5&6 - Poverty, Inequality And Development (part 1 And 2)

Question 1

What is inequality

Answer 1

Disparities in distribution of wealth and income

Question 2

What is income inequality

Answer 2

The disproportionate distribution of total national income among households

Question 3

Measuring relative inequality (3 ways)

Answer 3

• Size distributions (quintiles, deciles)
• Lorenz curves
• Gini coefficients and other aggregate measures of inequality

Question 4

Desirable properties for measures of relative inequality (size distributions)

Answer 4

• Anonymity = Measure should not depend on who has a higher income
• Scale independence = Inequality measures should not depend on size of the economy - want a measure of income dispersion
• Population independence principle = Inequality measure should not be based on the number of income recipients
• Transfer principle = All other incomes constant, if transfer income from a richer to a poorer person, resulting New income distribution is more equal
• Gini coefficient = Satisfies all four properties; so, does the coefficient of variation
• Gini coefficient

Question 5

What’s the Lorenz curve

Answer 5

• Graphical representation of measure of distribution of income in a country
• Line of perfect equality shows the distribution of income when the richest x% of the population owns x% of the cumulative income
• Greater the curvature of the Lorenz curve, the greater the relative degree of inequality
• Used to calculate the Gini coefficient

Question 6

Describe the Lorenz curve graph

Answer 6

• Y axis = Percentage of income
• X axis = Percentage of population
• Line of equality is a straight upwards diagonal line from the origin
• Lorenz curve, is a curvature line meeting at the start and end of the equality line, underneath the equality line

Question 7

Equation for Gini coefficient

Answer 7

• Shaded area of the area between equality line and Lorenz curve / The whole area below the equality line
• Gini coefficients can vary from 0 (perfect equality) to 1 (perfect inequality)
• Unequal income distributions typically lie between 0.50-0.70
• Equal distributions are around 0.20 to 0.35

Question 8

What’s Absolute poverty

Answer 8

A fixed economic threshold below which individuals or families are considered to be living in poverty

• The World Bank defines absolute poverty as living on less than $1.90 per day (adjusted for purchasing power parity)

Question 9

Desirable properties for poverty measures

Answer 9

• Anonymity
• Population independence
• Monotonicity
• Distributional sensitivity

Plus, The Focus Principle (Amartya Sen):
- A good poverty measure will be based only on the incomes (wellbeing) of the poor, not the non-poor
- As we will see, P2 (squared) (squares poverty gap index) has these properties

Question 10

What’s the Monotonicity principle

Answer 10

Monotonicity principe = If you add income to someone below the poverty line, all other incomes held constant, poverty falls

Question 11

What is the Distributional sensitivity principle

Answer 11

Distributional sensitivity people = 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

Question 12

What does the Monotonicity and distributional sensitivity principles clarify

Answer 12

• Clarifies what’s lacking in some widely used measures
• Looking ahead, the headcount ratio (fraction below the poverty line) satisfies anonymity and population independence, but not full Monotonicity; and it fails on distributional sensitivity
• The simple headcount (Number who are poor) fails even to satisfy the population independence principle. People who earn $400 per year are measured at the same weight as people who earn $300 per year, however there’s a big difference

Question 13

Headcount index equation

Answer 13

H/N

• Where H is number of people who are poor, and N is total number of people in the economy; H/N is the fraction who are poor
• Doesn’t meet desirable properties and accordingly is likely to cause incentive problems

Question 14

Unintended policy incentives of using headcount measures

Answer 14

When agencies are told their mission includes poverty reduction

• Measuring poverty by headcount or fraction poor creates incentive to report improvements in these measures, therefore focus more on those closer to poverty line to get evidence to report
• Government policy exhibits “urban bias” e.g. emphasising job creation for the poor in cities - Who are closer to poverty line
• NGOs work near district towns, easier-to-reach; if so, people assisted are less poor on average
• MDG to “half poverty” sent a signal

Question 15

What does calculating total poverty gap (TPG) do

Answer 15

Measures the total amount of income necessary to raise everyone who is below the poverty line up to that line

Question 16

How to find TPG (what is it)

Answer 16

The extent to which the incomes of the poor lie below the poverty line

• Is found by adding up the amounts by which each poor persons income (Yi), falls below the absolute poverty line (Yp)
• More accurate than a headcount of people below the poverty line

Question 17

How to work out Average poverty gap (APG)

Answer 17

TPG / N

• Total poverty gap / Number of persons in the economy
• Normalised poverty gap, NPG = APG/Poverty line (Yp)

Question 18

How to work out Average income shortfall (AIS)

Answer 18

TPG / H

• Total poverty gap / Number of poor people
• Normalised income shortfall, NIS = AIS / Poverty line

Question 19

What’s the FGT index

Answer 19

1/Number of people in the economy x Number of poor people (Poverty line - Each poor persons income / Poverty line)

Question 20

What’s so harmful about extreme inequality (3 factors)

Answer 20

• Leads to economic inefficiency
• Extreme disparities undermine social stability and solidarity
• Extreme inequality is generally viewed as unfair

Question 21

Extreme income inequality leads to economic inefficiency… why?

Answer 21

• Smaller fraction of population qualifies for credit e.g. For business or school
• Overall rate of saving tends to be lower. Highest rate of marginal savings usually found among the middle class
• Inequality May lead to inefficient asset allocation. E.g. Overemphasis on higher education at the expense of quality universal primary education
• Result can be lower average income and lower rate of economic growth when inequality is high

Question 22

Extreme inequality causes extreme disparities undermining social stability and solidarity…. how?

Answer 22

• High inequality strengthens political power of the rich, and therefore concentrates economic and social bargaining power. Usually this power will be used to help benefit themselves
• High inequality facilitated rent seeking. This includes excessive lobbying, bribery, large political donations, cronyism (appointment of friends into authority positions). When resources are allocated to such rent-seeking behaviours, they are diverted from productive purposes that could lead to faster economic growth

Question 23

Extreme inequality is viewed as unfair… why?

Answer 23

• Philosopher John Rawls proposed a thought experiment
• If you had a chance to select the overall level of inequality of the world but not your own identity
• You might be born as bill gates or poor in a poor country, its equal probability
• Rawls calls this uncertainty “veil of ignorance”
• People will want some inequality in the world, as it’ll encourage people to innovate, work hard and gain skills

Question 24

What’s multidimensional poverty index (MPI)

Answer 24

Identification of poverty through a dual cutoff

• Cutoff LEVELS within EACH dimension (E.g. $1.90 per day or below for income poverty)
• Cutoff in the NUMBER of dimensions in which a person must be deprived to be deemed multidimensionally poor
• MPI focuses on deprivations in health, education, and standard of living; each receives equal (one-third of overall total

Question 25

MPI allows for:
- Comprehensive assessment
- Granular analysis
- Policy relevance

Answer 25

• Comprehensive assessment = MPI is a more holistic view of poverty
• Granular analysis = Allows for detailed analysis at household level, pinpointing specific deprivations and ares of need
• Policy relevances = MPI identifies not just who’s poor but how they’re poor, guiding targeted policy interventions

Question 26

MPI indicators

Answer 26

Health = Whether a child has died in family or child or adult is malnourished

Education = Whether no house member completed 5 years of schooling, and whether any school-aged child is out of school for grades 1 through 8

Standard of living = Lack of electricity, insufficient drinking water, inadequate sanitation, inadequate flooring, unimproved cooking fuel,
Lack of more than 1 of 5 assets - telephone, radio, TV, bicycle and motorbike

Question 27

Computing the MPI

Answer 27

MPI = H x A

• H = Product of headcount ratio (percent of people living in multidimensional poverty)
• A = Average Intensity of people’s deprivation (percent of weighted indicators for which poor households are deprived on average)
• HA satisfies desirable properties like Dimensional Monotonicity as if a person identified a poor becomes deprived in another indicator she is measured as even poorer - Not the case using simple headcount ratio

Question 28

MPI limitations

Answer 28

• Data from household rather than individuals (such as whether any family member is undernourished)
• Doesn’t fully distinguish between past and present conditions (such as whether child has ever died)
• Doesn’t distinguish differences within households (if the undernourished individuals are females)
• Proxies are imperfect (nourishment doesn’t capture micronutrient deficiencies)
• Education only considers inputs not outputs (enrolments vs attainments)
• Choices of basic assets are questionable (even if radio is present, children may sleep on concrete floor)

Question 29

Describe the Kuznetsk curve

Answer 29

• Y axis = Gini coefficient
• X axis = Gross national income per capita
• Curve is an inverted U
• Relationship between economic development and income inequality
• Inverted U is consistent with modern sector enlargement growth and traditional or modern sector enrichment growth

Question 30

Characteristics of high poverty groups

Answer 30

• Disproportionately children
• Women and poverty
• Ethnic minorities, indigenous populations, and poverty
• Rural poverty
• Poor countries

Question 31

Children and poverty

Answer 31

• Level of poverty is Greater among children than adults
• More than one third of all children globally are living in multidimensional poverty (MPI 2018)

Question 32

Women and poverty

Answer 32

• Make up substantial majority of worlds poor
• Less likely to receive medical services, clean water, sanitation and other benefits
• Female-headed households: Ultra poor, no male earners, low earning potential, less education, lower incomes
• Income disparity between Male-and Female-headed households: Large earning differentials, barred from higher paying jobs, much less likely to obtain formal employment

Question 33

Ethnic minorities, indigenous populations and poverty

Answer 33

• Domestic conflicts and civil wars have arisen due to perception of marginalisation (Limited resources and jobs)
• Live In Greater extreme poverty, more malnourished, illiterate

Question 34

Rural poverty

Answer 34

• Estimated 79% of those in poverty live in rural areas (UN, 2023)
• Limited economic opportunities: Fewer jobs, especially in non-agricultural sectors, leading to unemployment
• Exposure to environmental risks like floods, droughts
• Lack of Education, healthcare and infrastructure

Question 35

Poor countries and generations

Answer 35

• The poor come from poor countries
• The poverty trap (born into poverty)
• Negative relationship between poverty and per capita income suggests that if higher incomes can be achieved, poverty will be reduced, if only because of the greater resources that countries will have available to tackle poverty problems

Question 36

Functional distribution of income (graph in PowerPoint)

Answer 36

• “Functional” income distribution is based on shares of national income of each factor of production (labour, capital, land)
• Focuses on (wage) share of labour, in contrast to distributions as rent, interest and profit
• Traditional neoclassical approach assumes competition; supply and demand curves assumed to determine prices of each factor
• Each factor is then paid what it contributes to national output
• Supply of, and demeans for, labour determine market wages
• The (average) wage multiplied by total employment is a measure of total wage payments, also called total wage bill

Question 37

Labour and inclusive development

Answer 37

• Most people receive income primarily from labour (work they do)
• Having work does not mean having a wage
• Most developing countries, minority of labour income is from conventional “jobs”
• Close to half engaged in self-employment
• Wage labour often Low-productivity Work, with irregular incomes

Question 38

Importance of high-quality jobs

Answer 38

• Work is where people get their income, and where they spend most of their time
• Jobs help people gain and maintain capabilities
• skills and attitudes people develop at jobs affect how other perceive them
• High inequality in labour markets can serve to magnify other forms of inequalities

Question 39

Policy options on income inequality and poverty

Answer 39

• Reduce constraints on job creation, such as building needed infrastructure
• Ensure incentives do not hinder quality job creation
• Reforming laws and norms. (E.g. don’t discourage women to work)
• Programs for employment when jobs are scarce

Question 40

Why is workfare better than welfare when helping poverty

Answer 40

Workfare, such as Food for Work Program, are more likely to represent a better policy than welfare on a current program efficiency basis when these criteria are met:

• Harder to screen the poor without a workfare requirement
• Poor workers have lower opportunity cost of time (economy loses little output when they work in the program)
• ## Non-poor workers have higher opportunity cost of time (unlikely to participate)

Question 41

Behavioural economics to address poverty

Answer 41

• The poor struggle with stress and environmentally linked deficits in cognitive skills, lower non-cognitive skills, and a greater incidence of mental illness
• Poor face higher risks of depression, anxiety and substance abuse
• Undernutrition decreases physical strength also leads to a decrease of cognitive functioning including difficulties concentrating