Poverty

24 April, 2024

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 Finishing Off From Last Time

Why equality (redistribution) might be good for growth

Poverty Traps:
• Banerjee and Duflo (2011, p. 11) “There will be a poverty trap whenever the scope
for growing income or wealth at a very fast rate is limited for those who have too
little to invest, but expands dramatically for those who can invest a bit more”
– Example: a higher yielding seed that can dramatically increase crop yields but poor people
cannot afford to buy it

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 The S-Shaped Curve: Poverty Traps and Inequality
Imagine a household’s income in the future depends on income (or wealth) today, in
the relationship depicted in the curve below
– A poverty trap exists because a small increase in income (or wealth) is not big enough to get out
of the trap

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• Low-income households are caught in poverty traps
• Redistribution from high-income to low-income households would increase average
incomes
• What might explain the S-shape (being trapped in poverty)?

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Making Sense of the Debate (Does Equality Increase or Decrease Growth?)
– Does equality or redistribution distort incentives (more on this in
tutes)
– Will small tax increases really distort incentives
– Short v long run
• Inequality good for growth in short run (taxes affect incentives quite quickly)
• Inequality bad for growth in long run (e.g. takes a long time for inequality to
affect human capital and then growth)

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Key Questions for Today:
• What is the best way to measure poverty?
• What is the relationship between economic growth and poverty?

Reading for Today:

• Textbook chapter 5
• Plus other readings from reading list

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 Measuring Poverty

Absolute versus Relative Poverty

– Absolute poverty
=
– Relative poverty
=

Note: development economists most concerned about absolute poverty

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Absolute poverty is measured using poverty lines:
– $1PPP per day in 1985 constant prices
• The amount of local currency required to buy food that would cost $1 in the US

– $1.25PPP per day in 2005 constant prices

– $1.90PPP per day in 2011 constant prices
– $2.15PPP per day in 2017 constant prices

These adjustments are to control for inflation (i.e. keep the poverty line
fixed in real terms)

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Absolute poverty is a function of the distribution of income and Y/P,
implying there are 2 ways to reduce absolute poverty:
– Economic growth
– More equal distribution of income

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 Different Measures of Absolute Poverty
A good measure of absolute poverty should pass 3 of the 4 criteria for
inequality measures:
– Anonymity
– Population Independence
– Pigou-Dalton

Notation
Yi = income of person i
Yp = poverty line
N = number of individuals
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 Measure (1): Headcount (Index)

Headcount (H) is the number of people below the poverty line and the
Headcount Index (HI) is the % of people below the poverty line
HI = H/N
Problem: HI does not measure the extent to which individuals are below
the poverty line

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Example:
• Poverty line (Yp) = $1000 per annum
• 100 people earn $900; another 100 earn $500
• You have been allocated $10,000 to reduce absolute poverty
(1) On humanitarian grounds, how would you choose to spend the
money?

(2) If your job depended on reducing poverty according to the HI, how
would you spend the money?

What does this imply about the use of the HI for policy purposes?

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 Measure 2: Total Poverty Gap (TPG)
Takes into account how far below the poverty line different individuals are
Sum of all individuals
below the poverty line

= total $ amount required to eliminate poverty gap

Example:
I=I(40,60,100)
Yp=70
TPG =

Problem: depends on population size, so fails on population independence

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 Measure (3): Average Poverty Gap (APG)
APG gives the average amount per capita required to eliminate absolute
poverty
Recall:
APG = TPG/N I = I(40,60,100)
Yp = 70
In our example, APG =

Passes population independence

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 Measure (4): Normalised Poverty Gap (NPG)
Recall:
NPG= APG/Yp I = I(40,60,100)
Yp = 70

Note this is the amount per capita, as a proportion of the poverty

line, required to eliminate poverty
In our example, NPG =

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Note: NPG (and TPG and APG) ignores inequality among the poor (i.e. fails Pigou
Dalton)
To see this, take $5 off the person with $40 and give to the person with $60; what
happens to NPG? Recall:
I = I(40,60,100)
Yp = 70
After transfer:
I= I(35,65,100)

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 Measure (5): Foster-Greer-Thorbecke (FGT) Measure

The FGT measure is given by

If a = 0 then collapses to HI
If a = 1 then collapses to NPG
If a = 2 then greater weight is given to observations further away from the
poverty line

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 Recall:
What happens in our example if a=2 I = I(40,60,100)
P2 = Yp = 70
After transfer:
I= I(35,65,100)

Now take $5 off the person with $40 and give it to the person with $60
P2 =

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 Data on Poverty
Todaro and Smith 2015, Table 5.4 (Yp = $1.25 per
day in 2005 constant PPP NPG
FGT(a=2)

Extreme
Poverty

Poverty

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Todaro and Smith (2020) Table 5.4

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Todaro and Smith (2020) Figure 5.12

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 Does Economic Growth Benefit the Poor?

“Growth really does help the poor: in fact it raises their incomes by about as
much as it raises the incomes of everybody else. … In short, globalisation raises
incomes, and the poor participate fully.” (The Economist, May 27, 2000, p.94)

“There is plenty of evidence that current patterns of growth and globalisation

are widening income disparities and hence acting as a brake on poverty
reduction.” (Justin Forsyth, Oxfam Policy Director, Letter to The Economist, June
20, 2000, p.6).

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Dollar and Kray (2000)
Find a 1:1 relationship between growth in Y/P and growth in income of the
poorest 20% (using cross-country data)
See Todaro and Smith (2006), Fig 5.17 on next slide
Incomes of the poor go up by the same % as everyone else on average (i.e.
inequality does not change), so growth does benefit the poor

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Dollar and Kray also find that policies which affect growth (e.g. trade
openness and low inflation) do not affect the income share of the poorest
20%
This means growth promoting policies do not adversely affect the poor

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Ravallion 2001
Argues we should “look beyond the averages”
In some countries incomes of the poor rise with growth, in others they fall

Ravallion finds a 1% increase in average incomes reduces the HI index by

2.5%, so growth reduces poverty

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Policies for Reducing Poverty and Inequality
(Covered in tutes)

Next Time
• The Millennium Development Goals
• The Sustainable Development Goals
• Covid and Poverty

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 Next Time
• Does Economic Growth Benefit the Poor?
• The Millennium Development Goals
• The Sustainable Development Goals
• Covid and Poverty

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