Growth and Development

Growth, Poverty & Income Distribution

Context
 

In the 1970s there was growing disillusionment concerning growth. Developed nations: Quality of life is the issue.
 

Environmental concerns Equity, social justice

Developing nations: should a few rich people or a large pool of people bring about the growth?


Inequality of distribution was the key question for them.

Size Distribution


The personal or size distribution of income is the most common measure. This tells us how much income a person or household receives. The process or way it is earned is not the key issue. This income could be from employment, earnings from interest, dividend, rents and inheritance. We ignore the location (urban or rural) and occupational source (agriculture or manufacturing).

Size Distribution of Income

Size Distribution of Income



 

A Common measure of income inequality is the ratio of income received by the bottom 40% to the top 20% of the population. This is the ratio of the extreme poor and extreme rich of the society. In our case it is 1:3.7 or 0.28. A more frequent instrument is the Lorenz Curve. The number of income recipients are plotted in the horizontal axis in cumulative percentages. The vertical axis is the cumulative percentage of population. A very convenient method of measuring income inequality is the Gini Coefficient. It is the ratio of the area between perfect equality and Lorenz Curve to the area of the half-square in which the Lorenz Curve is located.

Size Distribution: Lorenz Curve

Dualistic Development and some Stylized Typologies



Modern sector enlargement growth typology



Size of the economy increases with constant wage in both sectors.

Modern sector enrichment growth typology



Growth of a limited number of people in the modern sector, with number or workers and wage held constant in the traditional sector.

Traditional sector enrichment growth typology



Growth benefits are equally distributed among traditional sector

Functional Distribution


The second common measure of income inequality is the functional or factor share distribution of income. In this approach they attempt to explain share of total national income that each factor of production receives. Instead of looking at different individual or entities, the theory inquires into the percentage that labor receives as a whole and compares this with percentage of total income distributed in the form of rent, interest and profit. A factor can receive income from all sources.

Poverty


Economists rely on income, consumption, and to some extent on welfare as proxies in measuring poverty. At times poverty is synonymously used with the phrase well being. Economic concept of well being stems from the issue of whether someone has adequate income to acquire a basic level of consumption or human welfare. Other social scientists, particularly sociologists and anthropologists, focus on social, behavioral and political underpinnings of human well being. Poverty studies broadly accepted three major streams for defining and measuring poverty:
  

Economic wellbeing Capability Social exclusion

This reductionism is a problem in itself. The complexities at times reduces our degrees of freedom to better understand what is at the core of the problem.

Poverty definition


Economists spearhead poverty discussion by quantifying it. They use income, consumption and welfare. More ever, these measures are defined in absolute, relative and subjective concepts. Absolute poverty signifies lack of basic means to survival. Ones non-poor status is related to the ability to avoid absolute deprivation. The debate stems from defining basic means of survival as we set arbitrary benchmarks.


Usually one use a minimum level of income to acquire minimum calorie intake, a consumption basket, or utility level. WB, IMF and UNDP use an absolute income based approach of one dollar a day.

What about quality? The question of quality are related to economic, psychological, often political issues. Some of which are not quantifiable. Recreation, leisure, social involvement etc.

Poverty
  

   

Rowntree (1901) used an absolute consumption approach for UK. The US system looks at absolute consumption for subsistence living. ILO uses an approach where they look at basic food needs plus necessary consumption of a nonfood bundle e.g. transportation, education, health etc. Extreme poverty is lack of income for a minimum subsistence food intake. Overall poverty is the lack of income to meet subsistence food and non-food consumption. According to UNDP only the former is defined as absolute poverty. Welfare based poverty lines are yet to be fully operational.

Poverty approaches: Relative Poverty

 

Poverty in relative terms is another measure used by the economists. Galbraith (1958) redefines poverty being a measure that looks into ones income/consumption relative to other members of the society. Fuchs (1965) argue that living standards tend to change over time, poverty lines defined by percentage of mean or median income or by the lowest stratum of consumption or income distribution also need to change accordingly. In this approach income distribution is the key element: how much of the income the least well off receive vis-vis the rest of the society. Townsend (1970, 1999) argument from the perspective of command over resources, poverty is defined with lack of adequate resources to achieve dietary requirements, participation, standard of living and amenities.

Subjective poverty
 

Subjective poverty is based on self assessment. Streeten (1998) calls it- an approach that look at same substances through subjective lenses. People use both monetary and non-monetary perceptions to describe themselves. Research on this approach uses survey and opinion polls to collect data
  

Income, consumption or welfare deemed necessary to be non-poor. Sufficiency of income as a measure Certain income level being insufficient, good, or very bad.

Subjective poverty, though reflects cultural and other social aspects, is criticized for being noncomparability over time across society and reliability of survey data.

Income and Poverty



 

Economists agree to the fact that there are numerous factors affecting poverty and wellbeing. But most of the issues can be captured under economic wellbeing or in terms of income. Increased income will simply lead to poverty reduction. However, debate stem from two perspectives:
 

Accelerating economic growth and increasing employment opportunities (World Bank, 2001). Improving the pattern of income distribution leading to equality (Townsend, 1999).

Capability approach


  

 

Given the fact that growth does not always transcend toward greater equality and poverty reduction, we need to distinguish human wellbeing with economic well being. This is where the Capability approach becomes relevant for poverty measures. Poverty looks at those factors that hinder individual ability to derive human well being. Ones capacity may take many dimensions: education, health, nourishment etc. which have significant impact on ones well being. This may also enhance ones ability to achieve higher income and consumption. Capability is the ability to achieve functioning or achievements (Sen 1987, 1992). Income or a consumption bundle do not make one better off. Neither opulence nor lack of income have an impact on wellbeing.

Capability approach and poverty



Since it is not possible to capture all the aspects of human wellbeing as per the capability approach UNDP uses a pragmatic approach- they look for a set of functioning needed to improve or sustain a higher level of well-being. Following this line they measure illiteracy, malnutrition, life expectancy, poor maternal health, and illness from preventable disease. CA approach acknowledges that income is important to achieve basic needs and higher income will make one more capable to achieve these functioning's. Sen (1999) pointed that relationship between income and capability is contingent upon factors such as age, gender, social role, location, health status and knowledge.

Social Exclusion


This approach is more common in sociology and anthropology. Popularized in 1970s. This approach define poverty as whole group of people partly or completely outside the effective scope of human rights (Strobel, 1996) European Foundation (1995) define social exclusion as the process through which individuals or groups are wholly or partially excluded from full participation in the society they live in. Taylor (1999) uses denial and says access to service that will enable them to engage fully in the economy and society. This stream is criticized being loaded with political connotations Silver (1994) came up with three different forms of exclusion:  Solidarity: social exclusion arising from withering of social bonds  Specialization: individual behavior and exchanges.  Monopoly: different and competing groups acting to enhance their group benefits or profit.

Measuring Incidence of Poverty



Head Count:
Head Count Index, H ! n is the total polulation. p where p is the number of poor people and n

Poverty Gap: Measures the average distance of people below the poverty line.
p

PG ! (u  xi )
i !1

1 p u  xi ! n i !1 u

Poverty measures


Sen Index is a weighted total of individuals poverty gap. The weight is dependent on the relative position of each poor person. Where TP is the Head count index, I is the Average PG and G represent the Gini coefficient.

S ! T x( I  (1  I )


Thon Index is a variation of the Sen Index and applied to a sufficient large value of p

S ! Px(S  2(1  P)I

Poverty Index


Foster, Greer and Thorbecke Index

E

1 p u  xi FGT ! , E u 0  poverty aversion para eter n i !1 u FGT ( 0 ) ! TP FGT (1) ! AGP