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Economics of Development Chapter 2. Development Gap and Measurement of Poverty Development gap and income distribution in world economy Measures of inequality and historical trends International inequality and Global (or world) inequality Measurement...

Economics of Development Chapter 2. Development Gap and Measurement of Poverty Development gap and income distribution in world economy Measures of inequality and historical trends International inequality and Global (or world) inequality Measurement and comparability of per capita incomes at purchasing power parity (PPP) Per capita income as measure of development Measuring poverty Meeting Sustainable Development Goal poverty reduction target Tackling poverty from the ‘grass roots’ Randomised control trials Human Development Index Multidimensional poverty index Can poor countries ever catch up? 1  Economics of Development Development Gap and Income Distribution in World Economy Many concepts of development gap: Between ‘North’ and ‘South’ Between continents Between low, middle and high income countries as defined by the World Bank Many measures of development gap: Absolute income gap Relative income gap Variance and standard deviation of per capita incomes Gini ratio derived from Lorenz Curve All measures show historical rise in development gap over time 2  Economics of Development Measures of Inequality and Historical Trends Absolute gap measures gap between the richest and poorest countries. This gap widens through time Relative gap in ratio of richest country (or group of countries) to poorest country (or countries). This gap has widened through time. Ratio of per capita income in high income countries to low income countries now 60:1 Variance or standard deviation of per capita income measures dispersion around the mean. Necessary condition for dispersion to narrow is poor countries grow faster than rich countries (sigma convergence). No evidence of sigma convergence across all countries Gini ratio measures a country’s share of income in relation to share of population. Ratio varies between 0 and 1. 0 is perfect equality and 1 is perfect inequality (see Table 2.3) 3  Economics of Development Table 2.3 A comparison of Gino Ratios International Inequality Global (or World) inequality Year Bourguignon and Unweighted Population weighted Milanovic (2005 and 2016) Sala-i-Martin (2002) Morrisson (2002) 1820 0.20 0.12 0.50 1870 0.29 0.26 0.56 1890 0.31 0.30 0.59 1913 0.37 0.37 0.61 1929 0.35 0.40 0.62 1938 0.35 0.40 1952 0.45 0.57 0.64 1960 0.46 0.55 0.64 1978 0.47 0.54 0.66 0.66 (1970) 1988 0.53 0.60 0.68 0.65 1993 0.56 0.59 0.70 0.66 (1992) 0.64 1998 0.56 0.57 0.69 0.63 2002 0.58 0.56 0.71 0.63 2005 0.57 0.54 0.70 2008 0.55 0.51 0.69 2011 0.54 0.48 0.67 2013 0.54 0.47 Sources: Adapted from Milanovic, 2005, Table 11.1; Milanovic, 2016. 4  Economics of Development International and Global Inequality Three measures of inequality using Gini ratio: International inequality with each country given equal weight International inequality with each country weighted by population size Global (or world) inequality which takes individual person (or household) as unit of measurement; therefore takes account of inequality within countries as well as between countries In 19th century, international inequality relative to global inequality much less than today. In 1820, Gini for international inequality 0.2, and for global inequality 0.5. Today, Gini for international inequality 0.54; for global inequality 0.67 Major cause of global inequality today is inequality between, not within, countries. 5  Economics of Development Measurement and Comparability of Per Capita Incomes at Purchasing Power Parity (PPP) Difficult to measure and compare per capita income in poor countries for three reasons: – Practical difficulty of measuring money national income in rural economies – Only goods produced and sold in markets are included; not subsistence production – To compare countries’ per capita incomes, all values need conversion into common currency (e.g. US dollar), but official exchange rate only reflects supply and demand for traded goods Many goods are not traded (e.g. restaurant meals, haircuts, etc.) and their relative price is lower, the poorer the country To compare living standards, PPP rates of exchange necessary On average, poor countries’ per capita incomes at PPP are twice as high as measured by the official exchange rate 6  Economics of Development Per Capita Income (PCY) as Measure of Development Development means more than rise in PCY because it ignores distribution of income and human development. But PCY correlates with several characteristics of underdevelopment: – High proportion of labour force in low productivity agriculture – High proportion of expenditure on food and necessities – Low levels of savings and investment – Low level of technology, and poor human capital – Exports dominated by primary commodities PCY can be used as starting point for classifying levels of development, and identifies need for development. 7  Economics of Development Measuring Poverty Headcount Index counts number of people living below poverty line defined by the World Bank as $1.90 a day at PPP, currently 900 million. Poverty rate is ratio of poor people to total population (see Table 2.4) Poverty Gap measures the proportionate gap between the average level of PCY below the poverty line and the poverty line itself (see Table 2.5) e.g. if poverty line is $1.90 a day and average income below poverty line is $1.50, then poverty gap is ($1.90-$1.50)/($1.90) = 21% Food Energy Method measures number of people without sufficient income to buy minimum food intake. Income level to buy sufficient food will vary from country to country 8  Economics of Development Table 2.4 Absolute poverty and poverty rates, 1990 and 2012 Global and regional poverty at the poverty line of $1.90 per day (at 2011 PPP) Number of Poor in Millions Poverty rate (percent of population) Region 1990 2012 1990 2012 East Asia and Pacific 996 147 60.6 7.2 Europe and Central Asia 9 10 1.9 2.1 Latin America and the Caribbean 78 34 17.8 5.6 Middle East and North Africa 14 6.0 South Asia 575 309 50.6 18.8 Sub-Saharan Africa 288 389 56.8 42.7 World 1,959 897 37.1 12.7 Source: World Bank, 2015. 9  Economics of Development Table 2.5 Poverty gap at $1.90 a day (2011 PPP) (%) 2012 East Asia and Pacific (developing only) 1.47 Europe and Central Asia (developing only) 0.58 Latin America and Caribbean (developing only) 2.64 Low income 18.6 Lower middle income 4.69 Low and middle income 4.35 Middle East and North Africa (developing only) Sub-Saharan Africa (developing only) 16.47 10  Economics of Development Meeting the Sustainable Development Poverty Reduction Target Meeting Sustainable Development Poverty Reduction Target of eliminating extreme poverty by 2030, currently measured as people living on less than $1.90 a day at PPP The growth rate to meet the Target depends on the initial poverty rate and elasticity of poverty rate with respect to growth 11  Economics of Development Tackling Poverty from ‘Grass Roots’ World Bank approach: Promoting opportunity by expanding asset base of poor people and increasing return on assets. Facilitating empowerment by strengthening participation of poor people in decision-making; eliminating discrimination, and making State institutions more accountable. Enhancing security by providing insurance against economic shocks; natural disasters; crop failures; ill health; violence, and wars. 12  Economics of Development Randomised Control Trials (RCTs) RCTs used to find out the most effective way to fight poverty at the micro-level First a random group of people chosen to conduct experiments and then compare results with a control group not subject to experiment and see whether experiment leads to significant change in behaviour or outcome e.g. does micro- credit work; do financial incentives work to get children educated; etc. RCTs have limits: may be difficult to generalise results; experiment may be implemented in such a way that it cannot be replicated; trial itself may cause treatment and control group to alter behaviour, leading to false inferences 13  Economics of Development Human Development Index (HDI) HDI based on three variables: – Life expectancy at birth – Educational attainment measured as arithmetic mean of average and expected years of schooling – Per capita income at PPP Minimum and maximum value is given to each variable and index is constructed as: Index = (Actual value – Minimum value) / (Maximum value – Minimum value) Each index ranges from zero to one. If actual value = minimum value, index = 0. If actual value = maximum value, index = 1 HDI is an average of the three indexes and published by UNDP’s Human Development Report (see Case Example 2.3) 14  Economics of Development Multidimensional Poverty Index (MPI) Index developed by Oxford Poverty and Human Development Institute and published in UNDP’s Human Development Report Three main dimensions of poverty identified: education, health and standard of living. Each dimension has various indicators. Education measured by years of schooling and child attendance. Health Measured by child mortality and nutrition. Living standards measured by electricity, sanitation, drinking water, flooring, cooking fuel and asset ownership Each indicator has weights Person identified poor if deprived of at least one-third of weighted indexes About 800 million people are multidimensionally poor MPI does not take account of income-gap only consequences of lack of income 15  Economics of Development Can Poor Countries Ever Catch Up? Catch-up with rich countries requires per capita growth of poor countries in excess of rich countries. For poor country with annual per capita income of $1,200 growing at 4%, with rich country with PCY of $25,000 growing at 3%, catch up would take 300 years. For average poor country to reach current living standards of rich countries would take 150 years growing at 2 per cent per annum. 16  Economics of Development Learning Objectives You should now know: Measures of income inequality and development gap Difference between international and global inequality Concept of purchasing power parity (PPP) for comparison of real living standards across countries Use of per capita income as index of development Different ways of measuring poverty and extent of world poverty Use of Randomised Control Trials (RCTs) World Bank’s approach to tackling poverty How Human Development and Multidimensional Poverty Indices are constructed How to calculate whether poor countries will ever catch up with rich countries 17  Economics of Development Chapter Summary Absolute and relative income gaps between rich and poor countries are growing Gini ratio of international and global inequality has risen over last 100 years Number of people living in absolute poverty on less than $1.90 a day is 900 million PCY not always a good indicator of economic development, but correlated with characteristics of underdevelopment and identifies need for development HDI and Multidimensional Poverty Index give broader measures of development World Bank tackles poverty by promoting opportunities, facilitating empowerment and enhancing security For average poor country to reach average living standards of today’s rich could take 150 years. 18  Economics of Development Websites on Poverty and Income Distribution World Bank http www.worldbank.org/en/topic/poverty UNDP (Human Development Report) http://hdr.undp.org Oxford Poverty and Human Development Initiative www.ophi.org.uk/ Oxfam www.oxfam.org.uk War on Want www.waronwant.org WIDER www.wider.unu.edu/project/wiid-%E2%80%93-world-income-inequality- database Luxemburg Income Study Center www.gc.cuny.edu/liscenter University of Texas, Inequality Project http://utip.lbj.utexas.edu 19