Economics of Development Chapter 2

Development Gap and Income Distribution

• Concept of development gap exists between the "North" (developed) and "South" (developing) countries.
• Income categories defined by the World Bank: low, middle, and high-income countries.
• Various measures of development gap: absolute income gap, relative income gap, variance, standard deviation of per capita incomes, and Gini ratio from Lorenz Curve.
• Historical trends show a widening development gap.

Measures of Inequality and Historical Trends

• The absolute gap between the richest and poorest countries has increased over time.
• The relative gap, with a current ratio of per capita income between high and low-income countries at 60:1, has also widened.
• Sigma convergence, necessary for reducing income dispersion, shows no consistent evidence across all countries.
• Gini ratio ranges from 0 (perfect equality) to 1 (perfect inequality); variability indicates skewed income distribution.

Gini Ratio Overview

• Historical Gini ratios from 1820 to 2013 show gradual increases in inequality.
• Examples of ratios include 0.20 in 1820 rising to 0.54 by 2013 for unweighted international inequality.

Poverty Measurement

• Poverty gap at $1.90 a day (2011 PPP) shows significant variance across regions, with Sub-Saharan Africa at 16.47%.
• Meeting the Sustainable Development Goal of eradicating extreme poverty by 2030 hinges on economic growth rates and initial poverty rates.

Grass Roots Poverty Reduction

• World Bank focuses on: expanding assets for the poor, improving empowerment and decision-making, and enhancing security against economic shocks and disasters.

Randomised Control Trials (RCTs)

• RCTs are employed to discover effective poverty alleviation methods; involve experimental groups against control groups to assess interventions.
• Limitations of RCTs include challenges in generalizability and potential changes in behavior due to participation.

Human Development Index (HDI)

• HDI integrates life expectancy, educational attainment, and per capita income at PPP.
• The index ranges from 0 (minimum) to 1 (maximum), reflecting overall human development status.

Multidimensional Poverty Index (MPI)

• The MPI is constructed based on education, health, and standard of living, allowing a comprehensive understanding of poverty's dimensions.
• Education evaluates years of schooling and child attendance.

Learning Objectives Reflection

• Key measures of income inequality and the distinction between international and global inequality are essential for understanding development.
• Purchasing Power Parity (PPP) is crucial for comparing living standards internationally.
• Various metrics, including per capita income, RCTs, and indices like HDI and MPI, are vital for assessing and addressing poverty.

Chapter Summary Insights

• Income disparities between rich and poor countries continue to grow, with 900 million people living on less than $1.90 daily.
• Per capita income, while a key indicator, does not fully capture development needs or changes.
• Strategies by the World Bank emphasize opportunities, empowerment, and security to tackle poverty effectively.
• Economic catch-up for poorer countries can take an estimated 150 years to achieve the living standards of currently wealthy nations.