Chap.

4 :
How the big push works :

Consider a country whose economy is characterized by a large number of sectors which are so small that any increase in the productivity of one sector has no impact on the economy as a whole. Each sector can either rely on traditional methods or switch to modern methods of production which would increase its efficiency. Let us assume that there are l workers in the economy and n sectors. Each sector therefore has l/n workers. Using traditional technology, a sector would produce l/n amount of ouput, with each worker producing one unit of the commodity. Using modern technology a sector would produce more as the productivity would be greater than one unit per worker. However, a modern sector would require some of the workers (say h) to perform administrative tasks. In figure 1, the x-axis represents the labor employed and the y-axis represents the level of production. The production in the traditional sector is given by the curve T and the production in the modern sector is given by M. The curve M has a positive intercept on the x-axis, implying that even with zero production, there is a minimum level of h workers who still remain employed for carrying out administrative activities. With our assumption of l/n workers in the economy, the modern sector will have a higher level of productivity than the traditional sector. The production function of the modern sector is steeper than that of the traditional sector because of the higher productivity of workers in the former. The slope of both production functions is 1/m, where m is the marginal labor required to produce an additional unit of output. This level of m is lower for the modern sector than it is for the traditional sector.

Assume that the traditional sector pays workers one unit of output which is subsequently spent equally by them in all sectors. The modern sector pays higher wages to workers. If all the workers are employed by the traditional sector, then the demand generated for the output of each sector is D1 = l/n. We have two possible cases: Wages are low When low wages are prevalent in the economy, say w1, a firm which faces demand D1 will need to employ l* workers if it wants to modernize. This will cost the firm w1l*. Now, wages are low. Therefore w1l* < D1 This implies that costs (given by w1l*) are lower than the earnings (given by D1). So the firm makes a profit and will choose to modernize (even if other firms do not). Wages are high When high wages are prevalent in the economy, say w2, a firm which faces demand D1 will make losses if no other firms choose to modernize. This is because * > D This implies that costs (given by w l*) are higher than the earnings (given by w2l 1 2 D1). However, if all the other firms have modernized, the firm faces a higher demand D2, arising out of higher income levels of workers of these modernized firms. The firm will hence choose to modernize as well so that it makes profits: w2l* < D2

Chap. 5 :
Gini Coefficient : It has the following desirable principles : -Anonymity -Scale Independance -Population Independance -Transfer Principle Functional distribution : -Its a nice theory in the sense that you get paid for what you contribute -Failure of the theory is its incapacity to take into account the important role of nonmarket forces for say determining the factor prices Headcount index : H/N Total Poverty gap : TPG = " (Yp !Yi )
i=1 H

Where H is the number of persons who are poor and N is the total number of people in the economy. Where Yp is the absolute poverty line ; and Yi the income of the ith poor person Simplistically TPG can be seen as the amount of money per day it would take to bring every poor person up to the PV line. TPG Average poverty gap : 0 < APG = < 1 N APG Normalized poverty gap : NPG = Yp
TPG H AIS Normalized income shortfall : NIS = Yp

Average income shortfall : AIS =

1 H " Y !Y % The Foster-Greer-Thorbecke (FGT) index : P! = ($ p i ' N i=1 $ Yp ' # &

The Multidimensional Poverty Index (MPI) : Dual cutoff : -First, cutoff levels within each dimension -Second, 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 ; and each receives equal weight. Health : -Whether any child has died in the family -Whether any adult or child in the family is malnourished

Education : -Whether no household member compleded 5 years of schooling -Whether any school-aged child is out of school for grades 1 through 8 Standard of living : -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 A convenient way to express the resulting value is H*A where H is the headcount ratio and A the average intensity of deprivation Dimensional monotonicity : If a person already identified as poor becomes deprived in another indicator she is measured as even poorer. MPI limitations : -Data is from household instead of individual level -Does not distinguish between present and past conditions -Does not distinguish differences within the household -Proxies used are imperfect Poverty, Inequality and Social Welfare -Extreme income inequality leads to economic inefficiency, lack of human capital and capital flight, even inefficient allocation of assets -Extreme income disparities undermine social stability and solidarity. Worse it gives more political power to the rich. It shifts the focus from increasing the size of the pie to its redistribution. -It is unfair : Rawls veil of ignorance Wealth will be measured as : W=W(Y,I,P) Where Y is the income per capita, P is absolute poverty and I is inequality. Dualistic development and shifting Lorenz curves : Traditional sector enrichment -Improved Income Distribution Modern sector enrichment -Worsened Income Distribution Modern sector enlargement : -Ambigus : -The poor in traditional sector have their income unchanged but they are a smaller fonction of larger total. Therefore, new Lorenz curve remains below the old Lorenz curve

-Each modern sector worker receives the same absolute income, but now the share received by the richest income group is smaller. Therefore, new Lorenz curve is above the old Lorenz curve Kuznets inverted-U hypothesis : He suggested that in the early stages of economic growth the distribution of income will tend to worsen, only at later stages it will improve -Early growth may be concentrated in the modern industrial sector, where employment is limited and productivity is high -Returns to education may first rise due to demand for high skills and then lower due to an increase in supply The end of poverty : The prospect of ending poverty depends critically on two factors : -The rate of economic growth provided it is undertaken in a shared and sustainable way -The level of resources devoted to poverty programs and the quality of those programs Poverty and Growth Are the reduction of poverty and the acceleration of growth in conflict ? Or are they complementary ? -Rapid growth bad for poor because they will be marginalized by structural changes -Public expenditure required to reduce poverty would entail a reduction in the rate of growth -Concerns that concentrated effort to reduce poverty would slow the rate of growth are paralleled by the arguments that countries with lower inequality grow slower -There are at least five reasons why policies focused towards reducing poverty levels need not lead to a slower rate of growth : -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 In Sum : Economic growth is not sufficient to eradicate poverty because : -It may benefit only the modern sector with little or no tricke-down -The rich may not use their wealth to make productive local investments. Investing in health and education improves worker productivity -Increasing the income of the poor may be translated into demand-led growth -Pro-growth arguments emphasize more savings by the higher income groups and the trickle-down theory Policy Options on Income Inequality and Poverty : Areas of Intervention : -Altering the functional distribution -Mitigating the size distribution -Moderating the size distribution at upper levels

-Moderating the size distribution at lower levels Policy options : -Changing relative factor prices -Progressive redistribution of asset ownership -Progressive taxation -Transfer payments and public provision of goods and services -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