GROUP 2

Main Topic 3:

Growth,
Poverty and
Inequality
INTRODUCTION
As nations get wealthier, income poverty diminishes
on average. Education, health, and other well-being
indicators also rise. Economic growth helps reduce
poverty for these reasons.

Global living conditions scarcely improved until the

mid-18th century. Most communities accepted poverty
as inevitable.
In 1820, per capita incomes ranged from $500 in China
and South Asia to $1,000–1,500 in Europe's finest
countries. Three-quarters of the globe lived on less
than $1 a day.

Modern economic development allowed growth to

enhance the lives of underprivileged people and
everyone else.
The number of people living on less than $1 a day in
prosperous European countries has dropped to zero.
In slower-growing China, less than 20% live on less
than $1 a day. 40% of South Asia's slower-growing
population does.

Policies, institutions, history, and geography affect

growth, income distribution, and poverty alleviation.
 GROUP 2

1. Documents the strong links between

SIGNIFICANCE OF economic growth and the income and
THE SUBJECT non-income dimensions of poverty.
2. The policies and structures that
support growth and provide the
foundation for reducing poverty.
3. The linkages between economic
growth and the two non-income
components of poverty, health, and
education.
 GROUP 2

After studying this module, the

Intended Learning students will be able to:
Outcomes:
1. Discuss the difference between
growth, poverty and inequality;
2. Explain how to measure human
poverty index;
3. Discuss economic efficiency;
4. Explain the qualities or
characteristics of the poor people.
GROUP 2

Definitions and
the Elimination of
Unnecessary
Disagreements
Poverty, Inequality and
Development
Economic Growth GROUP 2

Economic growth is generally defined as

an increase in Gross Domestic Product
(GDP), either in total GDP or in GDP per
capita.
With high annual population growth rates
of 2-3 % a country may easily be in a
situation with growth in total GDP but not
in per capita GDP, and we shall therefore
refer to economic growth as an increase in
GDP per capita.
Inequality GROUP 2

Use in economic analyses of growth,

inequality and poverty, the term refers to
end results on welfare, and not in material
and intangible assets that may contribute
to the 2 explanations of these end results.
The most common measure of income
inequality is the Gini coefficient or index
(G), named after the Italian statistician
Corrado Gini (1912).
 GROUP 2

Gini Coefficient
Kuznet's Ratio
This gives the ratio between the
average income of the richest and
the average income of the poorest
– typically undertaken by focusing
on the averages of the top and
bottom quintiles, i.e., the richest
20 % and the poorest 20%.
POVERTY
Poverty definition has at least three important
purposes and uses

It should be useful in policy debates and

formulations, to define scope of poverty
reduction strategies or PRS.
It should help in targeting and measuring
impact of specific poverty alleviation
programmes and policies
It should be useful as an analytical concept to
understand and analyze poverty and also
measures changes.
The trend over time to use more
inclusive measures is a reflection of
new research on the cause of poverty.
With poverty back on the
international agenda, donors may
also use poverty alleviation as an
umbrella concept for several
development objectives. Example:
health, education, equality, equity,
economic growth, and empowerment.
A key criterion for a poverty
measurement indicator is to allow for a
consistent distinction between the poor
and not-so-poor and the non-poor.
Ravallion (1997) notes the great
divergence between the comprehensive
definitions of poverty found in
literature and what is possible to
operationalize and measure on the
ground-both in terms of methods and
data availability.
INCOME POVERTY
 GROUP 2

Reducing income poverty is not the only aim

of development policies.
An additional argument for using an
apparently narrow income or consumption-
based definition of poverty is that, in the
long run and at an aggregated scale,
economic growth and reduction in poverty
broadly defined (income, health, life
expectancy, education, vulnerability and
political influence) often go hand in hand, cf.
Ray (1998) and World Bank (2000).
Poverty Measures
 GROUP 2

The most widely used

income poverty line
internationally is the ‘one
dollar a day’ measure, or
more precisely 370 US
dollars per year at their 1985
value (World Bank 1990).
GROUP 2

Other poverty lines have also been

used, including extreme poverty
(0.6 dollar) and moderate poverty
(2 dollars a day).

Concepts at the center of

international debates often face
pressures for a broadened
interpretation.
GROUP 2

The definition of poverty as lack of

income, inherited from classical
economists like Adam Smith and
David Ricardo.
In recent decades, however, it has
become increasingly popular to
extend the definition of poverty to
other, non-material aspects of
human well-being.
 GROUP 2

The evolution of the

concept of poverty reflects
changes in development
theories and practices in
general.
Consequently, attempts at
measurement, description
and analysis of poverty
have expanded accordingly.
The first relates to the inclusion
of non-monetary income and
consumption – the ‘hidden
harvest’ of subsistence goods
that do not enter the formal
cash-based economy. These
include forest products and
subsistence production in
agriculture.
Second, during the 1970s, the emphasis in the
development debate gradually shifted from hardcore
economics to that of the ‘basic needs’ of the poor. This
accompanied changes in the measurement of welfare.

Human development extension is the poverty concept

implying that increasing attention was given to
indicators related to health, education and nutrition.
Human Development Index
(HDI) is the most popular
indicator.
HDI includes per capita income
but with decreasing welfare
'returns' over growing income
levels.
An extra dollar in a poor
country has a greater HDI
effect than in a rich one.
 GROUP 2

In the long run and at an aggregated scale,

economic growth and reduction in poverty
broadly defined (income, health, life
expectancy, education, vulnerability and
political influence) often go hand in hand,
cf. Ray (1998) and World Bank (2000).
The standard economic definition of
income includes both subsistence and cash
income.
Human Development Index
(HDI) is the most popular
indicator.
HDI includes per capita income
but with decreasing welfare
'returns' over growing income
levels.
An extra dollar in a poor
country has a greater HDI
effect than in a rich one.
Health and education are incorporated
into the index.
HDI should capture the access to public
goods and services, such as health and
education, not just income in the
definition of poverty.
Individual level - access to such
services improves welfare, and
interpersonal comparisons
disregarding unequal access to
public services will be
misleading.
Country level - HDI 'punishes'
those countries that have
unequal income distribution and
poor public service provision.
One can still argue that the choice of specific
HDI indicators as well as the weighting among
the three indicators (income, education and
health) remain arbitrary by Ravallion (1997).
Third, opposition against the belief that
economic growth automatically takes care
of all human needs also came from the
environmentalist corner, with work such
as 'Limits to Growth' (Meadows et al.,
1972).
Emphasis gradually shifted from physical,
man-made capital to human and natural
capital as foundation for welfare
improvements.
In late 1990s, four conceptualized
further through the Sustainable
Livelihoods Approach (SLA) and the
Five Capital Approach suggested by
Carney (1998), Scoones (1998),
Bennington (1999) and Ellis (2000).
In Five Capitals Approach, natural,
human, social, physical and financial
capital represent the main asset
needed to generate satisfactory
livelihood.
Fourth, since the mid-1990s,
we have witnessed what one
could call an ‘empowerment’
and ‘institutional’ extension
of the poverty concept.
Empowerment is thus both a
means and an end to higher
welfare.
GROWTH AND INEQUALITY
Economic growth usually changes
the income distribution in a
country – the extra pieces of the
growing cake are not distributed
to all members of society in
shares equal to their initial
shares of the cake.
Economic growth is often due to,
and/or accompanied by, new
market opportunities.
 GROUP 2

Higher market contact often

increases inequality as individual
actors respond variably to
favorable prices or other newly
emerging opportunities, because
of specific skills and assets they
possess, but also because of
individual differences in risk
aversion, entrepreneurial spirit,
and luck.
GROWTH AND POVERTY
If there is no macro-level evidence
for systematic changes in income
distribution during economic
growth, we can expect growth to
facilitate poverty reduction.
Fields (2001: 99) concludes that
growth reduces poverty and
recession increases it, though in
about 10 percent of the cases,
poverty did not appear to fall when
growth took place.’ GROUP 2
 GROUP 2

Likewise, Ravallion (1997: 637)

notes that the biggest
problem facing the world’s
poor today is not “low quality
growth” – in HDR terms – but
too little growth of even quite
normal quality.
Functional Inequality
• regularity criterions on production
scalling is formulated using a
functional Inequality.
• it gives more detailed information
in a country that important for
policy.
Poverty
It refers to the lack of sufficient
financial resources, such that
people, homes, and entire
communities are unable to
survive or obtain the essentials
for a fulfilling existence.
GROUP 2

Headcount- number of
people below the PL
(Poverty Line)
Headcount Index (ratio) -
the proportion of people
below PL from the whole
population
GROUP 2

Poverty Line (PL) - minimum

amount of income or the PPP
adjusted that can be used to
compare poverty
internationally.
Absolute Poverty - the
number of people unable to
satisfy some basic needs
Total Poverty Gap (TPG)
measures the total amount of income
necessary to lift everyone below the
PL to that line.

H - headcount
H/N - headcount index
 HUMAN POVERTY INDEX
(Introduced by UNDP)
• composite index of poverty that
focuses on deprivations in human
lives.
• aimed at measuring poverty as a
failure in capabilities in multiple
dimensions.
 Three Deprivations by UNDP
1. of life ( the % of people unlikely to live
beyond 40 years of age)
2. of basic education (the % of adults who
are illiterate)
3. of overall economic provisioning (% of
people without access to safe water + %
of children underweight for their age)
 According to the World Bank, the countries
with the highest poverty rates in the world are:
1. South Sudan - 82.30%
2. Equatorial Guinea- 76.80%
3. Madagascar- 70.70%
4. Guinea Bissau- 69.30%
5. Eritrea- 69.00%
6. Sao Tome and Principe- 66.70%
7. Burundi-69.40%
8. Democratic Republic of the Congo-63.90%
9. Central African Republic-62.00%
10. Guatamela - 59.30%
POVERTY, INEQUALITY
AND WELFARE
 1. Economic Efficiency: Income
Inequality can lead to Inefficiencies
 1. Economic Efficiency: Income Inequality
can lead to Inefficiencies

Example 1: Credit Markets

Example 2: Education
Example 3: The Saving Rate
Example 4: Farming

NOTE: For most of the above to be true we need some type of

credit or other market inefficiency; if all markets are perfect,
inequality would not matter.
2. Political and Social
Stability
Political stability is necessary for a country to
create and maintain an environment conducive to
economic growth.
It allows for a government to plan for the long
term and to create policies that are beneficial for
economic development.
Social stability is also important for economic
development, as it is necessary for people to
have social order and trust in each other.
Without social stability, people may be unable
to cooperate in the marketplace, and economic
activity could suffer.
Higher levels of inequality may
undermine political and social stability.
 3. Moral and ‘Fairness’
Objections to Inequality
What is moral?

Moral refers to what societies

sanction as right and acceptable.
What is fairness?
The quality of treating people
equally or in a way that is right or
reasonable.
Why are moral and
fairness object
inequality?

 GROUP 2

Rawls’ ‘Veil
of Ignorance’
Criterion
Philosopher John Rawls suggests that we
should imagine we sit behind a veil of
ignorance that keeps us from knowing who
we are and identifying with our personal
circumstances.
 GROUP 2

EXAMPLE:
If on average society is poor (say
average income y) and there are
fixed costs to set up a business of F
> y then if all people are equally rich
no one can set up business (e.g.
adopt modern technology) and the
economy stays in subsistence.
 GROUP 2

EMPIRICAL
EVIDENCE
Growth and Inequality
Evidence
GROUP 2
GROUP 2

Growth and Poverty

Evidence
 GROUP 2

Growth Is Good for the Poor

pro-growth policies benefit poor as much as everyone else
the elasticity of poverty reduction from growth depends
on:
-the average level of income (distance from the PL)
-the level of inequality!
GROUP 2

How does income

inequality affect
economic growth?
Who are the poor?
 GROUP 2

A poor person is an
individual who does not
have the provisions or
financial capabilities to
fulfill the minimum essential
necessities of life.
1. Rural
Poor are disproportionately
located in rural areas.
Often urban bias in terms of
development policy
Focus on rural areas and
agriculture in particular is
necessary
2. Women
Women and children experience harshest
deprivation, more likely to be
undernourished, less likely to receive
medical services, clean water, formal
sanitation.
Women paid less for some tasks but also
effectively precluded from high earning
occupations.
These gender biases are possible reason for high sex
ratios in some countries like ;

USA - .97
China - 1.06 Kuwait- 1.39 France - .95
India - 1.06 Canada - .98 Japan - .96
3. Ethnic Minorities
people who belong to an ethnic
group that is a relatively small
part of a population.
Mexico over 80% of indigenous
population is poor
18% of non indigenous
4. People in the Poor
Countries

seems obvious but

important implication is
that growth can help
David Dollar & Aart Kraay
Dollar and Kraay first identify a group
of developing countries that are
participating more in globalization.
China, India, and several other large
countries are part of this group.
They try different macro policy
variables (rule of law, openness to
trade, inflation stabilization).
How to increase school enrollment?
Increasing supply of schooling (but
trade-off between quality and
quantity of schools and teachers).
Increasing demand for education
(conditional transfer programs in
Mexico, Brazil, etc. that encourage
school enrollment).
Rural Development
not all rural poor are farmers
incentive vs. land parcelization
rural infrastructure
transaction costs
What should work?
productivity enhancing technologies for
small farmers
food crops research
extension systems
risk reduction devices for small farmers
increasing non farm employment