ch 5

Question 1

Distribution and Development: Eight
Critical Questions

Answer 1

1. How can we best measure inequality and poverty?
2. What is the extent of relative inequality in developing countries; how is this related to the extent of poverty?
3. Who are the poor, and what are their economic characteristics?
4. What determines the nature of economic growth—that is, who benefits from economic growth, and why?
5. Are rapid economic growth and more equal income distribution compatible or conflicting objectives?: Is rapid growth achievable only at a cost of greater income inequality or can lessening income disparities contribute to higher growth rates?
6. Do the poor benefit from growth, and does thisndepend on the type of growth a developing country experiences? What might be done to help the poor benefit more?
7. What is so bad about extreme inequality?
8. What kinds of policies are required to reduce the magnitude and extent of absolute poverty?

Question 2

Measuring Inequality (enu)

Answer 2

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

Question 2

inequality measures should not depend on size of the economy – want a measure of income dispersion

Answer 2

Scale independence:

Question 2

measure should not depend on who has higher income; e.g. whether we believe the rich or poor to be good or bad people

Answer 2

Anonymity:

Question 2

an inequality measure should not be based on the number of income recipients

Answer 2

Population independence principle

Question 3

all other incomes constant, if transfer income from a richer to a poorer person (not so much that the poorer person is now richer than the originally rich person), resulting new income distribution is more equal.

Answer 3

Transfer principle

Question 4

Gini coefficient satisfies all four properties; so does the coefficient of variation (CV), and some others

Question 5

5.2 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

Question 6

Desirable properties for poverty measures (enu)

Answer 6

Anonymity

Population independence

Monotonicity

Distributional sensitivity

Question 6

Desirable Properties for Inequality Measures

Desirable properties for poverty measures:
Anonymity
Population independence
Monotonicity
Distributional sensitivity

Plus: the Focus Principle

As we will see, P2 has these properties

Question 7

5.2 Measuring Absolute Poverty

Average poverty gap (APG):

Where N is number of persons in the economy

TPG is total poverty gap

Note: normalized poverty gap, NPG = APG/Yp

Question 8

5.2 Measuring Absolute Poverty

Measuring Absolute Poverty

Average income shortfall (AIS):

Where H is number of poor persons

TPG is total poverty gap

Note: Normalized income shortfall, NIS = AIS/Yp

Question 9

5.2 Measuring Absolute Poverty

The Foster-Greer-Thorbecke (FGT) index:

N is the number of persons, H is the number of
poor persons, and α ≥0 is a parameter

When α=0, we get the headcount index measure

When α=2, we get the “P2” measure

Question 10

5.2 Measuring Absolute Poverty

The Newly Introduced Multidimensional
Poverty Index

Question 11

Following Amartya Sen’s capability approach, it is apparent that, in general, poverty needs to be conceptualized – and so measured – in a multidimensional way

Question 12

is consistent with modern sector enlargement growth, but not traditional or modern sector enrichment growth

Answer 12

Kuznets’ Inverted-U Hypothesis

Question 13

5.4 Absolute Poverty: Extent and Magnitude

Progress on Extreme Poverty

Clear progress on $1.25-a-day headcount

Less clear progress on $2.00-per-day headcount
(see Figure 5.14)

Incidence of extreme poverty is uneven

Relationship between Growth and Poverty

Association between growth and poverty
reduction

When it is inclusive, growth reduces poverty

Lower extreme poverty may also lead to higher
growth

Question 14

5.4 Absolute Poverty: Extent and Magnitude

Poor health, nutrition, and education lowers
economic productivity of people in poverty,
leading directly and indirectly to slower
growth

Higher income for the poor raises demand for
locally produced goods

Often, the poor lack access to credit, which
constrains entrepreneurship, children’s
education, and fertility reduction

Social exclusion/injustice associated with
poverty also leads to bad government policies
that can reduce growth

Question 15

Identification of poverty status through a dual cutoff:

Answer 15

The Multidimensional Poverty Index
(MPI)

Question 15

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.

Answer 15

The Multidimensional Poverty Index
(MPI)

Question 16

focuses on deprivations in health, education, and standard of living; and each receives equal (that is one-third of the overall total) weight.

Answer 16

The Multidimensional Poverty Index
(MPI)

Question 17

MPI Indicators

Health - 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 toward the maximum deprivation in the MPI)

Education - two indicators with equal weight - 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).

Standard of Living, equal weight on 6 deprivations (each
counts as 1/18 toward the maximum): lack of electricity;
insufficiently safe drinking water; inadequate sanitation;
inadequate flooring; unimproved cooking fuel; lack of more
than one of 5 assets – telephone, radio, TV, bicycle, and
motorbike.

Question 18

Interaction of the deprivations?

Building the index from household measures up to the
aggregate measure (rather than using
already-aggregated statistics), MPI approach takes
account of multiplied or interactive harm
(complementarity) done when multiple deprivations are
experienced by the same individual or family

The MPI approach assumes an individual’s lack of
capability in one area can only to a degree be made up
by other capabilities – capabilities are treated as
substitutes up to a point but then as complements.

Question 19

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.

Answer 19

Dimensional monotonicity:

Question 20

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, 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.

Question 21

Multidimensional poverty tells a different story than income poverty The results showed that knowing income poverty is not enough if our concern is with multidimensional poverty. Multidimensionally, Bangladesh is substantially less poor - but Pakistan substantially poorer - than would be predicted by income poverty Ethiopia is far more multidimensionally poor, and Tanzania much less so, than predicted by income poverty. Most Latin American countries e.g. Brazil rank worse on multidimensional poverty than on income poverty; but Colombia’s income and MPI poverty ranks are about same.

Question 22

5.5 Economic Characteristics of High-Poverty Groups Rural poverty Women and poverty Ethnic minorities, indigenous populations, and poverty

Question 23

Workfare, such as a Food for Work Program, represents a better policy than welfare when these criteria are met: The program does not reduce incentives for the poor to acquire human capital and other assets There are greater net benefits of the program’s work output It is harder to screen the poor without a workfare requirement

Question 23

Poor workers have lower __________________________ (so the economy loses little output when they work in the program)

Answer 23

opportunity cost of time

Question 24

Workfare Non-poor workers have higher opportunity cost of time (so they are unlikely to participate to get the benefits) The fraction of the population living in poverty is smaller (so the extra costs of a universal welfare scheme would be high) There is less social stigma of visible workfare participation, so the poor do not suffer humiliation or be deterred from needed work (otherwise, a discreet welfare transfer may be preferable)

Question 25

5.6 Policy Options on Income Inequality and Poverty: Some Basic Considerations * Areas of Intervention: Altering the functional distribution Mitigating the size distribution Moderating (reducing) the size distribution at upper levels Moderating (increasing) the size distribution at lower levels

Question 26

5.6 Policy Options on Income Inequality and Poverty: Some Basic Considerations * Policy options Changing relative factor prices Progressive redistribution of asset ownership Progressive taxation Transfer payments and public provision of goods and services

Question 27

5.7 Summary and Conclusions: The Need for a Package of Policies Policies to correct factor price distortions Policies to change the distribution of assets, power, and access to education and associated employment opportunities Policies of progressive taxation and directed transfer payments Policies designed to build capabilities and human and social capital of the poor Some specific programs covered in later chapters include: conditional cash transfers (Chapter 8); agricultural extension (Chapter 9); and micro-finance (Chapter 15, and Chapter 11 cases)