Lez Management of Dev Income Inequality and Poverty, 14 Marzo 2012

7/27/2019 Lez Management of Dev Income Inequality and Poverty, 14 Marzo 2012

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Income inequality and

poverty

Astrig Tasgian (Economic Department, Univ.of Torino)

Master in Management of Development

March 14, 2012


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LECTURE TOPICS

Is there a trade-off between equity

and economic growth, betweenequity and economic efficiency?

Alternative theoriesThe concept of absolute poverty

Policies to redistribute income andassets and to reduce poverty


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The personal distribution of income

The best concept of income

distribution is the personal distributionof income:

how total national income of a countryis distributed among individuals or

households irrespective of the sourceof that income (wages and salaries,interest, profit, dividends, rent, gifts,inheritance etc.)


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Measures of personal income distribution Divide the population in quintiles or

deciles: what % of total income goes

to each % group

Lorenz curve

GINI INDEX: 0 Perfect equality100 Perfect inequality

50-70 Countries with very unequal incomedistribution

20-35 Countries with relatively equitable

income distribution


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Income inequality

- Data show that income inequality is greater inLDC than in DC because of larger differences

between sectors in labour productivity & wagesand because DC (especially North Europe) haveimplemented progressive taxation, social

expend., welfare payments to the poor,unemploym. benefits). But US is unequal.

- Income distribution is vey unequal in Latin

America (land concentration) and in someAfrican countries

- Less unequal in Asia and in ex-socialist

countries


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Some evidence on income inequality

- From the 80s income inequality has risen inthe majority of countries, because of debt

crisis,structural adjustment, globalization whichhas decreased bargaining power of L andincreased power of K : share of wages has

declined and that of profits increased- In most Latin American countries over 2002-07 income inequality has declined because of

economic growth, increase in employment andminimum wage, public works, targeted socialspending, conditional cash transfers.


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INCOME DISTRIBUTION VS. GROWTHALTERNATIVE THEORIES

NEOCLASSICAL THEORY

An unequal distribution of income is a

necessary condition for rapid economic growthASSUMPTIONS:

- The rich have a higher propensity to save: S I

- Inequality stimulates entrepreneurship

OBJECTIONS: - In many LDCs there is not a

national bourgeoisie devoted to nationaleconomic development; the rich spend a large% of income in luxury C, jewelry, gold, nonproductive I; capital flight- Saving potential of the poor is often underestimated


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NEOCLASSICAL THEORY

Inequality is a temporary situation:

- trickle-down mechanism: the benefits of

growth would spread automatically to allsocial groups through market mechanisms(higher employment, greater productivity,

lower prices of C goods, higher wages)- alternatively, when per capita income

would be high enough, it would bepossible to implement some redistributionpolicies, according to some neoclassicals


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INCOME REDISTRIBUTION HAS POSITIVEEFFECTS ON ECONOMIC GROWTH

Income redistribution and poverty reductionhelp economic growth by correcting market

failures that particularly affect the poor:- imperfections of the credit market: a poor, even witha good project, cannot get a bank loan since he hasno collateral

- imperfections of the human capital market: very

bright capable children may not get educated if theyare born in a poor illiterate family.

Increasing access of the poor to credit and

education improves both equity and efficiency


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INCOME REDISTRIBUTION HAS POSITIVEEFFECTS ON ECONOMIC GROWTH

LATIN AMERICAN STRUCTURALIST SCHOOL

Positive effects of income redistribution on

economic growth depend on changes in thestructure of demandAssumptions:

- Low income people have a higherpropensity to consume necessities (food,clothing etc.)- The production of necessities is morelabor intensive

- Necessities have a lower import content


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LATIN AMERICAN STRUCTURALIST SCHOOL

Objections:

- The tastes of low income people aredistorted by publicity, imitation effects,etc

- Some luxury goods (tobacco, luxuryclothing and furniture, consumerelectronics, etc) and domestic services

are labor intensive- Often LDCs produce locally luxury goods

and import necessities such as food


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Horizontal vs. vertical inequalities

VERTICAL INEQUALITY is inequality amongindividuals or households in income,consumption and sometimes assets.

HORIZONTAL INEQUALITIES are

inequalities between groups defined by areaof residence, nationality, ethnicity, race, caste,religion, gender,etc.

Regional inequalities, urban-rural inequalitiesgender inequalities, etc.

Group inequalities within a country can be asource of violent conflict.


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GENDER INEQUALITY

Despite progress in last 30 yrs. (CEDAW,Convention on elimination of all forms ofdiscrimination against women of 1979, has

been ratified by 187 countries), genderinequalities in resources, in education andhealth opportunities are still very large in theworld, especially in poor LDCs and at lower

incomes. Female literacy rate and school enrollment are muchlower than male, especially in South Asia and Sub-

Sahara Africa. In India the mortality rate among children of 1-5 yrs.is 50% higher for girls than for boys. In SSA more than 55% of HIV infected adults are

women


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GENDER INEQUALITY

-There are 100 million missing women (Sen) in LDCs(especially in India and China): they die from neglect,insufficient food and medical care, treated differentlythan their brothers; they die because of high maternal

mortality (high risk of death in pregnancy andchildbirth), female infanticide. Furthermore, because ofsex-selective abortions (prenatal sex determinationwith cheap mobile ultrasound clinics), there are mln of

missing girls at birth (in 2008 it is estimated that inChina an additional 1 million girls and in India 257000more would have been born if sex ratios at birthresembled those found worldwide). WDR 2012 Gender

Equality and Development : excess female deathsaccount for an estimated 3.9 million women each yearin low and middle income countries (of whom 37% arenever born, 15% die in early childhood and over a third

in their reproductive years).


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GENDER INEQUALITY

Women are caught in an inequalitytrap that prevents them from realizingtheir potential as individuals. In patriarchal

societies they are often denied propertyand inheritance rights. Their freedom ofmovement is restricted by social norms.

Girls are less likely to be sent to school;women are less likely to work outside the

home; women are more likely to engagein low productivity activities than men, towork in the informal sector and to be

unpaid family workers;


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GENDER INEQUALITY

women generally earn less than menfor similar work; underrepresented in

politics. Feminization of poverty.WDR 2012: Progress has been

slowest in 3 domains: a) control overresources (women have no say inhousehold decisions about spending)and access to assets; b) domesticviolence; c) political voice:

parliamentary representation,etc.


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Gender equality and development

Greater gender equality and womensempowerment (3 Millennium Development

Goal) have positive effects on ec. dev. :education and outside work can decreasetheir fertility rate (they marry later and have

fewer, more evenly spaced children) andtherefore population growth rate. They alsoincrease productivity.

A greater female participation in the labourforce helps to decrease poverty and boosts

GDP growth.


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Gender equality and development

The positive effects extend to futuregenerations.

Literature shows evidence of a correlation

between mothers education and earnings,and child welfare (education, nutrition andespecially health). Its stronger than the

corresponding correlation with fatherseducation and earnings.The under-5 yrs. mortality rate is twice as high

for children of illiterate mothers as for childrenwhose mothers have secondary or highereducation. Income or assets in the hands ofwomen are associated with larger

improvements in child health and education.


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GDI and GEM

-The Human Dev. Report 1995 introduced twonew measures of human development thathighlight the status of women.

The Gender-related Development Index(GDI) considered inequalities by gender in theHDI dimensions.

The Gender Empowerment Measure (GEM)examined the extent to which women and menare able to actively participate in economic and

political life and take part in decision-making.- The HDR 2010 introduced a new measure: theGender Inequality Index (GII)


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Gender Inequality Index (GII)

The GII captures the loss of achievement, due to genderinequality, in 3 dimensions:

- reproductive health (measured by maternalmortality rate and adolescent fertility rate)

- empowerment (ratio of female to malerepresentatives in Parliament and differences insecondary and higher education attainment)

- labour market (labour force participation)The index shows the loss in human developmentdue to inequality between female and male

achievements in the 3 dimensions.Lack of data prevents taking into account genderwage gap, time use and ownership of economic

assets.


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The concept of absolute poverty: its

evolution Multidimensional concept

60s-mid 70s MONETARY or INCOME

POVERTY: insufficient level of income or C mid 70-80s HUMAN POVERTY: inability tosatisfy some basic needs

Today the concept includes also:

- INSECURITY, VULNERABILITY to negative

external shocks (natural disasters, wars, badweather, disease, loss of job etc.)

- SOCIAL EXCLUSION, LACK OF VOICE and

power in the institutions and society


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INCOME POVERTY AND HUMAN POVERTY

Income poverty: the share of the worlds peopleleaving on less than 1.25 $ a day has fallen from 42%in 1990 to 25.2% in 2005 (see table 2.8 WDI) and to

22.4% in 2008 according to estimates released byWorld Bank on 29 Feb. 2012. It has fallen in allregions since 1990, except in Europe and Central

Asia.

There are large regional variations.

In general, poverty has fallen faster in countries withrapid economic growth: the decline in poverty wasdriven by China. This association between economicgrowth and poverty reduction has been quantified bysome economists (Ravaillon and Chen, Dollar and

Kraay).


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INCOME POVERTY AND HUMAN POVERTY

However, income distribution matters for povertyreduction, because it affects the rate at whicheconomic growth converts into poverty reduction (thegrowth elasticity of poverty). Economic growthreduces income poverty most when initialinequality is narrow. In countries with low inequalitythe benefits of economic growth spread more easilyto the poor.

In a mechanical sense the rate of income povertyreduction in a country is a function of two things: therate of economic growth and the share of any

increment in growth captured by the poor. If theeconomic pie gets bigger, will the poor gets a largerslice?

Thus every 1% increase in growth reduces poverty by

about 1.5% in Viet Nam and by only 0.75% in Mexico.


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Human poverty index (HPI)

The Human Development Report 1997introduced a human poverty index (HPI).Rather than measure poverty by income, theHPI used indicators of the most basicdimensions of deprivation: a short life (theprobability of not surviving to ages 40) , lack ofbasic education (measured by the percentageof adults who are illiterate), lack of access topublic and private resources (measured by thepercentage of the population without access tosafe water and the percentage of underweightchildren for their age ).


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Multidimensional Poverty Index (MPI)The Human Development Report 2010 replaced it with a newmeasure: the Multidimensional Poverty Index (MPI), whichconsiders deprivations across the same 3 dimensions as theHDI (health, education and living standards) measured by 10indicators: malnutrition, child mortality (health), years ofschooling and children not enrolled (education), no access toelectricity, clean water, adequate sanitation, using dirty cookingfuel, a home with a dirt floor, lack of assets (living standards).The MPI represents the share of population that ismultidimensionally poor, adjusted by the intensity of thedeprivations suffered.

About 1.7 billion people living in the 109 countries covered by

the MPI (1/3 of their population) live in multidimensional povertyas against 1.3 billion people living on less than 1.25 $ a day inthe same countries. Half of the worlds multidimensionally poorlive in South Asia (844 million people) and 458 million live in

Africa.

P li ti t d t d


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Policy options to reduce poverty and

inequalities in the distribution of incomeREDISTRIBUTION OF WEALTH, ASSETS:

land and capital (physical, financial and human)

LAND REFORMA land reform (that transforms tenants orlandless labourers into smallholders) to be

successful needs to be accompanied bycomplementary policies that guarantee accessto necessary inputs (credit, seeds, fertilizers,

equipment, extension services, marketingfacilities) and by policies to eliminate pricedistortions.


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LAND REFORM

The effects of land reform on productivity maydepend on the type of crop cultivated, thequality of land. If there are economies of scale,

to split a large farm into small plots might causea reduction in productivity; large farms mighthave better access to input and output markets.

However, generally speaking a moreequitable land distribution increases agricultural

efficiency and output: no trade-off betweenequity and efficiency. The smallholder hasmore incentive to increase production

compared to the tenant or sharecropper.

O


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LAND REFORM

One beneficial byproduct of land reform is to changethe local political structure in the village: it gives morevoice to the poor, it induces them to get involved inlocal self-governing institutions.

However, given the strong opposition ofvested interests, many economists and policyadvisers (for ex. World Bank) consider coercive

land reform as politically unfeasible, so theydrop it from the agenda of poverty alleviation(Stiglitz: land reform is not included in thestructural reforms of IMF). The World Bank inthe WDR 2006 says: Expropriating land (withcompensation) is probably the most disruptiveredistribution instrument. It might provoke

conflict, violence, undermining growth.


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REDISTRIBUTION OF WEALTH ASSETS


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REDISTRIBUTION OF WEALTH, ASSETSImprove the access of the poor (including girls)to human capital in the form of education andskill, as a way to raise their income-earningpotential. -Free universal primary education forall ( free textbooks)- Conditional cash transfers to poor families (in

Mexico Progresa,in Br. Bolsa Escola,B.Familia)- School lunches - Schools near home

- Female teachers - Separate latrines for girls

- Sensibilisation, awareness campaigns withfamilies

-Against absenteism, hire teachers locally;contract teachers


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Redistribution policies that affect

monetary incomeDIRECTLY : - progressive taxation on income

- money transfersINDIRECTLY : - policies to increaseemployment (public works, appropriatetechnology, labour intensive technology)

- policies to support or control prices

- policies to raise the productivity of the poor, topromote income generating activities

-minimum wages laws

R di t ib ti li i th t ff t l


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Redistribution policies that affect real

income, welfareDirect distribution of essential goods andservices: food, contraceptives, drugs, seeds,

fertilizers, school lunches; provision of cleanwater, electricity, roads, especially in remoteareas; public health and education, publictransport and housing etc.

High administrative costs of direct distribution

Social expenditures often benefit mainly therich in urban areas

Difficult to identify the poor and to reach them

SOCIAL SERVICES ARE FAILING


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SOCIAL SERVICES ARE FAILING

POOR PEOPLESocial services are failing poor people in access,quantity and quality

Public spending on health and education is typicallyenjoyed by the non-poor, by the urban middle andupper class

Doctors, nurses, teachers do not want to serve inremote rural areas (absenteeism) or they treat poorpatients very badly.

Lack of demand: even if social services are free,there is no guarantee that the poor will use them,because of problems of distance, costs to travel andto lose one day work, tradition and culture (refusal to

send the daughter to school or the wife to the clinic).

DELIVERY OF SOCIAL SERVICES:what role for


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DELIVERY OF SOCIAL SERVICES:what role forthe State?

Central governmentLocal government: decentralization

Grass-root associations, communityorganisations, NGOs

Community managed water systems, rubbish

collection (K costs paid by govt or donors andoperation, maintenance costs by community)

Public-private partnership: govt financing with

contracting or just regulation; public funding ofprivate education through vouchers to poor kids

Participation of beneficiaries as monitors of

quality (Educo in El Salvador).

DELIVERY OF SOCIAL SERVICES


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DELIVERY OF SOCIAL SERVICES

- Self-organisation of poor communities isthe best way to ensure that anti-povertyprograms will reach the poor

- However, one should not romanticize thevalue of local community: there is

corruption also at local level, locallandlords can capture local institutions

- NGOs, civil society should be acomplement, not a substitute for Stateactivities

Policy options to reduce inequalities in the


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Policy options to reduce inequalities in the

distribution of incomeNeed for an integrated package of

policies that support each otherIt depends on the socio-economic

characteristics of the poorThe order of implementation of the

policies is important


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A STRATEGY FOR REDUCING POVERTY

It must be nationally owned4 COMPONENTS:ECONOMIC GROWTH: a) it increases average

income, so directly reduces income poverty,especially if income inequality is narrow. b) indirectlyit reduces non income poverty by enabling publicinvestment in education, health etc.

HUMAN and SOCIAL DEVELOPMENT:a)promoting self-employment, microenterprises;increasing employment; b) improving access of the

poor to ec. assets and basic social servicesVirtuous circle between human developmentand ec. growth


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A STRATEGY FOR REDUCING POVERTY

INSTITUTIONAL DEVELOPMENT

-Accountability

- Good governance, fight against corruption- Empowerment of the poor, capacity buildingof civil society

- Strengthening the process of democratisation,decentralization

- Strengthening the judiciary system

A REDUCTION IN THE INSECURITY OFTHE POOR

Documents

Lez Management of Dev Income Inequality and Poverty, 14 Marzo 2012