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CHAPTER 4

Poverty, Inequality,
and Development
Measuring Inequality and Poverty

•define the dimensions of the


income distribution and poverty
problems and
•identify some similar elements that
characterize the problem in many
developing nations.
MEASURING INEQUALITY

•personal size distribution of


income and
•functional or distributive factor
share distribution of income.
Size Distribution the personal or size
distribution of income is the measure
most commonly used by economist. It
simply deals with individual persons or
households and the total income they
received.
1. Lorenz Curves
• common way to analyze personal income statistics
• shows the actual quantitative relationship between
the percentage of income recipients and the
percentage of the total income they did in fact receive
during a given year.
2. GINI Coefficient
• often used as a gauge of economic inequality,
measuring income distribution or, less commonly,
wealth distribution among a population.
GINI Coefficient’s four highly desirable properties

1. The Anonymity- simply means that our measure of inequality should


not depend on who has the higher income
2. Scale Independence- means that our measure of inequality should
not depend on the size of the economy or the way we measure its
income
3. Population Independence – it state that the measure of inequality
should not be based on the number of income recipients.
4. The Transfer Principle- states that holding all other incomes constant.
If we transfer some income from a richer person to a poorer person the
resulting new income distribution will be equal.
Functional Distribution

•the second common measure of income


distribution used by economist.
•also known as Factor Share Distribution of
Income
•attempts to explain the share of total
national income that each of the factors of
production receives.
Negative implications of High Inequality

First, extreme income inequality leads to economic


insufficiency.

Landlords, business leaders, politicians and other rich


elites are known to spend much of their incomes on
imported luxury goods, gold jewelry, expensive houses,
and foreign travel or to seek safe havens abroad for
their savings in what is known as capital flight.
The second reason to be concerned with
inequality above poverty line is that extreme
income disparities undermine social stability and
solidarity.
• High inequality strengthens the political power
of rich.
• High inequality makes poor intuitions very
difficult to improve
• High inequality may also lead poor to support
populist policies that can be self-defeating.
Finally extreme inequality is generally viewed unfair because
much of the inequality we observe in the world is based on
the luck or extraneous factors, such as the inborn ability to
kick a football or simply the identity of one’s great
grandparents.
• innate abilities (individuals possessing different sets of
abilities may have different levels of wealth)
• intelligence (a lot of people believe that smarter people
tend to have higher income and hence more wealth)
Issues concerning poverty reduction:
• First, widespread poverty creates conditions in which the
poor have no access to credit.
• Second, the rich in many contemporary poor countries are
generally not noted for their frugality or for their desire to
save and invest substantial proportions of their income in
the local economy.
• Third, the low incomes and low levels of living for the poor,
which are manifested in poor health, nutrition, and
education, can lower their economic productivity and
thereby lead directly and indirectly to a slower-growing
economy.
• Fourth, raising the income levels of the poor will
stimulate an overall increase in the demand for
locally produced necessity products.
• Fifth, a reduction of mass poverty can stimulate
healthy economic expansion by acting as a
powerful material and psychological incentive to
wide-spread public participation in the
development process.
Poverty Groups

Rural Poverty
• scratch out their livelihood from subsistence
agriculture either as small farmers or as low-paid
farmworkers.
• engaged in petty services, and others are located
in fringes and in marginal areas of urban centers,
where they engage in various forms of self-
employment.
Women and their Children
• They are more likely to be poor and malnourished and
less likely to receive medical services, clean water,
sanitation, and other benefits.
• Have less access to education, formal sector
employment, social security, and government
employment programs.
• Strong bias against females in areas such as nutrition,
medical care, education, and inheritance.
Ethnic Minorities and Indigenous
Populations
•lives in extreme poverty
•being indigenous greatly increases the
chances that an individual will be
malnourished, illiterate, in poor health,
and unemployed.
Areas of Interventions
1. Altering the functional distribution- determined by factor prices,
utilization levels and the consequent shares of national income that
accrue to the owners of each factor.
2. Mitigating the size distribution- how ownership and control over
productive assets and labor skills are concentrated and distributed
throughout the population.
3. Moderating (reducing) the size distribution at the upper levels
through progressive taxation of personal income and wealth
4. Moderating (increasing) the size distribution at the lower level
through public expenditures of tax revenues to raise the incomes of
the poor either directly outright money transfers or indirectly
through public employment creation or the provision of free or
subsidized primary education and health care.
Altering the Functional Distribution of Income through Policies
Designed to Change Relative Factor Prices

Measures designed to reduce the price of


labor relative to capital will cause employers
to substitute labor for capital in their
production activities. Such factor substitution
increases the overall level of employment
and ultimately raises the incomes of the
poor.
Modifying the Size Distribution through Progressive
Redistribution of Asset Ownership
• The ultimate cause of the unequal distribution of personal
incomes in most developing countries is the unequal and
highly concentrated patterns of asset ownership.
• Policy to reduce poverty and inequality is to focus directly
on reducing the concentrated control of assets, the
unequal distribution of power, and the unequal access to
educational and income- earning opportunities that
characterize many developing countries.
Reducing the Size Distribution at the Upper Levels
Through Progressive Income and Wealth Taxes

Any national policy attempting to improve


the living standards must secure sufficient
financial resources.
The major source of such development
finance is the direct and progressive taxation
of both income and wealth.
Direct Transfer Payment and the Public Provision of
Goods and Services

• Public health project in rural villages and urban fringe


areas, school lunches and preschool nutritional
supplementation programs and the provision of clean
water and electrification to remote rural areas.
• Direct money transfers and subsidized food programs
for the urban and rural poor, as well as direct
government policies to keep the prices of essential
foodstuffs low, represent additional forms of public
consumption subsidies.
• First, when resources for attacking poverty are
limited, they need to be directed to people who are
genuinely poor
• Second, it is important that beneficiaries not become
unduly dependent on the poverty program
• Third, we do not want to divert people who are
productively engaged in alternative economic
activities to participate in the poverty program
instead.
• Finally, poverty policies are often limited by
resentment from the nonpoor.
END OF
DISCUSSION

NEXT ACTIVITY: QUIZ

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