Week 2: Growth, Income Distribution and Poverty Notes

Week 2: Growth, Income Distribution and Poverty

• Course: ECON3036: Economic Development
• Topics Covered: Income inequality, its effects on development, measurement techniques, and the link between poverty and growth.

Key Concepts

• Distributional Issues:

  • Importance of income distribution for economic development.
  • Understanding how income disparity affects overall economic growth and human welfare.

• Vicious Circles of Development:

  • Poverty traps where poor households remain in poverty across generations.
  • Developing strategies to break these cycles.

• Measures of Poverty:

  • Evaluating various poverty metrics like head count ratio and poverty gap ratio to gauge poverty levels.

• Evaluating GDP:

  • Discussion of GDP as a policy tool for addressing poverty; explores the elasticity of poverty relative to changes in income.

Development as a Perspective

• Debraj Ray's View:
  • Development viewed as a complex process where fewer well-chosen variables can explain outcomes.
• Economic Attainments:
  • How economic success influences development trajectories.
  • Focus on initial vs. later distribution of income.

Global Poverty and Growth

• Despite growth, 1-2 billion people live in poverty (approx. 16% of global population).
• The widening gap between rich and poor countries complicates efforts to reduce poverty.
• Children of impoverished families often remain in poverty, perpetuating cycles of disadvantage.

Poverty Traps

• Diagram Analysis (Poor Economics):
  • Identifies individuals in poverty trap zones where future income is projected to decrease.
  • Importance of policy interventions aimed at assisting these populations.

Measures of Poverty

• Head Count Ratio (HCR):
  • $HCR = \frac{q}{n}$
    where q = individuals below poverty line, n = total population.
• Poverty Gap Ratio (PGR):
  • $PGR = \frac{(sum ext{ of incomes below } p)}{total ext{ income}}$
• Income Gap Ratio (IGR):
  • $IGR = \frac{(sum ext{ of incomes below } p)}{total ext{ income earned by the poor at } p}$

Concepts of Poverty

• Absolute vs. Relative Poverty:
  • Absolute Poverty: Lack of basic needs for survival (nutrition, shelter).
  • Relative Poverty: Economic position compared to others (can be poor relatively without being in absolute poverty).

Policy Approaches for Poverty Reduction

• Elasticity of Poverty:
  • $E_p = \frac{rate ext{ of change in poverty}}{rate ext{ of change in income}}$
• Importance of combining economic reforms with targeted policies to achieve poverty reduction.
• Pro-poor growth: Income of the poor growing at a higher rate than the non-poor or reducing poverty through growth.

Inequality Metrics

• Lorenz Curve:

  • Illustrates income distribution within a population, showing cumulative income shares.
  • A perfectly egalitarian distribution would appear as a 45-degree line, indicating total equality.

• Gini Coefficient:

  • $G = \frac{A}{A+B}$
    where A = area between the Lorenz curve and the equality line; B = area below the Lorenz curve.
  • Ranges from 0 (perfect equality) to 1 (maximum inequality).

Income Inequality in Developing Countries

• Contributors to Inequality:
  • Capital accumulation
  • MPS (Marginal Propensity to Save) is higher among the wealthy.
  • Development and income distribution relationship discussed in Kuznets's theory.

Evolution of Global Inequality

• Different measurements of inequality: between countries vs. within countries.
• Impact of globalization on inequality trends over the decades.
• The role of major economies like China and India in shaping global inequality.

Drivers of Income Inequality

• Key Factors:
  • Globalization, technology, education, labor market conditions, fiscal policy.
• Policies to further reduce poverty and inequality include progressive taxation, education access, employment generation, and asset redistribution.