poverty and inequality Flashcards
Global and Regional Poverty Trends
The number of individuals experiencing monetary poverty has fallen dramatically in the last 50 years
Certain groups consistently feature among those living below the poverty line include:
▪ Those living in rural areas - often due to a reliance on (subsistence) agriculture
▪ Women – facing discrimination in employment, education and health
▪ Ethnic minorities and indigenous populations
What properties would we want in a good measure of Poverty?
o Anonymity principle: The measure should not depend on who has higher income; e.g.whether we believe the rich or poor to be ‘good’ or ‘bad’ people
o Population independence principle: An inequality measure should not be based on the number of income recipients
o Monotonicity principle: If you add income to someone below the poverty line, all other incomes held constant, poverty falls
▪ There is a “less decisive” version, called weak monotonicity, which requires that poverty can be “no greater than” it was
o Distributional sensitivity principle: If you transfer income from a poor person to a richer person (even if the “richer” person is also below the poverty line), the resulting economy is deemed strictly poorer
Poverty Headcount
o The Poverty Headcount is simply the number of individuals falling below a pre-specified poverty level – The current international poverty line is defined as $1.90 PPP
o The simple Poverty Headcount fails even to satisfy the population independence principle
Headcount Ratio
o The Headcount Ratio is the number of persons who are poor H as a fraction of the population N – Therefore, H/N is the fraction who are poor
o The Headcount Ratio satisfies anonymity and population independence, but not fullmonotonicity; and it fails on distributional sensitivity
o The Headcount Ratio is still the most widely used measure of poverty – yet the failure of this measure to satisfy monotonicity and distributional sensitivity can produce unintended consequences
Unintended Incentives from Using Headcount Measures
o When agencies or governments are told their mission includes poverty reduction…
o Measuring poverty by Headcount or fraction poor creates incentive to report improvements in these measures - this incentivises policymakers to focus efforts toward those closest to poverty line
o The original Millenium Development Goal (MDG) of “halving poverty” sent a signal
o Regions and countries were compared in UN reports using these measures, without mention of any other indicator
Total Poverty Gap
o Measures the amount of income required to lift all those defined as poor to the poverty line
o TPG = H Σ i=1 (Yp -Yi)
o Total Poverty Gap and related measures are sensitive to changes in income below the poverty line
o The TGP satisfies the properties of Monotonicity andDistributional Sensitivity
o However, the TPG is not independent of population size…
o A larger population implies a larger TGP for the same percentage of poor individuals
Average Poverty Gap
Dividing the TPG by the population N
APG = 1/N H Σ i=1 (Yp -Yi)
APG = TPG/N
Satisfies all 4 desirable properties
Poverty Gap Index
o The PGI provides a measure of the average extent to which individuals fall below the poverty line as a percentage of the poverty line
PGI = 1/N H Σ i=1 ((Yp -Yi)/Yp)
Satisfies all 4 desirable properties
The Foster-Greer-Thorbecke (FGT) Index
Pa = 1/N H Σ i=1 ((Yp -Yi)/Yp)^a
When a=0, we get the Headcount Ratio
When a=1, we get the Poverty Gap Index
When a=2, we get the “P2” or “𝑭𝑮𝑻𝟐” measure
The greater α – the higher the weight we place on those further below the poverty line
why might wealth or income inequality and issue for economic development?
o Overall, the rate of saving in the economy tends to be lower – The highest rate of marginal savings is usually found in the middle of the income distribution
o High inequality strengthens the political power of the rich - concentrating economic and social bargaining power
o High inequality of land ownership may be inefficient - The most efficient scales for farming is at the level of small- or medium-size farms
o High inequality facilitates corruption and abuse of public office for private gain - rent seeking
The result can be a lower average income and a lower rate of economic growth when inequality is high - moreover, these factors in turn often lead to still more inequality
The Kuznets Curve
o Graph on slides
o The Kuznets Curve is a hypothesized representation of the relationship between economic development(measured by per capita income) and income inequality – Kuznets (1955)
o In the early stages of development, income is concentrated within a few individuals or groups
o This leads to a rise in inequality as new investment opportunities become available
o As the economy continues to develop, factors such as urbanization, education, and technological progress contribute to a more equal distribution of income
Mapping the Gini coefficient against GNI per capita
o Mapping the Gini coefficient against GNI per capita at a global-level does show an inverted-u shaped relationship
o However, according to Fields (2001), this may rely on the presence of countries in Latin America
o On average, Latin American countries tend to have high levels of inequality but neither especially high or low levels of income per capita distribution
o Controlling for countries in Latin America tends to lead to the relationship disappearing
What properties would we want in a good measure of Inequality?
o Anonymity
o Population independence
o Scale independence: Inequality measures should not depend on size of the economy – we want a measure of income dispersion
o Transfer principle: all other incomes constant, if we transfer income from a richer to a poorer person – the resulting new income distribution is more equal
The Lorenz Curve
o The Lorenz Curve graphs a country’s distribution of income shares relative to population shares
o The greater the curvature of the Lorenz Curve, the greater the relative degree of inequality
