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38
CHAPTER OUTLINE
I. Chapter 6 probes the relationship between economic growth and the goal of
improving human welfare. After World War II, economists tended to accept
that the bene ts of growth would trickle down to the poor. This complacent
view was challenged by evidence of rising income in e qual ity and a stubborn
prevalence of poverty in many developing countries. Such evidence stimu-
lated active concern with promoting more equitable growth. During the 1980s,
poverty- oriented policies were pushed to the background by the need to cope
with macroeconomic shocks. Since then, concern with poverty- oriented pol-
icy has revived, but not as an alternative to concern about growth. The evi-
dence of the past half century shows that growth is necessary for alleviating
widespread poverty.
II. The rst step is to explain basic concepts and mea sures relating to develop-
ment, including the functional and size distributions of income, frequency
distributions, the Lorenz curve showing income shares, the Gini concentra-
tion ratio, and the poverty line. Tables provide up- to- date statistics for a wide
range of countries. The discussion in the text emphasizes mea sure ment prob-
lems, the distinction between relative and absolute poverty, and the difference
between in e qual ity and equity. The stylized facts indicate that in most regions
poverty is falling rapidly; a notable exception is Africa where poverty is ris-
ing. Opinions disagree on where exactly to draw the global poverty line.
III. Is there a pattern to the changes in in e qual ity and poverty that occur during
economic development? With regard to in e qual ity, Kuznets’s inverted- U
hypothesis still serves as a baseline. The hypothesis states that in e qual ity rst
rises and then falls over the course of development. This hypothesis received
some support from cross- section data, and data for speci c countries exhibit
In e qual ity and Poverty
CHAPTER 6
In e qual ity and Poverty | 39
great differences. More recent econometric tests show no relationship between
in e qual ity and growth. Therefore, rising in e qual ity is not an inevitable con-
comitant of development. Differences in in e qual ity have been attributed to
factors such as education, population growth, the structure of asset own ership,
and control by entrenched elites. On balance, the determinants of income
in e qual ity are not well understood. In e qual ity matters because the poor may
be credit- constrained or may not be po liti cally connected.
IV. Looking at poverty, the empirical pattern is clear and simple: Poverty is
diminishing in countries that are growing rapidly, while in the absence of
economic growth rising poverty is virtually unavoidable.
V. The chapter contrasts the two broad strategies of growth as good and growth
not being good enough. It describes the role of the Washington Consensus and
its impact on poverty. It suggests some methods of poverty intervention such
as improving opportunities and providing income transfers and safety nets.
The chapter closes by exploring the pop u lar issue of global income in e qual ity
and shows how conclusions depend on the chosen unit of mea sure ment. It
also provides Sachs’s arguments for The End of Poverty.
Boxed Examples
Box 6–1: National Poverty Lines in Bangladesh, Mexico, and the United
States
Box 6– 2: Who Is Not Poor?
Box 6– 3: Why Should Development Strategies Have a Poverty Focus?
There are three boxed examples. The rst study compares the national poverty
lines of Bangladesh, Mexico, and the United States. The second example pro-
vides Lant Pritchett’s dissension on the global poverty line of a “$1.25 a day.” The
nal example describes an interview with Dani Rodrik, who explains why devel-
opment strategies should be poverty focused.
In the New Edition
The seventh edition of this chapter updates the analysis of in e qual ity and poverty
by examining the revision of the global poverty line from $1 per day to $1.25 per
day. Combined with recent mea sures of PPP, the latest estimates on levels of both
in e qual ity and poverty are presented. A new section, “Living in Poverty,” includes
insights from the work by economists Abhijit Banerjee, Esther Du o, and others
about the economic lives of the poor. The use of conditional cash transfers also
receives more attention.
40 | Chapter 6
Class Notes
The themes of human development and poverty recur in many of the later chap-
ters, so it is vital that students master the fundamentals here. As much as one may
wish to believe otherwise, students get confused about the basic concepts and
mea sures if they are not explained clearly in class. Along with clarifying technical
details, discuss the statistical and normative problems with mea sures of in e qual ity,
poverty, and human development. This course should help students become wiser
consumers of data and information. They should be aware of hidden pitfalls in
many of the statistics that are widely touted in discussions of human welfare and
development.
Students can better understand the use of in e qual ity and poverty mea sures if
they are shown a country policy paper that uses these mea sures. A Web search
will reveal a number of studies that vary in length and focus. Videos such as the
World Bank’s Voices of Poverty enhance the students’ understanding of poverty
and allow them to view poverty as beyond income.
An in- class example on the Lorenz curve will help students better understand
the concept of cumulating quintiles. Because there is no tight relationship between
growth and in e qual ity, another avenue would be to pursue country studies and
explore how different countries have tackled the dif culties of in e qual ity and pov-
erty while they grew. Controversies abound on how these strategies should be
best pursued and will foster good class discussions.
For data on welfare issues, your best source is the annual UNDP Human Devel-
opment Report and the World Bank World Development Report, both of which
are published by Oxford University Press.
There are many supplementary topics to which you might devote class time. For
example, you might delve more deeply into the po liti cal economy of income distri-
bution. Or open students’ eyes to problems of intrafamily income distribution and
the subordinate role of women in many cultures.
Or discuss how policies aimed at helping the poor (such as food price controls)
can produce adverse effects, particularly once general- equilibrium adjustments
are taken into account.
QUESTION BANK
Concept Map
In e qual ity and Poverty
Mea sur ing In e qual ity
Growth and In e qual ity
Why In e qual ity Matters
Why $1.25 a Day?
In e qual ity and Poverty | 41
Pro- Poor Growth
Income Transfers and Safety Nets
Global In e qual ity and the End of Poverty
Multiple- Choice Questions
1. The single most important variable explaining the number of people in pov-
erty in a given country is:
a. the literacy rate.
b. the HDI.
c. per capita income.
d. population.
2. Elements of a pro- poor development strategy would contain all of the follow-
ing EXCEPT:
a. encouraging rapid economic growth.
b. improving basic health and education.
c. designing social safety nets for vulnerable groups.
d. encouraging zero population growth through free access to all forms of
birth control.
3. Most frequency distributions of income have the following shape:
a. rectangular.
b. normal.
c. lognormal.
d. none of the above.
4. To draw a Lorenz curve showing the distribution of income by house hold,
one should rst rank all house holds according to:
a. house hold size.
b. age of head of house hold.
c. wage level.
d. income or consumption level.
42 | Chapter 6
5. If everyone in a country had the same level of income, then the value of the
Gini concentration ratio would be:
a. 1.0.
b. 0.0.
c. 0.5.
d. in nity.
6. Kuznets speculated on the relationship between growth and in e qual ity, argu-
ing that in e qual ity rose when:
a. industrialization and urbanization rose.
b. everyone remained in the agriculture sector.
c. ser vice sector jobs reigned supreme as a model for job expansion.
d. people failed to live by the premise found within It Takes a Village.
7. According to W. Arthur Lewis’s surplus labor model, in e qual ity is not just a
necessary effect of economic growth; it is
a. the cause of human suffering and exploitation.
b. a cause of growth.
c. an unintended consequence of modern developmental economics.
d. the leading cause of falling wages.
8. High levels of in e qual ity tend to be associated with:
a. communalism.
b. personal and po liti cal violence.
c. countries with poor infrastructures.
d. the rate of infectious diseases.
9. Based on recent estimates of 2005 purchasing power parity (PPP) dollars,
developmental economists now estimate living in extreme poverty as living
below:
a. $1.00 a day.
b. $1.25 a day.
c. $1.57 a day.
d. $4.95 a day.
10. According to the World Bank, 64 million people were recently pushed into
“extreme poverty” due to:
a. civil war in the Sudan.
b. global warming and its impact on agriculture.
c. the collapse of the Soviet Union.
d. the nancial crisis of 2008.
11. A small subsidy to the poorest of the poor will leave which of the following
unchanged?
a. headcount index
b. poverty gap
c. income distribution
d. none of the above
REF:200 MSC:Factual
12. Major components of the Washington Consensus are:
a. macroeconomic stability and economic openness.
b. the promotion of peace and justice.
c. exploiting the agricultural sector to fund urban industrial development.
d. combating international piracy and terrorism.
13. Trade can help the poor by:
a. increasing the employment of unskilled workers.
b. increasing productivity which will increase growth.
c. decreasing the price the poor pay for goods and ser vices.
d. all of the above.
14. The design of social safety nets differs from income transfers in that the
former:
a. recognize that poverty is often transitory and not permanent.
b. do not always go to poor people.
c. are expensive to administer and lack public support.
d. none of the above.
15. Recent studies show that global in e qual ity is signi cantly higher than:
a. what the Lorenz curve portrays.
b. the Club of Rome anticipated.
c. population- weighted international in e qual ity.
d. the latest UN data suggested.
IDs and Paired- Concept Questions
These terms can be used individually as short- answer identi cation questions, or
they can be used in pairs. In the latter case, ask students to explain (1) the meaning
and signi cance of each of the two terms and (2) the relationship between them.
2. National poverty line, global poverty line
4. $1.00 a day, $1.25 a day
6. Income transfers, social safety nets
8. Kuznets, Lewis
