Poverty, Inequality and Development Todaro: Chapter 5 Part II

2. Overview Problems arising from Inequality Field�s Stylized Development Typologies Kuznet�s Inverted-U Hypothesis Growth and Inequality Extent of Absolute Poverty

3. Problems Arising from Inequality Why should relative poverty be a concern? Measures of inequality among the poor Extreme Inequality results in Economic Inefficiency Social Instability and Conflict Most of us as a part of our value system, view inequality as unfair.

4. Welfare Function W = Social Welfare Y = National Income I = degree of inequality P = degree of absolute poverty

5. Field�s Stylized Development Typologies Classifications of cases of dualistic development by common characteristics: Modern-Sector Enlargement Growth Modern-Sector Enrichment Growth Traditional-Sector Enrichment Growth Certain policies may cause inequality to increase initially but may make everyone better off and reduce inequality in the long-run.

6. Kuznet�s Inverted-U Hypothesis The hypothesis states that in early stages of growth, inequality will increase only to fall at later stages, leading to an inverted-U shaped relationship between per capita national income and measures of inequality. Explanations for the hypothesized relationship point to the nature of structural change. The validity of the relationship remains an empirical question. There is significant evidence to suggest that increases in per capita income does not have to paired with worsening inequality.

7. Per capita income does not appear to be highly correlated with any of the three inequality measures for the set of LDCs that we have considered. �Latin America Effect� � the observed inverted-U relationship may be attributed to the social and political history of Latin American countries which while being middle-income countries have the highest average level of inequality in the world. For many countries there is no particular tendency for inequality to change much in the process of economic development.

8. Growth and Inequality There is no obvious relationship between economic growth rates and measures of inequality. Who participates often determines whether growth leads to a reduction or increase in inequality.

9. Extent of Absolute Poverty Although the total number of the world�s population living in absolute poverty (global headcount) has increased over the last 20years, the percentage of the population living in absolute poverty (global headcount ratio) has fallen, despite rapid population growth. Much of the improvement has occured in the developing world

10. Growth and Poverty The traditional thinking was that efforts expended towards reducing poverty would slow down growth rates and that countries with lower inequality would experience slower growth rates. Reductions in poverty need not come at the expense of high economic growth. We can look at China � a country that has experienced the highest growth rates in the past 20 years and the most dramatic reduction in absolute poverty.

11. Widespread poverty actually retards growth The developing world elite, unlike their developed counterparts have lower savings rates and often invest in foreign assets. Extreme poverty leads to poor health, nutrition and education which results in low productivity and slower growth Increasing the income of the poor increases demand for domestic products. Reduction in mass poverty can act as a powerful incentive to participate in the development process, while growing income disparities and absolute poverty can have the opposite effect.