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Poverty, Inequality, and
Development
Chapter 6
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Centesimus Annus
34. It would appear that, on the level of individual nations and ofinternational relations, the free marketis the most efficient instrumentfor utilizing resources and effectively responding to needs. But this istrue only for those needs which are "solvent", insofar as they are
endowed with
purchasing power, and for t
hose resources w
hic
hare"marketable", insofar as they are capable of obtaining a satisfactory
price. But there are many human needs which find no place on themarket. It is a strict duty of justice and truth not to allow fundamentalhuman needs to remain unsatisfied, and not to allow those burdenedby such needs to perish. It is also necessary to help these needypeople to acquire expertise, to enter the circle of exchange, and todevelop their skills in order to make the best use of their capacities
and resources. Even prior to the logic of a fair exchange of goodsand the forms of justice appropriate to it, there exists somethingwhich is due to man because he is man, by reason ofhis lofty dignity.Inseparable from that required "something" is the possibility tosurvive and, at the same time, to make an active contribution to thecommon good ofhumanity.
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Poverty across countriesCountry(in order of increasing GNP percapita)
% of Population below $1 a day
Bangladesh 29.1
Kenya 26.5
Sri Lanka 6.6
Indonesia 7.7
Philippines 14.6
Jamaica 3.2
Paraguay 19.5Costa Rica 6.9
Malaysia
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Inequality across countriesCountry(in order of increasingGNP per capita)
The Poorest 40% get % of income
Ratio of Highest 20% tolowest 20%
Bangladesh 22.9 4.0
Kenya 10.1 18.3
Sri Lanka 22.0 4.4
Indonesia 20.4 5.1
Philippines 15.5 8.4
Jamaica 16.0 8.2
Paraguay 8.2 27.1Costa Rica 12.8 12.9
Malaysia 12.9 11.7
Brazil 8.2 25.7
United States 16.1 8.5
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But careful ! In these surveys, both the very poor and the very rich and underrepresented.
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But careful ! In these surveys, both the very poor and the very rich and underrepresented.
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Poverty, Inequality, and GNP per
capita
Theres no simple relation betweenpoverty/inequality and per capita
income. Inequality (high or low) seems to be very
persistent; but it typically changes (up or
down) when output per capita c
hanges.
There might be a complicatedrelation,involving the interaction of many factors.
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The GrowthControversy:Seven Critical Questions
What is the extent of relative inequality, andhow is this related to the extent of poverty?
Who are the poor? Who benefits from economic growth?
Does rapid growth necessarilycause/require greater income inequality?
Do the poor benefit from growth? Are high levels of inequality always bad?
What policies can reduce poverty?
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The GrowthControversy:Seven Critical Questions
Inequality and poverty need to bedefined carefully if we want to Compare countries to each other; Assess progress in fighting them;
What kind of policies/incentives need tobe designed.
What kinds of growth improve welfare?
What are the main things to be done?
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Measuring Inequality andPoverty
Measuring Inequality
Size distributions
Lorenz curves and Gini coefficients
Functional distributions
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Measuring Inequality andPoverty
Measuring Inequality
size distributions
How much income does householdX earn?
Sort people according to income and putthem in major groups.
Ignore differences in the source of income (or
capabilities, for example)
A quartile is a fourth (25%) of the population;a decile is a tenth; a quintile is a fifth.
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The Kuznets
ratio:
the ratio of
the share ofincome of the
highest 20%
divided by
the share ofincome of the
lowest 40%.
Household
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Measuring Inequality andPoverty
Measuring Inequality
Lorenz curves
Arrange population according to the share ofincome they receive, from lowest to highest.
Calculate cumulative percentages (the lowest5%, the lowest 45%, etc.)
Plot the cumulative percentage ofhouseholdsagainst the cumulative percentage of theincome they earn.
http://mysite.avemaria.edu/gmartinez/ Courses/ECON320/xls/Lorenz_Curve.xls
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Hous hol s I come
Cummul ti e
ercent eof
Househol s
ercent eof
incomeearned
1 5 5% 5. %2 5 10% 10.0%
3 5 15% 15.0%
4 5 20% 20.0%
5 5 25% 25.0%
6 5 30% 30.0%
7 5 35% 35.0%
8 5 40% 40.0%9 5 45% 45.0%
10 5 50% 50.0%
11 5 55% 55.0%
12 5 60% 60.0%
13 5 65% 65.0%
14 5 70% 70.0%15 5 75% 75.0%
16 5 80% 80.0%
17 5 85% 85.0%
18 5 90% 90.0%
19 5 95% 95.0%
20 5 100% 100.0%
Cumulati ePercentageofincomeearned
Cumulati e Cummulati ePercentageofincomeearned
Cumulati e Cumulati ePercentageofincomeearned
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Percentage of income earned
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
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Households Income Percentage of Households
Cumulative CumulativePercentage ofincome earned
1 0.80 5% 0.8%2 1.00 10% 1.8%3 1.40 15% 3.2%4 1.80 20% 5.0%5 1.90 25% 6.9%6 2.00 30% 8.9%7 2.40 35% 11.3%
8 2.70 40% 14.0%9 2.80 45% 16.8%
10 3.00 50% 19.8%11 3.40 55% 23.2%12 3.80 60% 27.0%13 4.20 65% 31.2%
14 4.80 70% 36.0%15 5.90 75% 41.9%16 7.10 80% 49.0%17 10.50 85% 59.5%18 12.00 90% 71.5%19 13.50 95% 85.0%20 15.00 100% 100.0%
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Percentage of income earned
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
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Households Income
Cummulati e
Percentageof
Households
Percentageof
incomeearned
1 0.80 5% 0.0%
2 1.12 10% 0.1%
3 1.57 15% 0.2%
4 2.20 20% 0.3%
5 3.07 25% 0.5%
6 4.30 30% 0.8%
7 6.02 35% 1.1%
8 8.43 40% 1.6%9 11.81 45% 2.4%
10 16.53 50% 3.3%
11 23.14 55% 4.7%
12 32.40 60% 6.7%
13 45.36 65% 9.4%
14 63.50 70% 13.2%15 88.90 75% 18.5%
16 124.45 80% 25.9%
17 174.24 85% 36.4%
18 243.93 90% 51.0%
19 341.50 95% 71.4%
20 478.10 100% 100.0%
I=1.4^H
rescaled so
that H1s
income is
0.8
(Divide all
incomes
by H1s
income,
1.4, andmultiply
them all by
0.8)
Cumulati e Cumulati ePercentageofincomeearned
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Percentage of income earned
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
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The Greater the Curvature of theLorenz Line, the Greater the Relative
Degree of Inequality
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Four Possible Lorenz Curves
Which is the
least unequalcountry?
Which is the
most unequal?
Can we rankthem all?
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Measuring Inequality and Poverty
Measuring Inequality
Gini coefficients (an aggregate measure
of inequality)
Its a quantitative measure ofhow far asociety is from being perfectly equal.
Calculate the area between the perfect-equality curve and the actual curve.
Divide that area by the total area under theperfect-equality curve.
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Estimating the Gini Coefficient
http://mysite.avemaria.edu/gmartinez/Courses/ECON320/pdf/CalculationGini.pdf
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Measuring Inequality and Poverty
Measuring Inequality
Functional Distributions
What is the income that goes to eachkind of factor of production? That is,what is the labor share in income? Whatis the profit-rent-interest share in income?
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Functional Income Distribution in aMarket Economy: An Illustration
According to this theory, incomes
are determined by demand for theinput (and therefore by its
marginal productivity) and by its
supply.
Non-market influences (or marketimperfections) are ignored.
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Measuring Poverty
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Measuring Poverty
Poverty is
Lack of income;
Lack of drinking water
Lack of access to health care
Lack of protection against adverse
shocks
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Measuring Poverty
Measuring Absolute Poverty
The Absolute Poverty Headcount H
simply adds the number of people whoseincome is below an agreed upon povertyline.
The Headcount index H/Ndivides thisnumber by the population.
The international poverty line is $1 a day,but adjustment to local conditions can
lead to a different number.
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Measuring the Poverty Gap
The poverty gap is different but H or
H/N would be the same.
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Measuring Poverty
Measuring Absolute Poverty
Total poverty gap
where Yp is the absolute poverty lineYi is income of person i
TPG Y Y p iiH
! ! ( )1
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Measuring Poverty
Measuring Absolute Poverty
The Normalized Poverty Gap is the Total
Poverty Gap divided by the product of thepoverty line and the population
p
H
i ip
NY
YYNPG
!
!
1
)(
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Measuring Poverty
Measuring Absolute Poverty Foster-Greer-Thorbecke measure
Is a very general form of poverty measurethat satisfies anonymity (no person is worth more than another),
population independence (a larger populationdoesnt change it, ceteris paribus),
monotonicity (making a person richer wontdecrease the index) and
distributional sensitivity (taking income away from apoor person makes the poverty index worse).
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Measuring Poverty
Measuring Absolute Poverty
Foster-Greer-Thorbecke measure
IfE=2, you get a measure that is extremelysensitive to the depth and severity of poverty.
!
!
H
i p
ip
Y
YY
NP
1
1
E
E
? A2222 )()1()/( pCVNPGNPGNHP !Coefficient of variation of incomes of the poor
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Measuring Poverty
Measuring Absolute Poverty The Human Poverty Index (UNDP)
Deprivation of life (percentage whose lifeexpectancy is below 40%)
Deprivation of education (percentage ofilliterate people)
Deprivation of economic provisioning(percentage without access to health careand safe water plus percentage ofunderweight under-5 children)
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Measuring Poverty
Measuring Absolute Poverty
Is $1 a day too low?
Is $2 a day too low?
Lots of people live between $1 a day and$2 a day, and although there are fewerpeople below $1 a day, the proportion of
people living under $2 a day hasnt fallenmuch.
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Measuring Poverty
Measuring Absolute Poverty How about $15 a day as the standard to
say that someone is poor? If $15 a day makes your poor in the US,
why should you be non-poor if you make $10a day in Zambia?
How about using income rather thanconsumption, and national accountsrather than surveys? The number of poor people seem to be much
fewer.
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Poverty, Inequality, and Social
Welfare Whats so bad about inequality?
Extreme income inequality leads to
inefficiency. Lack of access to credit leads to
underfinancing of good productiveopportunities.
Since the middle-class has the highestaverage and marginal saving rates, incomeinequality leads to lower saving andinvestment.
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Poverty, Inequality, and Social
Welfare Whats so bad about inequality?
Extreme income inequality leads to
inefficient allocation of assets. Overemphasis on higher education to the
detriment of basic education.
Inefficiently large farms next to inefficiently
small farms.
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Poverty, Inequality, and Social
Welfare Whats so bad about inequality?
St. Augustine on the Preferential Optionfor
the Poor
God does not demand much of you. He asks
back what he gave you, and from him you
take what is enough for you. The superfluities
of the rich are the necessities of the poor.When you possess superfluities, you possess
what belongs to others. (Exposition on Psalm
147, 12).
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Poverty, Inequality, and Social
Welfare Whats so bad about inequality?
CIC: 2444 "The Church's love for the poor . . .
is a part ofherconstant tradition." This loveis inspired by the Gospelofthe Beatitudes, of
the poverty ofJesus, andofhis concernfor
the poor. Love for the pooris evenone ofthe
motives for the duty ofworking so as to "be
able togive to those inneed. It extends not
only to material poverty but also to the many
forms ofcultural and religious poverty.
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Poverty, Inequality, and Social
Welfare Dualistic development and shifting
Lorenz curves: some stylized
typologies modern sector enlargement
modern sector enrichment
traditional sector enrichment
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Improved Income Distributionunder the Traditional-SectorEnrichment Growth Typology
Sri Lanka,
Kerala (India).
Low growth
by great
struggle
against
poverty.
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Crossing Lorenz Curves in
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Crossing Lorenz Curves inthe Modern-Sector
Enlargement GrowthTypology
OECD, EastAsia
The poor get richeras they become
modern-sector
workers, increasing
the share of the
middle class.Those who are left in
the traditional sector
get a smallershare
of income.
With carefulmath, one can
show that the
Gini coefficient
will first
worsen andthen improve.
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Poverty, Inequality, and Social
Welfare So is inequality bad?
Kuznetss inverted-U hypothesis
Historically, he found that inequality fallsand then rises as countries develop.
The reasons may be complicated
and the validity of the hypothesis is anempirical question.
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The Inverted-U KuznetsC
urve
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Kuznets Curve with Latin
AmericanC
ountries Identified
Circles represent
LatinAmerica:
without themtheres no inverted-
U pattern.
The evolution of
inequality over
time is most oftendue to
sociopolitical
factors.
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Plot of Inequality data for
selected countries
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Poverty, Inequality, and Social
Welfare Growth and inequality
Highoverallgrowth may or may not be
accompanied by improved income for thepoorest 40%.
Low growth may or many not lead to low growth of theincomes of the poor.
The poor almost always share in (some of) the
benefits of growth. But whether growth leads to less inequality
depends on who does the growing.
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Long-Term Economic Growth and
Income Inequality, 19
65-199
6
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Absolute Poverty: Extent and
Magnitude
Poverty: some progress (1987-1998)
The s
hare of people living under $1 a dayfell in most regions of the world; remained
the same in some; and only rose in theex-communist countries.
This is in spite of population growing from5 billion to 6 billion, with pop. growthconcentrated in poor countries.
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Where Poverty Has Fallen,
and Wh
ere It Has Not
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Poverty in the Developing World IsShifting toward South Asia and Sub-
Saharan Africa
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Absolute Poverty: Extent and
Magnitude Growth and poverty
Growth is bad for the poor. They are
marginalized from modernization, so inequalityrises and even absolute poverty may rise as jobsdisappear.
Poverty/Inequality-reduction programs are bad forgrowth. Redistribution curtails incentive for saving
and work. The poor save a surprisingly large proportion of
their income. And extra income for the poor isinvestedinto better nutrition, education, health.
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Absolute Poverty: Extent and
Magnitude
Growth and poverty
Growth comes from taking advantage of profitable
opportunities. If the poor cant invest becausethey dont have access to credit, fewer profitableopportunities will be taken. Thenpoverty/inequality-reduction is good for growth.
Unlike the elites of the Industrial Revolution,todays Third-World elites are not high savers anddo not devote large resources to improving theproductivity of their business concerns.
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Absolute Poverty: Extent and
Magnitude
Growth and poverty
Poverty and destitution lead tounproductive workers.
Higher incomes for the poor create astrong domestic market.
Poverty/Inequality reduction generatessupport for development policies andprograms.
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Is Growth Good for the Poor?
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Is Growth Good for the Poor?
No, if its
Jobless Is growth labor-
intensive?
Ruthless Does inequality
worsen?
Voiceless Does democracy
expand?
Rootless Are people able to retain
their cultural identity?
Futureless Does growth squander
resources for futuregenerations?
Human Development Report, UNDP
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Is Growth Good for the Poor?
Yes, if it is accompanied by
Expanded opportunity Are the losers compensated by the winners?
Is competition open and fair?
Are services (education, health, transportation,communication) good and reliable?
Macroeconomic stability
Are the costs of stabilization wort
hthe benefits?
Specialization in the countrys comparativeadvantage
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Growth and the Poor
Higher
average
incomelevels are
associated
with higher
income for
the poor.
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Growth and the Poor contd
Higher
average
incomegrowth is
associated
with higher
income
growth forthe poor.
Economic Characteristics of
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Economic Characteristics ofPoverty Groups
Rural Poverty
There are fewer income, health,
education, and insurance possibilities inrural areas than in urban areas.
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Economic Characteristics of
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Economic Characteristics ofPoverty Groups
Women and poverty Poorhouseholds are usually female-headed.
But females have less access to education,
credit, jobs, etc., and often live in more deprivedareas.
Within families, females often get fewerresources.
Often, nutrition-improvement programs workbetter if targeted at women.
Ethnic minorities, indigenouspopulations, and poverty
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Policy Options
The Range of Policy Options:
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The Range of Policy Options:Some Basic Considerations
Areas of intervention
Change the functional distribution Give more income to labor and less to capital.
Change assetand skillinequality: the sources ofincome inequality. Land reform; microcredit; basic education
Make taxes more progressive.
Poverty reduction programs: direct transfers orsubsidies for food, education, health, etc.
The Range of Policy Options:
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The Range of Policy Options:Some Basic Considerations
Policy options
Changing relative factor prices
Traditional-sector workers have very lowincomes and minimum-wage laws are seldomenforced.
Artificially high modern-sector wages (due to
unions or laws) reduce the growth of themodern sector, condemning more people topoverty and exclusion.
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The Range of Policy Options:
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The Range of Policy Options:Some Basic Considerations
Policy options
Transfer payments and public provision
of goods and services Make sure its targeted to the poor.
Prevent the poor from becoming dependenton it but encourage appropriate risk taking.
Discourage switching from work to program. Avoid resentment by nearly-poor-but-not-
enough who are working.
The Range of Policy Options:
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The Range of Policy Options:Some Basic Considerations
Policy options workfare is better than welfare if it
Does not undermine incentives for acquiringhuman capital needed for private sector jobs
Increases net benefits includingexternalities
Is difficult to identify the needy without work
requirement There are relatively few poor people
There less social stigma / political resentmentfrom workfare
Poverty Declines as National
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Poverty Declines as NationalIncome Rises
The Range of Policy Options:
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g y pSome Basic Considerations
The need for a package of policies
Eliminate price distortions: more
efficiency, more employment and lesspoverty
Structural change in asset ownership
Progressive taxes and transfers; safetynet
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Global Inequality
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Global Inequality
Measures
Unweighed
Lesotho and China get the same weight Population-weighed
More populous nations get more weight, butpeople are assumed to have identical
incomes. Global Household surveys.
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Global Inequality
Measures Unweighed
Global inequalityhas been getting worse:dominated by lots of countries in Sub-
Saharan Africa and Latin America.
Population-weighed Global inequality has been getting better:
dominated by China, India, and East Asia.
Global Household surveys Inequality seems worse because of US,
China, and India.
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