Poverty,

Inequality, and
Development

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The Growth Controversy:
Seven Critical Questions
• What is the extent of relative inequality, and
how is this related to the extent of poverty?
• Who are the poor?
• Who benefits from economic growth?
• Does rapid growth necessarily cause
greater income inequality?
• Do the poor benefit from growth?

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The Growth Controversy:
Seven Critical Questions
• Are high levels of inequality always bad?
• What policies can reduce poverty?

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Measuring Inequality and
Poverty
• Measuring Inequality
– Size distributions (quintiles, deciles)
– Lorenz curves
– Gini coefficients
– Functional distributions

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Table 5.1 Typical Size Distribution of
Personal Income in a Developing Country by
Income Shares—Quintiles and Deciles

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Figure 5.1 The Lorenz Curve

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Figure 5.2 The Greater the Curvature of the
Lorenz Line, the Greater the Relative
Degree of Inequality

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Figure 5.3 Estimating the Gini
Coefficient

0 perfect equality
1 perfect inequality
0.50-0.70 highly unequal distribution
0.20-0.35-relatively equal distribution
0.40-0.45 relatively unequal
distribution

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Figure 5.4 Four Possible Lorenz
Curves

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Desirable Properties for
Inequality Measurement
1. Anonymity Principle
- Focus on measuring inequality and depend on
who is that or those person
2. Scale interdependence Principle
- Should not depend on size of the economy or
what currency but focuses on the magnitude of
distribution

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Desirable Properties for
Inequality Measurement
3. Population Independence Principle
4.Transfer Principle (Pigou-Dalton Principle)
- If a distribution y is obtained from another
distribution x by adding a fix amount to all
incomes, then y is Lorenz superior to x
- If we transfer income x from rich to poor then y
is Lorenz superior to x

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Measuring Inequality and
Poverty
• Measuring Absolute Poverty
– Headcount Index
– Total poverty gap

TPG  i 1 (Yp  Yi )
H

– Where Yp is the absolute poverty line

– Yi is income of person I

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Figure 5.6 Measuring the Total
Poverty Gap

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Measuring Inequality and
Poverty
• Measuring Absolute Poverty
– Average poverty gap

TPG
APG 
H
– Where H is number of persons
– TPG is total poverty gap

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Measuring Inequality and
Poverty
• Measuring Absolute Poverty
– Foster-Greer-Thorbecke measure

1  p i
(Y
i 1
 Y ) 

P 
n Yp

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Measuring Inequality and
Poverty:
• Measuring Absolute Poverty
– The Human Poverty Index (HPI)/
Multidimensional Poverty Index (MPI)
– Applies the framework of Amartya Sen’s Capability
• A poverty measure that identifies the poor using dual
cutoffs for levels and numbers of deprivations, and
then multiplies the percentage of people living in
poverty times percentage of weighted indicators for
which poor households are deprived on average

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 Exit Times
The measure is based around the number of years
that it would take poor households to grow out of
poverty given a hypothetical, steady growth of income.

If the assumed growth rate of income is g percent per year, an

individual whose income starts at yi will take T years to exit, where T
solves this equation (Morduch, 2000):
z = yi(1+g)T
ln(1+g) ≈ g, for small values of g
Example:
If a person’s income starts at 80 percent of the poverty line and his
income grows at 5 percent per year (after adjusting for inflation), his
exit time will be ln(100/80) / 0.05 = 4.5 years.
 Exit Times
If the hypothetical exit time , Ti, for each poor household
is averaged over the population below the poverty line,
the “average exit time” is:

One aspect that makes the average exit time potentially valuable is
that it can be decomposed explicitly to show the impact of
inequality below the poverty line.
 Exit Times

In their survey of 1,144 households in Papua New Guinea,

Gibson and Olivia (2002) found that given an assumed,
hypothetical growth rate of 2 percent per year, the average
exit time of the population would be 20.5 years. Their
calculation helps to frame the potential importance of
growth-based strategies, if growth is steady and broad.
With economic growth very much a part of the poverty reduction
policy agenda, tools like exit times provide ways to summarize
data in a manner relevant to policy debates on growth-based
poverty strategies. These simple exit times, though, can be useful
in identifying opportunities and constraints to guide policy.
Poverty, Inequality, and Social
Welfare
• Kuznets’ inverted-U hypothesis
– A graph reflecting the relationship between a
country’s income per capita and its equality of
income distribution

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Figure 5.10 The “Inverted-U”
Kuznets Curve

1. Inequality might worsen during the

early stages of economic growth
2. Eventually improving are
numerous.

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Figure 5.11 Kuznets Curve with
Latin American Countries
Identified

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Poverty, Inequality, and Social
Welfare
• Growth and inequality

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Figure 5.14 Change in Inequality in
Selected Countries, with or without
Growth

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Absolute Poverty: Extent and
Magnitude
• Extreme Poverty
– $1.25 -a-day headcount shows some progress
– Incidence of extreme poverty is uneven

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Table 5.4 Regional Poverty
Incidence, 2004

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Table 5.5 Poverty Incidence in
Selected Countries

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Table 5.5 Poverty Incidence in
Selected Countries (continued)

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Absolute Poverty: Extent and
Magnitude

• Growth and poverty

– 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

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Economic Characteristics of
Poverty Groups
• Rural Poverty
• Women and poverty
• Ethnic minorities, indigenous populations,
and poverty

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Table 5.6 Poverty: Rural versus
Urban

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Table 5.7 Indigenous Poverty in
Latin America

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The Range of Policy Options:
Some Basic Considerations
• Areas of intervention
– Altering the functional distribution
– Mitigating the size distribution
– Moderating (reducing) the size distribution at
upper levels
– Moderating (increasing) the size distribution at
lower levels

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The Range of Policy Options:
Some Basic Considerations

• Policy options
– Changing relative factor prices
– Progressive redistribution of asset ownership
– Progressive taxation
– Transfer payments and public provision of
goods and services

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