Lecture Development economics - Lecture 29: Poverty, inequality, and development

Poverty, Inequality, and
Development
Lecture 29


Poverty across countries
Country
(in order of increasing GNP per
capita)

% of Population below $1 a day

Bangladesh

29.1

Kenya

26.5

Sri Lanka

6.6

Indonesia

7.7

Philippines

14.6

Jamaica

3.2

Paraguay

19.5

Costa Rica

6.9

Malaysia

<2

Brazil

9.0


Inequality across countries
Country
(in order of increasing
GNP per capita)

The Poorest 40% get …
% of income

Ratio of Highest 20% to
lowest 20%

Bangladesh

22.9

4.0

Kenya

10.1

18.3

Sri Lanka

22.0

4.4

Indonesia

20.4

5.1

Philippines

15.5

8.4

Jamaica

16.0

8.2

Paraguay

8.2

27.1

Costa Rica

12.8

12.9

Malaysia

12.9

11.7

Brazil

8.2

25.7

United States

16.1

8.5


But careful ! In these surveys, both the very poor and the very rich and underrepresented.


But careful ! In these surveys, both the very poor and the very rich and underrepresented.


But careful ! In these surveys, both the very poor and the very rich and underrepresented.


Poverty, Inequality, and GNP per capita
• There’s no simple relation between
poverty/inequality and per capita income.
– Inequality (high or low) seems to be very
persistent; but it typically changes (up or
down) when output per capita changes.
– There might be a complicated relation,
involving the interaction of many factors.


Poverty, Inequality, and GNP per capita

• Inequality is probably determined by
– history
– social cleavages,
– politics and government policies

• Careful statistical/econometric analysis is
necessary to identify the effect of each
factor.



The Growth Controversy:
Seven Critical Questions
• What is the extent of relative inequality, and how
is this related to the extent of poverty?
• Who are the poor?
• Who benefits from economic growth?
• Does rapid growth necessarily cause/require
greater income inequality?
• Do the poor benefit from growth?
• Are high levels of inequality always bad?
• What policies can reduce poverty?


The Growth Controversy:
Seven Critical Questions
• Inequality and poverty need to be defined
carefully if we want to
– Compare countries to each other;
– Assess progress in fighting them;

– What kind of policies/incentives need to be
designed.

• What kinds of growth improve welfare?
• What are the main things to be done?


Measuring Inequality and
Poverty
• Measuring Inequality
– Size distributions
– Lorenz curves and Gini coefficients
– Functional distributions


Measuring Inequality and
Poverty
• Measuring Inequality
– size distributions
• How much income does household X earn?
• Sort people according to income and put them in
major groups.
• Ignore differences in the source of income (or
capabilities, for example)
• A quartile is a fourth (25%) of the population; a
decile is a tenth; a quintile is a fifth.


Household

The Kuznets 
ratio:
the ratio of 
the share of 
income of the 
highest 20% 
divided by 
the share of 
income of the 
lowest 40%.


Measuring Inequality and
Poverty
• Measuring Inequality
– Lorenz curves
• Arrange population according to the share of
income they receive, from lowest to highest.
• Calculate cumulative percentages (the lowest 5%,
the lowest 45%, etc.)
• Plot the cumulative percentage of households
against the cumulative percentage of the income
they earn.
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Households

Income

1

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

5
5
5
5
5
5
5
5
5
5

5
5
5
5
5
5
5
5
5
5

Cummulative
Cumulative
Percentage of
Households
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%

80%
85%
90%
95%
100%

Cummulative
Cumulative
Percentage of
Percentage
of
income earned
income earned
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%

90.0%
95.0%
100.0%


Percentage of income earned

100.0%

90.0%

80.0%

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95% 100%


Households

Income

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19

20

0.80
1.00
1.40
1.80
1.90
2.00
2.40
2.70
2.80
3.00
3.40
3.80
4.20
4.80
5.90
7.10
10.50
12.00
13.50
15.00

Cumulative
Cumulative
Percentage of Percentage of
Households income earned
5%
0.8%
10%

1.8%
15%
3.2%
20%
5.0%
25%
6.9%
30%
8.9%
35%
11.3%
40%
14.0%
45%
16.8%
50%
19.8%
55%
23.2%
60%
27.0%
65%
31.2%
70%
36.0%
75%
41.9%
80%
49.0%
85%

59.5%
90%
71.5%
95%
85.0%
100%
100.0%


Percentage of income earned

100.0%

90.0%

80.0%

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95% 100%


I=1.4^H
rescaled so 
that H1’s 
income is 
0.8
(Divide all 
incomes 
by H1’s 
income, 
1.4, and 
multiply 
them all by 
0.8)

Households

Income

1

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

0.80
1.12
1.57
2.20
3.07
4.30
6.02
8.43
11.81
16.53

23.14
32.40
45.36
63.50
88.90
124.45
174.24
243.93
341.50
478.10

Cummulative
Cumulative
Percentage of
Households
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%

80%
85%
90%
95%
100%

Cumulative
Percentage of
Percentage
of
income earned
income earned
0.0%
0.1%
0.2%
0.3%
0.5%
0.8%
1.1%
1.6%
2.4%
3.3%
4.7%
6.7%
9.4%
13.2%
18.5%
25.9%
36.4%
51.0%

71.4%
100.0%


Percentage of income earned

100.0%

90.0%

80.0%

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95% 100%


100.0%

90.0%

80.0%

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95% 100%


100.0%

90.0%

80.0%

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95% 100%


100.0%

90.0%

80.0%

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95% 100%


The Lorenz Curve