone has adequate income to acquire a basic levelof consumption or human welfare.

Other social scientists, particularly sociologists andanthropologists, focus on social, behavioral and politicalunderpinnings of human well being.

Poverty studies broadly accepted three major streams fordefining and measuring poverty: Economic wellbeing

Capability Social exclusion

This reductionism is a problem in itself. The complexities attimes reduces our degrees of freedom to better understandwhat is at the core of the problem.


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Poverty definition

Economists spearhead poverty discussion byquantifying it. They use income, consumption andwelfare. More ever, these measures are defined inabsolute, relative and subjective concepts.

Absolute poverty signifies lack of basic means to

survival. Ones non-poor status is related to theability to avoid absolute deprivation. The debate stems from defining basic means of

survival as we set arbitrary benchmarks. Usually one use a minimum level of income to acquire

minimum calorie intake, a consumption basket, or

utility level. WB, IMF

and UNDP use an absoluteincome based approach of one dollar a day.

What about quality? The question of quality arerelated to economic, psychological, often politicalissues. Some of which are not quantifiable.Recreation, leisure, social involvement etc.


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Poverty

Rowntree (1901) used an absolute consumptionapproach for UK.

The US system looks at absolute consumption forsubsistence living.

ILO uses an approach where they look at basicfood needs plus necessary consumption of a non-food bundle e.g. transportation, education, healthetc.

Extreme poverty is lack of income for a minimumsubsistence food intake.

Overall poverty is the lack of income to meetsubsistence food and non-food consumption. According to UNDP only the former is defined as

absolute poverty. Welfare based poverty lines are yet to be fully

operational.


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Poverty approaches: Relative Poverty

Poverty in relative terms is another measure used by theeconomists.

Galbraith (1958) redefines poverty being a measure thatlooks into ones income/consumption relative to othermembers of the society.

Fuchs (1965) argue that living standards tend to changeover time, poverty lines defined by percentage of meanor median income or by the lowest stratum ofconsumption or income distribution also need to changeaccordingly.

In this approach income distribution is the key element:

how much of the income the least well off receive vis--vis the rest of the society. Townsend (1970, 1999) argument from the perspective

of command over resources, poverty is defined with lackof adequate resources to achieve dietary requirements,participation, standard of living and amenities.


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Subjective poverty

Subjective poverty is based on self assessment. Streeten (1998) calls it- an approach that look at

same substances through subjective lenses. Peopleuse both monetary and non-monetary perceptions todescribe themselves.

Research on this approach uses survey and opinionpolls to collect data Income, consumption or welfare deemed necessary to

be non-poor. Sufficiency of income as a measure Certain income level being insufficient, good, or very

bad. Subjective poverty, though reflects cultural and other

social aspects, is criticized for being non-comparability over time across society and reliabilityof survey data.


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Income and Poverty

Economists agree to the fact that there arenumerous factors affecting poverty andwellbeing.

But most of the issues can be captured

under economic wellbeing or in terms ofincome. Increased income will simply lead to

poverty reduction. However, debate stem from two

perspectives: Accelerating economic growth and increasing

employment opportunities (World Bank, 2001). Improving the pattern of income distribution

leading to equality (Townsend, 1999).


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Capability approach

Given the fact that growth does not always transcendtoward greater equality and poverty reduction, we needto distinguish human wellbeing with economic wellbeing.

This is where the Capability approach becomes relevant

for poverty measures. Poverty looks at those factors that hinder individual

ability to derive human well being. Ones capacity may take many dimensions: education,

health, nourishment etc. which have significant impacton ones well being. This may also enhance ones ability

to achieve higher income and consumption. Capability is the ability to achieve functioning or

achievements (Sen 1987, 1992). Income or a consumption bundle do not make one

better off. Neither opulence nor lack of income have animpact on wellbeing.


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Capability approach and poverty

Since it is not possible to capture all the aspects ofhuman wellbeing as per the capability approachUNDP uses a pragmatic approach- they look for a setof functioning needed to improve or sustain a higherlevel of well-being.

Following this line they measure illiteracy,malnutrition, life expectancy, poor maternal health,and illness from preventable disease.

CA approach acknowledges that income is importantto achieve basic needs and higher income will make

one more capable to achieve these functioning's. Sen (1999) pointed that relationship between

income and capability is contingent upon factorssuch as age, gender, social role, location, healthstatus and knowledge.


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Social Exclusion

This approach is more common in sociology andanthropology. Popularized in 1970s. This approach definepoverty as whole group of people partly or completelyoutside the effective scope of human rights (Strobel,1996)

European Foundation (1995) define social exclusion as theprocess through which individuals or groups are wholly orpartially excluded from full participation in the society theylive in.

Taylor (1999) uses denial and says access to service thatwill enable them to engage fully in the economy andsociety.

This stream is criticized being loaded with politicalconnotations Silver (1994) came up with three differentforms of exclusion: Solidarity: social exclusion arising from withering of

social bonds Specialization: individual behavior and exchanges.

Monopoly: different and competing groups acting toenhance their group benefits or profit.


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Measuring Incidence ofPoverty

Head Count:

Poverty Gap: Measures the average distanceof people below the poverty line.

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Poverty measures

Sen Index is a weighted total of individualspoverty gap. The weight is dependent onthe relative position of each poor person.

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Thon Index is a variation of the Sen Indexand applied to a sufficient large value of p

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Poverty Index

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lecture 11 eco311 inequality and poverty 1

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