Week3 Poverty,Inequality,Growth

8/8/2019 Week3 Poverty,Inequality,Growth

1/14

Poverty Inequality andEconomic Growth

Presented By:

Takesh Luckho


2/14

Poverty, Inequality and GrowthThe scourge of poverty is one of the greatest challengesfacing the world today. In a world with enough for all, thereare over one billion people living in extreme poverty - tryingto survive on less than two dollars a day.The main aim of most development economist is to find away of reducing poverty rates, especially in developingcountries.Economic growth has been at the core of poverty reductionstrategies with higher per capita income expected to lead toimproved living standards for all income groups.Recently, however there has been rising criticism over thefocus on economic growth to reduce poverty in developingcountries, particularly as the number of people living belowthe poverty line has continued to rise.Hence, the persistent problem of poverty in the developingworld has led many to question the efficacy of economicgrowth and development as a means of poverty alleviation.


3/14

Poverty, Inequality and GrowthInequality has also been as the centre of lot of academicresearch over the years.One of the channels through which growth was expected

reach to the poor was via a reduction in theincome/salary gap between the rich and the poor.

However, data on inequality from the World BankDevelopment Indicator 2010 shows that incomeinequality has been increasing between regions, butmore alarming is that income inequality is growthbetween factions/population groups of the same country. Many developed and developing have suffered from a rise in

income inequality, whereby the income gap between middle-class and high-class worker have almost double in the lastdecade.

Income inequality over the last 2 years (figures in 2008,2009)shows stabilisation of inequality.


4/14

Definition: Poverty and InequalityBefore going further in analysing the effect of these two

phenomena on economic growth, it is important to know whatis the meaning of Poverty and Inequality ?Poverty may be defined as a situation where people cannotafford basic needs, such as clean water, nutrition, health care,education, clothing and shelter, because they dont havemoney/means to pay for them.However, this definition of poverty may not be applicable to

every country in the world. In other world, there is nocommon/agreed definition of poverty.International Organisations (like the World Bank) have come

up with a common approach to measure the level of povertyin a country By making use of the concept of poverty threshold or a

poverty line The common international poverty line has in the past been

roughly $1 a day. In 2008, the World Bank came out with arevised figure of $1.25.


5/14

A bsolute and Relative PovertyProblem of using this type of povertythreshold/line is that many country (likeMauritius) which has a good standard of livingmay find that everybody in the country is found

above the poverty line. Does that mean that acountry like Mauritius does not have any poor?So its very important to differentiate between twotypes of poverty: A bsolute poverty: A bsolute poverty is defined as a

situation where people does not have themeans/resources to buy the basic needs required toensure survival.

A ccording to the World Bank, A bsolute poverty is the number of people that get less than $1.25 a day,, that is the number of people that is found below the $1.25 poverty line


6/14

A bsolute and Relative PovertyRelative poverty is a conception of povertywhich argues that people are poor when theyare very much worse off than other people intheir society. (Mostly applicable to countries like

Mauritius)Commonly Measured through: Income-based poverty line (set at half the household

median income) The percentage of households that are found below

the said Income-based line is said to be facingrelative poverty.


7/14

A bsolute and Relative Poverty (e.g)


8/14

Measuring Poverty

In order counter this problem of poverty, it is important tomeasure the phenomenon. institutions have designdifferent measures of poverty. Here are four measurements that are frequently used in empiricalliterature. The headcount index (HCI), which measures the prevalence of

poverty;It is defined as the fraction of the population whose standard of living (income or expenditure) is below the poverty line.

The poverty gap index (PGI), which measures the depth of poverty;

The Foster-Greer-Thorbecke (FGT) index that measures theseverity of poverty. Human Poverty Index an index by the UNDP covering

important variables of development such as life expectancy,basic education and overall economic provision.


9/14

Measuring PovertyThe Headcount index (HCI) It is defined as the fraction of the population whose standard of

living (income or expenditure) is below the poverty line.The poverty gap index (PGI), A Poverty gap represents the transfer of income to the poor that

would be necessary to eliminate poverty, assuming an absolutepoverty line. The poverty gap index is simply the averagepoverty gap across the entire population.

The Foster-Greer-Thorbecke (FGT) Obtained by Squaring the poverty gap indexHuman Poverty Index Measure poverty in terms of human and not income. It is an index of: Life (over 30% of people in the least developed countries are

likely to live beyond 40 years of age) Basic education a measurement of the number of adults that isilliterate.

Overall economic provisioning measured by the percentage of people without access to health services and safe water pluspercentage of children under five who is underweight.


10/14

Inequality

What is Income Inequality? Income inequality comprises all disparities in thedistribution of economic assets and income. The termgenerally refers to inequality among individuals or groups within a society, but can also refer toinequality among countries and regions.

In other words, Income Inequality measure thedisparity between high income households and lowincome household in a country or the disparitybetween high income level country and low incomelevel country in a region.

The degree of income inequality is oftenregarded as an important aspect of the fairnessof the society we live in. Higher inequality meansthat a great portion of a countrys national cakeis going to the rich (haves) while the portiongoing to the poor (have nots) is minimal


11/14

Many institutions have designed differentmeasures of income inequality. Here are four measurements that are frequently used inempirical literature: G ini coefficient The coefficient varies between 0

and 1The Gini coefficient can be graphically represented by thearea between the Lorenz curve and the line of equality.Lorenz curve maps the cumulative proportion of thepopulation on the horizontal axis against the cumulativeincome share on the vertical axis.In the diagram, we find that 60 percent of the population of that country gains only about 30 percent of total income. If the area between the line of perfect equality and Lorenzcurve is M, and the area under the Lorenz curve is L, thenthe Gini coefficient is M/ (M+L).

The smaller is the area between the line of perfect equality andthe Lorenz curve, the smaller is the degree of inequality.

Measuring Inequality


12/14

H oover Index or the RobinH

ood Index It can begraphically represented as thelongest vertical distancebetween the Lorenz curve andthe line of income inequalityD ecile D ispersion RatioThe decile dispersion ratio isdefined as the income of therichest decile divided by that of the poorest decile.T he Atkinson Index The A tkinson Index is an indexderived by calculating theequity-sensitive averageincome, which is defined asthat level of per capita incomewhich (if enjoyed byeverybody) would make totalwelfare exactly equal to thetotal welfare produced by theactual income distribution.

Measuring Inequality


13/14

Poverty, Inequality and Economic

GrowthHow do poverty and inequalityimpact on growth?Theoretical LinkagePoverty and Growth The main theoretical channel

through which economicgrowth can have an impact onthe poor people is through anincrease in the Real income of the country.

Heckscher Ohlin (HO) theoryof comparative advantage.Developing countries willproduce and exports labour intensive good => a a rise inreal wages and a rise in labour intensive production (= rise intotal output of the country)make the poor better off


14/14

Poverty, Inequality and Economic

GrowthInequality and Growth CL ASSI C AL APPROA C - The common wisdom of this

approach suggests that higher income inequality will increasethe level of economic growth. A high initial income inequality

shows that the marginal propensity to save of the rich is higher than the poor, implying that it would yield higher aggregatesavings, capital accumulation and growth.

MO DE RN APPROA CH - The modern approach considers four different channels through which inequality impacts upon growth.These four channels are as follows:

Rent Seeking A ctivities reduce security of property rightSocio-Political Unrest more crimes, riots by the poor Political Economy Median voter does not workCredit Market Imperfections - disincentive to invest.

Documents

Week3 Poverty,Inequality,Growth