Drew Nicholas ECON 222 (Spring 2011) Prof.

Isleide Zissimos

Practice Questions 10
1) One in three poor Latin Americans is persistently poor. What are the other characteristics of chronic poverty? Explain. (25 pts) Chronic poverty is defined as a multidimensional deprivation of hunger, undernutrition, dirty drinking water, illiteracy, lack of access to decent health services, social isolation, and exploitation. It is not simply low income but the vulnerability and uncertainty. In order to be classified as chronic poverty, an individual experiences significant deprivation for more than 5 years. There is an important distinction to make; for poverty to be chronic, there must be more than a lack of resources. There must also be a lack of entitlements promoted by social exclusion and discrimination. For this reason, the chronically poor are trapped working low paying jobs and do not have an opportunity to advance. A concern with chronic poverty is that it is difficult to measure because it is defined over a 5 year period. While the number of chronically poor in Latin America is not overwhelming, one in every two or three in Latin America is persistently poor. This poverty is closely tied with the lack of education. In order to escape poverty a person must have at least a secondary education, yet only one in four children achieve that level. This is an example of another trap. Being born into an uneducated household increases the chance that they wont be educated and decreases the chances of escaping poverty. Half of Latin Americans have a developmental failure by the time they are eighteen: theyve died before age 5 or failed out of school or are unemployed between 15-18. They then bear children early, lacking many necessary skills. Their children repeat the cycle and the dysfunctional behavior. However an education is not a golden ticket. Even if one can find a job, there are other obstacles in the way of getting out of poverty. Three-quarters of the employed population dont make enough to surpass the poverty line. Additionally, many of these persons are employed in the informal sector which accentuates the problems of low wages, low-productivity, and job mobility. This informal sector leaves many without job benefits as well. Because of these difficulties, the moral of the impoverished has fallen; most now think that working to escape poverty is pointless. A revelation that further cuts the chances of improvement. 2) Why is high income inequality bad for a country? (10 pts)

High income inequality is bad because it promotes bad institutions, weak redistributive policies, and low capital investment. One way this is manifest is race. Racial inequality leads to income inequality because of discrimination. The more privileged continue to ensure their rights politically, as well as passing on beneficial values. Another way this inequality is created is through political policy by favoring the wealthy elite over the poor. The main cost of income inequality is the underdevelopment of human capital: the wealthy can afford educations while the poor cannot. Additionally, poverty reduction is inversely tied to inequality. That is the higher the inequality, the lower the poverty reduces. If Latin America had similar income distributions to other nations it would have much lower poverty rates. Therefore poverty in Latin America has been diagnosed as a distributive problem. There are also ties between inequality and overall growth. A nation can grow rapidly without helping the poor, while on the other hand growth can help improve the position of the poor. Kuznets explains this by showing that inequality increases as countries begin to grow, and then declines as more people benefit from the growth. Unequal income distribution weakens the accumulation of physical and human capital, which slows productivity growth. Improving equality is growth enhancing. 3) Select two Latin American countries, compare and discuss their main multidimensional indicators for poverty and inequality. (A good source for this is the UNDP website: http://hdrstats.undp.org/en/indicators/default.html) (15 pts) We will compare the poverty and inequality metrics for two Latin American countries; Argentina and Belize. Argentina has a multidimensional poverty index value of .011 and an inequality adjusted HDI value of .622, while Belize has a multidimensional poverty index value of .024 and an inequality adjusted HDI value of .495. From these numbers we see that Argentina a lower amount of poverty; more than half the value of Belize. At the same time the income inequality in Argentina is higher. Therefore we see the situation in both countries. Argentinas poor have benefited from the growth experienced (as described above). Belize on the other hand follows more Kuznets position, that with a relatively high income inequality, there is also high poverty. 4) What are main advantages of conditional cash transfers? What are the criticisms on this policy? (20 pts) Conditional cash transfers strive to improve equity and the accumulation of human capital among the less-advantaged members of society. They are designed as a demand side intervention to break the intergenerational transfer of poverty. Additionally, other than the increased incentive to invest in education, they change the accountability in the central government by having it pay familes
2

for keeping kids in school and keeping good health. These CCTs work best when they are implemented along with a supply side measure such as incentives to improve quality. They also make up for the childs opportunity cost of going to school; it supplements the income the child could earn if he was not in school. In order to implement an effective CCT program there are a few steps. First, there must be criteria for the recipients of the money. With constrained funds, there must be a way to choose children who will maximize the effect of the money. It also must be a randomized process. By these means the CCTs try and give the advantages aforementioned to their citizens. There are some criticisms however. For example there are difficulties raised with CCTs, such as erroneous inclusion or exclusion leading to leakage of funds or under-covering families. Also, it is difficult to enforce conditionalities; teachers of health classes falsify attendance records for example. The reviews of the processes are weak and therefore the trend is simply report compliance. Another concern is once one familys situation is ameliorated, when do you stop their payments and introduce new families? Recertification then is an issue because it is easier to bring people in than kick them out. Along with these difficulties and inefficiencies, there are some criticisms. For example, there is a lack of coordination with service providers which means the poor are required to waste time with inferior services. Also they do not serve rural and remote areas not attended by health and educational services. Street kids and families with no children are also excluded. Additionally, CCTs are not effective without the supply side incentives in tandem. Increased attendance at subpar schools will not help the children that much get out of the cycle of poverty. 5) Describe main models of modern economic growth. (30 pts) There are four main models of modern economic growth. First we need to define modern economic growth: on average, the per capita income of all people in a country rises. The first model for economic growth is the Take-off model. This model is best explained by Harrod-Domar, who state that domestic and foreign savings are required to be put towards investment in order to grow. The main criticism of this model is that savings are necessary but not sufficient conditions for development. High savings do not ensure that there will be economic growth. One reason for this is that traditionally in Latin America, when growth has occurred, consumption has drastically increased which stunts savings and investment. The second model of growth is the Structural Change theory. This theory is best represented by the Lewis model which explains that growth can occur from the transformation of domestic economic structure from traditional substance agriculture to a more modern manufacturing based
3

economy. The criticisms here are that there are institutional and labor frictions. For example, it assumes that the rate of labor transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation (profits are always reinvested, not used for research or consumption), which is not always the case. Third there is the International Dependence Revolution which emphasizes the international power imbalances and the need for fundamental economic, political, and institutional reform, both domestic and worldwide. This can be thought of as the income inequality of a country on a world wide scale. There is a rich country poor country dynamic that puts the poorer countries at an undesirable advantage. Therefore the poor countries are dependent on the richer countries for economic growth, protection, trade, etc. This also ties into the false-paradigm model, which says that the experts and people making the policy decisions depend too much on theoretical and do not account for things like social structures. At the same time this model provides no answers or solutions of its own. Lastly there is the Neoclassical counter revolution model which is centered around market fundamentalism. It promotes liberalization of the market (trade, interest rates, etc.) as well as privatization of business in order to accomplish macroeconomic stability. The best example of this model was the Washington Consensus. The criticism of this model was that it was not practical in the real world.