POVERTY, INEQUALITY

AND ECONOMIC DEVELOPMENT

• SIZE DISTRIBUTIONS
The personal or size distribution of income is the measure most
commonly used by economists. It simply deals with individual
persons or households and the total incomes they receive.

• The way in which that income was received is not considered. What
matters is how much each earns irrespective of whether the
income was derived solely from employment or came also from
other sources such as interest, profits, rents, gifts, or inheritance.

• Economists and statisticians therefore like to arrange all individuals

by ascending personal incomes and then divide the total population
into distinct groups, or sizes.
• A common method is to divide the population into successive
quintiles (fifths) or deciles (tenths) according to ascending income
levels and then determine what proportion of the total national
income is received by each income group.
• For example, Table 5.1 shows a hypothetical but fairly typical
distribution of income for a developing country.
• A common measure of income inequality that can be
derived from column3 is the ratio of the incomes
received by the top 20% and bottom 40% of the
population.
• This ratio, sometimes called a Kuznets ratio after Nobel
laureate Simon Kuznets, has often been used as a
measure of the degree of inequality between high- and
low-income groups in a country.
• In our example, this inequality ratio is equal to 51
divided by 14, or approximately 3.64.
• In Table 5.1, we see that the top 5% of the population
(the twentieth individual) receives 15% of the income,
a higher share than the combined shares of the lowest
40%.
• 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
WHAT’S SO BAD ABOUT EXTREME INEQUALITY?

Throughout this chapter, we are assuming that social welfare depends positively on the
level of income per capita but negatively on poverty and negatively on the level of
inequality, as these terms have just been defined. The problem of absolute poverty is
obvious. No civilized people can feel satisfied with a state of affairs in which their fellow
humans exist in conditions of such absolute human misery, which is probably why every
major religion has emphasized the importance of working to alleviate poverty and is at
least one of the reasons why international development assistance has the nearly
universal support of every democratic nation. Why should we be concerned with
inequality among those above the poverty line?
 Progress on Extreme Poverty
1. Clear Progress on $1.25-a-day headcount
2. Less clear progress on $2-a-day headcount
3. Progress of extreme poverty is uneven.
Link between Growth & Poverty
Regional Poverty Incidence, 2005
 Growth & Poverty in the Long-Run
• The relationship between economic growth and progress among the
poor does not by itself indicate causality. Some of the effect probably
runs from improved incomes, education, and health among the poor
to faster overall growth (as suggested by some of the arguments
listed previously).

• It is also important to note the institutional framework and sector

which receive benefits and contribute in the growth process.
ECONOMIC CHARACTERISTICS
OF HIGH-POVERTY GROUPS
1. RURAL POVERTY
2. WOMEN AND POVERTY
3. ETHNIC MINORITIES, INDIGENOUS
POPULATIONS, AND POVERTY
4. POOR COUNTRIES
POLICY OPTIONS ON INCOME INEQUALITY AND POVERTY:
SOME BASIC CONSIDERATIONS
 Policy Options
1. ALTERING THE FUNCTIONAL DISTRIBUTION OF INCOME THROUGH
RELATIVE FACTOR PRICES
Example: minimum wage rate , significant effects have been observed.

2. MODIFYING THE SIZE DISTRIBUTION THROUGH INCREASING

ASSETS OF THE POOR
– Asset ownership
– Redistribution Policies
– Land Reform

3. PROGRESSIVE INCOME AND WEALTH TAXES

– Progressive tax rate
– Regressive tax rate

4. DIRECT TRANSFER PAYMENTS AND THE PUBLIC PROVISION OF

GOODS AND SERVICES
SUMMARY AND CONCLUSIONS