Chapter 5
Poverty,
Inequality, and
Development
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The Growth Controversy:
Seven Critical Questions
• What is the extent of relative inequality, and
how is this related to the extent of poverty?
• Who are the poor?
• Who benefits from economic growth?
• Does rapid growth necessarily cause
greater income inequality?
• Do the poor benefit from growth?
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The Growth Controversy:
Seven Critical Questions
• Are high levels of inequality always bad?
• What policies can reduce poverty?
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Measuring Inequality and
Poverty
• Measuring Inequality
– Size distributions (quintiles, deciles)
– Lorenz curves
– Gini coefficients
– Functional distributions
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Table 5.1 Typical Size Distribution of
Personal Income in a Developing Country by
Income Shares—Quintiles and Deciles
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Figure 5.1 The Lorenz Curve
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Figure 5.2 The Greater the Curvature of the
Lorenz Line, the Greater the Relative
Degree of Inequality
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Figure 5.3 Estimating the Gini
Coefficient
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Figure 5.4 Four Possible Lorenz
Curves
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Figure 5.5 Functional Income
Distribution in a Market Economy: An
Illustration
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Measuring Inequality and
Poverty
• Measuring Absolute Poverty
– Headcount Index
– Total poverty gap
TPG  i 1 (Yp  Yi )
H
– Where Yp is the absolute poverty line
– Yi is income of person I
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Figure 5.6 Measuring the Total
Poverty Gap
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Measuring Inequality and
Poverty
• Measuring Absolute Poverty
– Average poverty gap
TPG
APG 
H
– Where H is number of persons
– TPG is total poverty gap
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Measuring Inequality and
Poverty
• Measuring Absolute Poverty
– Foster-Greer-Thorbecke measure
H
1
P 
n
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
(
Y

Y
)
 p i
i 1
Yp
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Measuring Inequality and
Poverty:
• Measuring Absolute Poverty
– The Human Poverty Index (HPI)
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Poverty, Inequality, and Social
Welfare
• What’s so bad about inequality?
• Dualistic development and shifting Lorenz
curves: some stylized typologies
– Traditional sector enrichment (see Figure 5.7)
– Modern sector enrichment (see Figure 5.8)
– Modern sector enlargement (see Figure 5.9)
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Figure 5.7 Improved Income
Distribution under the TraditionalSector Enrichment Growth Typology
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Figure 5.8 Worsened Income
Distribution under the Modern-Sector
Enrichment Growth Typology
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Figure 5.9 Crossing Lorenz Curves in
the Modern-Sector Enlargement
Growth Typology
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Poverty, Inequality, and Social
Welfare
• Kuznets’ inverted-U hypothesis
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Figure 5.10 The “Inverted-U”
Kuznets Curve
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Table 5.2 Selected Income
Distribution Estimate
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Table 5.3 Income and Inequality in
Selected Countries
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Figure 5.11 Kuznets Curve with
Latin American Countries Identified
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Figure 5.12 Plot of Inequality Data
for Selected Countries
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Poverty, Inequality, and Social
Welfare
• Growth and inequality
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Figure 5.13 Long-Term Economic
Growth and Income Inequality, 19651996
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Figure 5.14 Change in Inequality in
Selected Countries, with or without
Growth
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Absolute Poverty: Extent and
Magnitude
• Extreme Poverty
– $1-a-day headcount shows some progress
– Incidence of extreme poverty is uneven
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Table 5.4 Regional Poverty
Incidence, 2004
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Table 5.5 Poverty Incidence in
Selected Countries
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Table 5.5 Poverty Incidence in
Selected Countries (continued)
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Absolute Poverty: Extent and
Magnitude
• Growth and poverty
– Impact on per capita growth
– Limited saving and investment by rich in poor
countries
– Impact on productivity
– Lack of home demand
– Incentives for public participation in the
development process
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Economic Characteristics of
Poverty Groups
• Rural Poverty
• Women and poverty (See chapter 8 for
more detail)
• Ethnic minorities, indigenous populations,
and poverty
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Table 5.6 Poverty: Rural versus
Urban
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Table 5.7 Indigenous Poverty in
Latin America
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The Range of Policy Options:
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
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The Range of Policy Options:
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
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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
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Case Study: Bangladesh
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Concepts for Review
• Absolute poverty
• Factor-price distortions
• Asset ownership
• Factor share
distribution of income
• Character of economic
growth
• Deciles
• Disposable income
• Elasticity of factor
substitution
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• Factors of production
• Foster-GreerThorbecke (FGT)
index
• Functional distribution
of income
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Concepts for Review (cont’d)
• Gini coefficient
• Lorenz curve
• Headcount index
• Neoclassical priceincentive model
• Human Poverty Index
• Income inequality
• Indirect taxes
• Kuznets curve
• Land reform
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• Personal distribution of
income
• Poverty gap
• Progressive income
tax
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Concepts for Review (cont’d)
• Public consumption
• Quintiles
• Size distribution of
income
• Redistribution policies
• Subsidy
• Regressive tax
• Workfare programs
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Appendix 5.1: Appropriate Technology and
Employment Generation: The Price
Incentive Model
• Choice of techniques
• Factor Price distortions and appropriate
technology
• Possibilities of Labor-Capital substitution
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Figure A5.1.1 Choice of Techniques:
The Price Incentive Model
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Appendix 5.2: The AhluwaliaChenery Welfare Index
• Constructing poverty-weighted index of
social welfare
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Table A5.2.1 Income Distribution and
Growth in the Twelve Selected
Countries
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