ECO 315/Dr. Mitchell/Spring 2002 lecture4-poverty & inco e !

i"tri#ution

Todaro, Ch. 5: Growth, Poverty, and Income Distribution

Doe" econo ic gro$th "olve the poverty pro#le % &ot nece""'rily.

Income Distribution, Lorenz Curves and Gini Coefficients

( )oren* Curve 'n! ' +ini Coe,,icent 're $'y" o, ine-u'lity in ' "ociety. e'"uring the !egree o, inco e

The Lorenze Curve

( )oren*e Curve "ho$" ' country." inco e !i"tri#ution on ' gr'ph. /ere 're the "tep" involve!0 1. +et !'t' on e'ch ,' ily." inco e. 1Co only !one $ith ' "urvey.2 2. 3'n4 the ,' ilie" ,ro lo$e"t inco e to highe"t inco e. 3. Count the nu #er o, ,' ilie"5 'n! !ivi!e the tot'l #y 5. +roup the ,' ilie" into ,ive e-u'lly-"i*e! group" ,ro poore"t to riche"t. E'ch o, the"e group" i" c'lle! ' -uintile. 4. (!! up the tot'l inco e e'rne! #y e'ch -uintile. 5. E6pre"" the inco e e'rne! #y e'ch -uintile '" ' percent'ge o, the tot'l inco e e'rne! #y 'll ,' ilie". 7. Moving ,ro the poore"t -uintile to the riche"t5 "u inco e e'rne! #y th't -uintile 'n! 'll o, the e'rlier -uintile". 8. 9lot thi" in,or 'tion on ' gr'ph.

!am"#e: $% income
1::4. D't' ,ro the ;orl! Develop ent 3eport 1:::-20005 p. 23:. /ere $e h've 'lre'!y #een given the nee!e! in,or 'tion. 1;e 'l"o h've "o e e6tr' in,or 'tion ,or the lo$e"t 'n! highe"t !ecile" o, the popul'tion 't the #otto o, the t'#le <thi" in,or 'tion help" roun! out the picture.2
Quintile % of Pop. % of Inc. Cummulative % of Inc. 0 10 20 40 60 80 90 100 0 1.5 4.8 10.5 16 23.5 28.2 45.2 0 1.5 4.8 15.3 31.3 54.8 71.8 100

1 2 3 4 5

ECO 315/Dr. Mitchell/Spring 2002 lecture4-poverty & inco e !i"tri#ution ;e plot the !'t' in the ,in'l colu n on the percent'ge o, the popul'tion. Connecting the

!ot" give" the curve you "ee in the gr'ph. =ue"tion0 >, inco e $ere !ivi!e! e-u'lly ' ong hou"ehol!"5 then $h't "h'pe $oul! the )oren* curve h've%

Gini Coefficient
?he +ini Coe,,icient 'i " to e'"ure the @!i"t'nceA #et$een thi" country." inco e !i"tri#ution 'n! ' tot'lly e-u'l !i"tri#ution o, inco e. ?he h'tche! 're' '#ove "ho$" thi" !i"t'nce ,or the BS. =ue"tion0 ;h't i" the tot'l 're' un!er the "tr'ight line e-u'l to% )et x e-u'l the 're' o, the h'tche! region '#ove.

ECO 315/Dr. Mitchell/Spring 2002 lecture4-poverty & inco e !i"tri#ution Cor ul' ,or the +ini coe,,icient D Ex/50F100 =ue"tion"0 >, there i" per,ect inco e e-u'lity5 then $h't v'lue $ill the +ini coe,,icient h've% Suppo"e one ,' ily h'" 'll the inco e. ?hen $h't v'lue $ill the +ini coe,,icient h've%

?he +ini coe,,icient in the ;orl! G'n4 !'t' ,'ll" #et$een 0.20 'n! 0.55. 1&ote0 ?he ;G i" u"ing ' 0-100 "c'le in"te'! o, 0-1.2 See ?'#le" 5.2 & 5.3 on tr'n"p'rencie".

&bso#ute Poverty
Absolute poverty: the !egree to $hich people 're un'#le to "ecure the nece""itie" o, living. International Poverty Line0 H1 per !'y in 999 !oll'r". PPP ( Purchasing Power Parity)0 the i!e' th't there i" ' !i,,erent co"t o, living in !i,,erent countrie" #eyon! "i ply converting currencie" 't the 'r4et e6ch'nge r'te. 999 e6ch'nge r'te" t'4e the 'r4et e6ch'nge r'te and the co"t o, living into 'ccount. PPP dollars: ( ,igure th't h'" #een converte! u"ing the 999 e6ch'nge r'te5 "o th't ,igure" 'roun! the $orl! c'n #e co p're! !irectly to the purch'"ing po$er th't ' BS !oll'r h'" in the BS. See ?'#le 5.5 on tr'n"p'rency.

Generalizations about Poverty

?he poor 're ore li4ely to0 )ive in rur'l 're'" 9'rticip'te in 'gricultur'l 'ctivitie" Ge $o en or chil!ren living in ,e 'le-he'!e! hou"ehol!" Ge p'rt o, ' inority ethnic group or 'n in!igenou" people

More on Gender and Poverty

Sever'l cultur'l 'n! in"titution'l ,'ctor" contri#ute to $o en." poverty. ?hey c'n inclu!e0 C' ilie" choo"e to inve"t le"" on nutrition5 e!uc'tion5 'n! he'lthc're ,or $o en 'n! girl". ;o en 're le"" li4ely to $or4 in the 'r4et5 $hich li it" their '#ility to control ,' ily re"ource". ?hi" 'l"o re!uce" their perceive! v'lue to the hou"ehol!5 ten!ing to rein,orce the !eci"ion to inve"t le"" on the . ;o en 'y h've li ite! leg'l right" 'n! protection" th't prevent the ,ro o$ning #u"ine""e". 1property o$ner"hip5 contr'ct"5 lo'n"2

ECO 315/Dr. Mitchell/Spring 2002 lecture4-poverty & inco e !i"tri#ution

The 'e#ationshi" between Income Distribution and Growth

Why an More Unequal Distribution may Hel Gro!th
?he rich 're #etter '#le to "'ve 'n! inve"t5 '!!ing nece""'ry c'pit'l to the pro!uction proce"" 'n! "ti ul'ting gro$th. >n ,'ct5 the rich in !eveloping countrie" o,ten inve"t their oney el"e$here5 'n! thi" i!e' !oe" not h've uch "upport 'ny ore.

Why a More "qual Distribution may Hel Gro!th

Since the poor c'n.t "'ve or inve"t in their chil!ren." e!uc'tion5 they ight h've ore chil!ren $ith the i!e' they $ill "upport the in their ol! 'ge. ?hi" perpetu'te" poverty. ?he poor 'y h've "uch lo$ level" o, nutrition5 he'lth5 'n! e!uc'tion th't they 're le"" pro!uctive in the $or4pl'ce th'n they ought to #e. > proving the "itu'tion 'y le'! to gro$th. >, the poor $ere to h've higher inco e" then they $oul! "pen! it on loc'lly- '!e goo!"5 "ti ul'ting !e 'n!5 r'ther th'n on e6pen"ive i porte! goo!". > proving the "itu'tion o, the poor 'y h've po$er,ul p"ychologic'l i plic'tion" ,or gro$th.

Determinants of the Distribution of Income

?he !i"tri#ution o, inco e 'ri"e" !irectly out o, the !i"tri#ution o, pro!uctive ,'ctor" o, pro!uction0 l'n!5 phy"ic'l c'pit'l5 hu 'n c'pit'l5 l'#or.

Po#icy ("tions
Correct #actor Price Distortions
>n !eveloping countrie" $e o,ten "ee th't $'ge r'te" 're 'rti,ici'lly high5 !ue to union" 'n!/or ini u $'ge l'$". )i4e$i"e5 the price o, phy"ic'l c'pit'l i" o,ten 'rti,ici'lly lo$ !ue to v'riou" policie" "uch '"0 inve"t ent incentive"5 t'6 'llo$'nce"5 "u#"i!i*e! intere"t r'te"5 overv'lue! e6ch'nge r'te"5 'n! lo$ t'ri,," on c'pit'l goo!" i port. Correcting the"e !i"tortion" 'y help the !i"tri#ution o, inco e 1!o you "ee ho$%2

$edistribution of %ssets
)'n! re,or 1 u"t inclu!e 'cce"" to other input" "uch '" cre!it2 Other re!i"tri#ution o, '""et" '" gro$th occur" E!uc'tion '" re!i"tri#ution

Pro&ressive Ta'es
&ote th't in "pite o, ' progre""ive "y"te in l'$5 in pr'ctice the "y"te 'y #e regre""ive i, there i" ore t'6 ev'"ion #y the rich. &ee! to re,or t'6 collection "y"te ".

ECO 315/Dr. Mitchell/Spring 2002 lecture4-poverty & inco e !i"tri#ution

Direct Transfers of Money and Goods

C'"h tr'n",er" 1note incentive"2 9u#lic he'lth initi'tive" Cle'n $'ter5 electricity "upply School ,ee!ing progr' "