Carleton University

African Economic Development May 23, 2012

Poverty, Income Distribution and

Development

(Text, Chapter 7)

Agenda

1. Significance of Topic

2. Concept and Measurement

Poverty Measures

Income Distribution Measures

3. Equity, Poverty and Well-Being

4. Comments on Evidence re Poverty and Income Distribution

5. The Roots of Poverty and Income Mal-distribution

Kuznet’s “Inverted U Hypothesis”

6. Policies for Pro-Poor Growth

7. Millennium Development Goals

1. Significance of Topic

Central development issue in Africa:

reduce poverty!

“Make poverty history!”

Central focus of development efforts and of

this course

The focus of the “Millennium Development

Goals”

Is Poverty a “bad thing”? Why?

Amartya Sen’s concepts of capabilities and

choice

Income and Basic Human Need Fulfillment

Income Distribution:

Central to our ideas of fairness and justice

A more equitable income distribution is

supportive of both Growth and Poverty

Reduction

Growth generally reduces Poverty; But Growth

is “Neutral” regarding the “fairness” of

income distribution ……..

Unless major efforts are made to achieve distributional

objectives simultaneously with growth,

2. Concept and Measurement

Problems of Measuring Real Incomes

Income or consumption?

Accurate Information: sources

Definition of income:

Market generated Income? Or

Market generated Income + Transfers Or

Market generated Income + Transfers – Taxes? Or

Market Income + Transfers –Taxes + In-Kind Subsidies? Or

Market Income + Transfers –Taxes + In-Kind Subsidies +

Publicly-provided Education + Health Services?

Market Income + Transfers –Taxes + In-Kind Subsidies +

Education + Health + Home-Produced G $ S

Other complications: Home-produced G&S;

Differing prices

Differing needs in different circumstances

A. Poverty Concepts and Measures

1. The United Nations “Human Poverty Index”

(Used until 2009; now replaced by another measure)

Attempts to measure poverty with a composite index including:

1. Probability of not surviving to age 40;

2. Adult illiteracy rate;

3. Population without access to improved water source

4. Underweight children under age five.

2. Arbitrary Income “Cut-Offs” or Measures

e.g. population with real incomes (PPP) below some threshold such as $US 1.00 or $2.00

A. Poverty Concepts and Measures, cont’d

3. Calculations of real income necessary to meet basic human needs (used in Latin America – ECLA - and national measures)

4. Canada: “LICO” or lower income cut-off, i.e. 50% of median income;

(more a measure of distribution than of poverty)

5. Composite measures of Basic Need Fulfillment in real terms (access to water, literacy, child

mortality, etc. (as in example in text)

6. The New UNDP “Multidimensional Poverty

Index” (MPI)

• Identification of poverty status through a dual cutoff:

• First, cutoff levels within each dimension (analogous

to falling below a poverty line for example $1.25 per

day for income poverty);

• Second, cutoff in the number of dimensions in which

a person must be deprived (below a line) to be

deemed multidimensionally poor.

• MPI focuses on deprivations in health, education,

and standard of living; and each receives equal (that

is one-third of the overall total) weight.

MPI Indicators 1. Health (1/3rd weight) - two indicators with equal weight –

• whether any child has died in the family, and

• whether any adult or child in the family is malnourished –

weighted equally (each counts as one-sixth weight toward

the maximum deprivation in the MPI)

2. Education (1/3rd) - two indicators with equal weight (1/6th

each) –

• whether no household member completed 5 years of

schooling, and

• whether any school-aged child is out of school for grades 1

through 8 (each counts one-sixth toward the MPI).

3. Living Standards (1/3rd) : measured as an average of six

deprivations (1/18th each): safe water, electricity, sanitation,

flooring, improved cooking fuel, and possession of at least two

of telephone, bicycle, radio, TV, motorbike or car

Computing the MPI The MPI for the country (or region or group) is then

computed

• A convenient way to express the resulting value is

H*A, so that MPI = H*A i.e., The product of the headcount ratio “H” (the percent of people

living in multidimensional poverty), and the average intensity of

deprivation “A” (the percent of weighted indicators for which poor

households are deprived on average).

• The adjusted headcount ratio HA is readily calculated

HA satisfies some desirable properties. Important example:

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.

Multi-dimensional Poverty Indices for some African Countries

Country

MPI

2000-2008

MPI

Head-count, % of Total

Population

Population

below Poverty

Line $1.25 PPP per person

per day

Czech Rep. 0.000 0.0 0.0

China 0.056 12.5 15.9

Kenya 0.302 60.4 19.7

Ghana 0.140 30.1 30.0

Nigeria 0.582 63.5 43.4

Tanzania 0.367 65.3 88.5

Zambia 0.325 63.7 64.3

Ethiopia 0.582 90.9 39.0

Liberia 0.482 83.9 83.7

Niger 0.642 92.7 65.7

7. Measuring Poverty

Measuring Absolute Poverty

– Headcount Index: H/N

Where H is the number of persons who are poor and N is

the total number of people in the economy

– Total Poverty Gap:

Where Yp is the absolute poverty line; and Yi the income

of the ith poor person

TPG (Yp Yi)i 1

H

Measuring the Total Poverty Gap

MPI Rankings and Poverty Headcounts for Selected

Countries

Other Poverty Measures for Some African Countries, 2005

Country &

HDI Rank

Human Poverty Index

(pre-2009) (UNDP)

Per Cent

GDPpc (PPP)

$US

Population below

US$1.00 per day,

Per Cent

65. Mauritius 11.4 12,715 11.9

121. South Africa 23.5 11,110 10.5

135. Ghana 32.3 2,480 44.8

148. Kenya 30.8 1,240 22.8

151. Zimbabwe 40.3 2.038 56.1

154. Uganda 34.7 1,454 11,9

158. Nigeria 37.3 1.128 70.8

159. Tanzania 32.5 744 57.8

169. Ethiopia 54.9 1,055 23.0

177. Sierra Leone 51.7 806 57.0

81. China 11,7 7,100 9.9

Source: UNDP. Human Development Report, 2007/2008

Human Development Indices, Africa, 1975-2005

Country 1974 1985 1995 2005

Mauritius na .692 .751 .804

South

Africa

.650 .690 .745 .674

Ghana .442 .482 .542 .553

Kenya .466 .534 .544 .521

Zimbabwe .550 .615 .613 .513

Uganda na .420 .433 .545

Nigeria .321 .391 .432 .470

Tanzania na na .419 .467

Ethiopia na .311 .347 .406

China .530 ,595 .691 .777 Source: UNDP. Human Development Report, 2007/2008

Income Distribution and Well-Being

Income distribution and poverty: the differences

The Broad-Based Sense of “Fairness”

– Religious Basis

– Design of Human Institutions

• The Law;

• United Nations

• Welfare states & income taxation

• Democracy and human rights

• Development assistance

– Economistic “Games” showing that generally people

prefer Fairness

Income Distribution:

Central to our ideas of fairness and justice

A more equitable income distribution is supportive of

both Growth and Poverty Reduction

Growth generally reduces Poverty; But Growth may be

“Neutral” regarding income distribution

(Unless major efforts are made to achieve distributional

objectives simultaneously with growth)

Incentives and Income Distribution

Vote !!

Perceptions of Individual Well-Being and Happiness

Liberia Kenya USA Canada

Overall Life Satisfaction

Min 0 to 10 Max

3.4

3.7

7.5

8.0

Satisfaction with Standard of

Living (%)

46

25

75

87

Happiness:

Purposeful Life

100

98

95

91

Happiness:

Treated with Respect

82

78

94

93

Negative Life Experience

17 19 28 25

Source: UNDP Human Development Report 2010

Income Distribution Concepts and

Measures

1. Income shares of groups in the population

(quintiles or deciles)

2. Ratios of shares,

e.g. income share of top 10% / income share of poorest

10%

3. Lorenz Curve (See text, pp37-41)

4. Gini Coefficient (in class)

Figure 5.2 The Greater the Curvature of the Lorenz

Line, the Greater the Relative Degree of Inequality

Figure 5.3 Estimating the Gini Coefficient

4. Evidence re Income Distribution

Some International Comparisons

Income Distribution Measures for Some African Countries

Country Gini

Coefficient

Income Share of

Richest 20%

Poorest 20 %

Income Share

of Poorest

20%

Income Share

of Richest

20%

S. Africa .578 17.0 3.5% 62.2

Ghana .408 8.4 5.6 46.6

Kenya .425 8,2 6.0 49.1

Zimbabwe .501 12.0 4.6 55.7

Uganda .357 9.2 5.7 52.5

Nigeria .429 9.1 5.1 48.6

Tanzania .346 5.8 7.3 42.4

Ethiopia .399 4.3 9.1 39.4

Sierra Leone .629 57.6 1.1 63.4

China .570 12.2 4,3 51.9

Source: UNDP. Human Development Report, 2007/2008

“Who are the “’Poor’” in Africa?

Domestic Aspects

– Rural character

– Regional dimension

– Gender & children

– Indigenous dimension

Characteristics of the poor:

– Assets;

– Human capital (education, health);

– Income vulnerability

– Weak access to public services,

– Environmentally hostile environments,

– Lack of supportive networks

5. The Roots of Income Mal-distribution

in Africa (and Poverty to some extent)

1. Historical Inheritance and its Momentum:

A. Pre-Colonial Social Structures

Significant levels of equality in pre-colonial

eras;

High equality for “hunting and gathering”

peoples

B.Impacts of Colonialism

Unequal property rights and institutions

imposed by colonial powers

Imperial country living standards for

colonizers; traditional levels for Africans

Public services directed at settler peoples,

not indigenous peoples

Colonial hierarchies: Social stratification

based on Race and Ethnicity

2. Political Factors: Disproportionate power and influence of

elites and moneyed interests (e.g. property, gender, and literacy qualifications to the vote until recently)

Result:

– Public Policy has often been shaped in their interests

Thus:

– “Urban bias”

– “Upper and middle income class bias” and

– “Modern sector bias” in public policy

3. The Nature of the “Modernization”

Process:

Does a “Rising Tide Lift all Boats”?

Would you expect that a process of

modernization / development would

improve everyone’s living standards

simultaneously?

What forces generate “Inequities”?

“Equities”?

Note the

Latin American

Effect

3. The Nature of the “Modernization”

process: Forces Generating Inequalities

“Scarce capital” generates high returns for

its owners;

Scarce skilled labour generates higher

incomes for those with crucial skills;

Abundant unskilled labour generates low

wages and incomes;

3. The Nature of the “Modernization” process:

Forces Generating Inequalities, cont’d

International technological transfer: much

recent vintage technology is “labour-saving,”

thereby reducing the demand for labour and

thus wages and incomes.

“Backwash Effects” of “modernization” and

tech. change

Uneven access to opportunities

• Prior Elites;

• Regional Advantages;

• Personal Advantages

3. continued: The Nature of the “Modernization”

Process: Forces Generating Greater Equalities

The exhaustion of surplus labour in agriculture and

the informal economy?

Increasing productivity generally promotes rising

incomes in supporting service-type activities

Broadening Tax Base permits social programs &

welfare state type programs

Broadening human development (education health

etc.) broadens earning capabilities

Regional and rural-urban spread effects

• rising demand for goods and services from

elsewhere;

• linkage effects

Emphasis on

Human

Development

South Korea: Causal Factors Shaping Income Distribution and Growth

Successful

Export

Promotion

Good

Macroeconomic

Management

Good Private-

Public

Gov’t Market Mix

Land Reform

Coops;

Well Qualified

Labour Force

Population

Deceleration

Lower LF

Growth Rate

Rapid Job

Creation

Egalitarian Urban

Income Distribution

Rural-Urban

Equity

Egalitarian

Rural Distribution;

Income Growth

Rural Urban

Balance Agricultural

Expansion

Rapid Growth of

Manufacturing

Rapid Growth, Distributional Equity, Poverty Reduction [HDI: # 15 in world; 1970: .707; 2005 .901; Gini: 0.316; Growth pc, 1975-03: 6.1% pa]

Price Policy

Activist and Expanding

Social Policies

Increasing Taxes

Empirical Validity of Kuznets” Hypothesis?

Which effects predominate?

Note the

Latin American

Effect

Empirical Validity of Kuznets” Hypothesis?

Which effects predominate?

– Debatable;

– Latin American effect in Kuznets “U”

– Positives and negatives simultaneously;

– Other factors operate

– Ultimately “Public Policy” is paramount

4. Nature of Development Strategies (and Theorizing):

Early Theorizing: • Capital-Centered theories,

• Dualistic Development Models (W.A. Lewis)

• The Soviet Model,

• Prebisch - UN ECLAC)

• W. W. Rostow ………….

All emphasized

Growth first; income distribution later;

• Investment in the Modern Sector, esp. Industry;

• Import-substituting industrialization;

• Investment in physical capital

• De-emphasize traditional economy and informal sector

5. “Neo-Liberal” or “Washington Consensus” approach focused on growth first.

• Escape from hyper-inflation, macro-economic and external sector unsustainability and debt, led to “structural adjustment” programs

• which often generated “short-term pain” hopefully but not always for “long term gain”

6. Demographic and Sociological Factors:

“The Poor Have More Children:” large family

size among the poor

• reduces family investment per child and

• reduces possible inheritances per child vis-à-vis

the rich;

Labour force participation for poor women is low vis-

à-vis rich women;

• Higher female labour force participation rates for

better-off women raise family incomes for better-off

groups.

The rural poor sometimes have little alternative to

damaging their own environment, often resulting in

worsening future poverty.

7. “Market Power”

– Concentrated ownership patterns

– Monopoly and oligopoly power of

enterprise and individuals

– The power of professional associations,

unions and organized groups

– Political power determining income

patterns

8. International Factors

– Multinational Enterprise: islands of modernity and higher incomes

– Technological Transfer of modern capital-intensive machinery and equipment

higher incomes for some

– Internationally transferable skills help generate international income levels for some, while the unskilled remain with low incomes.

6. Policies for Pro-Poor Growth Possible Approaches and Components of Poverty

Reduction and Equity-Oriented Programs

1. Achieve Sustained Economic Growth Exceeding population growth rates;

• Permitting rising levels of personal or family

income and tax revenues;

• Permitting significant levels of domestic &

national savings

[Note: this is a necessary but insufficient

condition for enduring reductions in poverty]

2. Strive for “Equity with Growth”

– Make the growth process compatible

with equity, that is poverty reduction,

improved income distribution and

human development for low income

groups

– Focus sharply on the poorest.

– HOW?

3. Emphasize Investment in Human Development – Fairly Allocated

– Education, Health, Nutrition, Clean Water, Sanitation,

– Family Planning

– Build the capabilities of the state to provide necessary public goods

• [i.e. effective and efficient Tax Administration

– Plus effective and incorruptible public administration.]

4. Increase Demand for the abundant resource of the poor, namely labour, [i.e. rapid job creation]

[Difficult due to China’s manufacturing dominance due to cheap labour, mega-economies of large scale, undervalued exchange rate]

Improve the appropriateness of technology?

At an Appropriate Time, Switch from Import Substituting Industrialization to Job-creating Export Promotion

Promote labour intensive public works and infrastructure, especially that serving the needs of the poor;

5. Invest in the Physical Assets of the Poor

Support the “Informal Sector” [in various

ways;]

– Note the role of “Micro-credit”

Support Urban Development for low income

neighbourhoods [water, sanitation, sidewalks,

streets, electricity, security, etc.]

Support Agriculture and Rural Development,

focusing on low income rural peoples

– Rural roads; water & sanitation; drainage &

irrigation; garbage collection, law and order,

electrification in time

Avoid hyper-concentrated

urbanization and “First City” Bias

Promote Agriculture & Rural

Development

Regional Development;

7. Redistribute Assets

Land Reform of various sorts;

Democratic ownership patterns;

• Cooperative Property forms

• Taxation towards equity

• Favour small & local enterprise?

• Democratization of private ownership

Support Territorial Claims of

Indigenous Peoples;

8. Construct Safety Nets and Transfers as possible [for middle income countries]

Target the neediest groups;

Support Human development –promoting activities

[e.g. as in Brazil under Lula, financial support for the poorest families that keep their children in school;

or as in Chile, where school lunches programs are provided in low income neighbourhoods]