Chapter Poverty, Inequality, and Development Copyright © 2009 Pearson Addison-Wesley All rights reserved Measuring Income Distribution Relative Income Share: • The ratio of the highest 20% to lowest 40% of the population • The higher the ratio, the greater is income inequality Copyright © 2009 Pearson AddisonWesley All rights reserved 5-2 Typical Size Distribution of Personal Income Copyright © 2009 Pearson AddisonWesley All rights reserved 5-3 Lorenz Curve of Income Distribution • Depicting: quintile percentage of population vs cumulative percentage of income received • The closer the Lorenz curve to the line of equality, the better is the size distribution of income Copyright © 2009 Pearson AddisonWesley All rights reserved 5-4 Lorenz Curve of Income Distribution Data for the United States in 2000: Quintile % Income % Cumulative Income Lowest 20% 3.6 3.6 Second 20% 8.9 12.5 Third 20% 14.9 27.4 Fourth 20% 23.0 50.4 Richest 20% 49.6 100.0 Copyright © 2009 Pearson AddisonWesley All rights reserved 5-5 Lorenz Curve of Income Distribution Copyright © 2009 Pearson AddisonWesley All rights reserved 5-6 Lorenz Curve of Income Distribution The greater the curvature of the Lorenz Curve, the greater is the Copyright © 2009inequality Pearson Addisondegree of income Wesley All rights reserved 5-7 Improved Income Distribution Copyright © 2009 Pearson AddisonWesley All rights reserved 5-8 Worsened Income Distribution Copyright © 2009 Pearson AddisonWesley All rights reserved 5-9 Crossing Lorenz Curves Copyright © 2009 Pearson AddisonWesley All rights reserved 5-10 Change in Inequality with or without Growth Copyright © 2009 Pearson AddisonWesley All rights reserved 5-27 Absolute Poverty • International Poverty Line: $1 per day per person • The Headcount Ratio: The percentage of people living below the International Poverty Line Copyright © 2009 Pearson AddisonWesley All rights reserved 5-28 Regional Poverty Incidence, 2004 Copyright © 2009 Pearson AddisonWesley All rights reserved 5-29 Poverty Incidence in Selected Countries Copyright © 2009 Pearson AddisonWesley All rights reserved 5-30 Poverty Incidence in Selected Countries Copyright © 2009 Pearson AddisonWesley All rights reserved 5-31 Human Poverty Index Human Poverty Index is measured in terms of deprivation of • Life: years of life expectancy • Basic education: adult illiteracy • Basic needs: lack of access to health services , access to safe drinking water, and number of malnourished children Copyright © 2009 Pearson AddisonWesley All rights reserved 5-32 Characteristics of Poverty Groups • Rural population • Women and children • Ethnic minorities and indigenous population Copyright © 2009 Pearson AddisonWesley All rights reserved 5-33 Poverty: Rural vs Urban Copyright © 2009 Pearson AddisonWesley All rights reserved 5-34 Indigenous Poverty in Latin America Copyright © 2009 Pearson AddisonWesley All rights reserved 5-35 Policies of Income Distribution • Remove factor price distortions: Get factor prices right! • Land redistribution and supportive farm services • Income redistribution – Progressive taxation – Transfer payments Copyright © 2009 Pearson AddisonWesley All rights reserved 5-36 Policies to Reduce Poverty • Invest in human and social capital of the poor • Provision of public goods and social services • Reduce concentration of economic and political power Copyright © 2009 Pearson AddisonWesley All rights reserved 5-37 Appendix 5.1: Appropriate Technology and Employment Generation • Choice of techniques • Factor price distortions and appropriate technology • Possibilities of labor-capital substitution Copyright © 2009 Pearson AddisonWesley All rights reserved 5-38 Choice of Techniques: The Price Incentive Model Copyright © 2009 Pearson AddisonWesley All rights reserved 5-39 Ahluwalia-Chenery Welfare Index • Constructing poverty-weighted index of social welfare Copyright © 2009 Pearson AddisonWesley All rights reserved 5-40 Income Distribution and Growth Copyright © 2009 Pearson AddisonWesley All rights reserved 5-41 ... country may have a higher poverty rate and poverty gap than a lowincome country (South Africa vs Sri Lanka) Copyright © 2009 Pearson AddisonWesley All rights reserved 5-19 Measuring Total Poverty... Growth Copyright © 2009 Pearson AddisonWesley All rights reserved 5-27 Absolute Poverty • International Poverty Line: $1 per day per person • The Headcount Ratio: The percentage of people living... International Poverty Line Copyright © 2009 Pearson AddisonWesley All rights reserved 5-28 Regional Poverty Incidence, 2004 Copyright © 2009 Pearson AddisonWesley All rights reserved 5-29 Poverty Incidence