Micro for Development - Poverty and inequality Flashcards

Question

inequalities and theories of social justice - utilitarianism

Answer 1

* Underpins most standard neo-classical welfare economics * Associated with Adam Smith, Jeremy Bentham, John Stuart Mill, Francis Edgeworth, and Wilfred Pareto * Utilitarianism: “profoundly unconcerned with inequalities in the variable on which it focuses, individual utilities” (Sen and Foster, 1997). * Individualistic; individuals maximize utility. * Problem of social choice is not that different from individual choice; alternative states and policies are ordered and evaluated in terms of their contribution to maximize a society-wide welfare function. * Social welfare function includes all individual utility functions, with each carrying equal weight. * Goal is to maximize the sum of total utility in society. * Interpersonal comparisons of utility are ruled out. * Pareto criteria are used to evaluate different social positions. * Utilitarianism can tolerate considerable inequalities in utility * Question: what does this imply for income inequality? * “Assume that all individuals value the income they receive according to the same increasing and concave utility function. The standard maximization of the corresponding utilitarian objective (the sum of individual utilities) leads to an optimal distribution of income which is perfectly egalitarian” (Atkinson and Bourguignon, 2000)

Answer 2

* Rather than on utility, the focus here is on “primary social goods”, which include income and wealth, but extend also to political rights, rights of voice, association, political participation, etc. * Rawls asks the question of what one would do in the “original position” of negotiating a social contract (set of principles of a just social order) behind a “veil of ignorance” about one’s personal position, assuming as well a degree of risk aversion. * Rawls argues that the outcome of this negotiation will reflect two principles: * Liberty Principle: equality of basic rights. * Difference Principle: economic and social inequalities will be tolerated only if they provide most benefits to least advantaged members of society, relative to any alternative institutional arrangements. * “Maximin” procedure * The Pareto criterion employed by Utilitarians suggests that you choose options in terms of maximum gain, subject to no-one losing. * The Rawls criterion cares explicitly about who benefits. Comparing two options, the Rawlsians will choose that which offers greatest benefit to the least advantaged, even if the alternative provides much greater benefit to the less deprived.

Answer 3

* Nozick (1974) sees liberty and rights as the constitutive components of a fully worked out libertarian theory of justice. * Reflects concerns voiced by Hayek, Buchanon, Tullock, Sugden, * Failure of justice occurs when specified rights are violated, irrespective if other basic goals of society are better satisfied. * This version of Libertarianism is quite insensitive to actual social consequences. * For example, within Nozick’s framework the occurrence of famine may not violate social justice. Massive entitlement failure may occur without any rights being violated. * The focus is on process not outcomes. * •Note the egalitarianism in Nozick’s libertarianism: everyone’s liberties count equally. * •

Answer 4

* distributions (quintiles, deciles) * Lorenz curves (the greater the curvature, the greater the relative degree of inequality * Gini coefficients and aggregate measures of inequality * Some measures are clearly unattractive, e.g. range: reflects well the distance between the poorest and richest, but is totally unaffected by changes in the distribution of income within these two extremes. * A particularly desirable property in an inequality measure is that it satisfy the principle of transfers: a transfer from a poorer person to a richer person, all things equal, must result in an increase of inequality (Pigou-Dalton principle). * Many other measures do satisfy this property, but not other basic axioms (e.g. variance has the problem of not being scale neutral) * practice is to select only those which pass basic properties of principle of transfers, scale neutrality and anonymity * Amongst eligible candidates there are still differences in implicit judgements * Gini coefficient attaches more weight to transfers affecting the middle income classes * Coefficient of variation: * Attaches equal weights to all income levels * No less arbitrary than other judgements. * Standard deviation of logarithems: * Is more sensitive to transfers in the lower income brackets. * Bottom line: The degree of inequality cannot in general be measured without introducing social judgements.

Answer 5

* Atkinson (1970) introduces the notion of ‘equally distributed equivalent’ income, Y_EDE. * This represents the level of income per head which, if equally shared, would generate the same level of social welfare as the observed distribution. * This then defines a measure of inequality of the following form: I_A = 1 - (Y_EDE/μ) * A low value of Y_EDE relative to μ implies that if incomes were equally distributed the same level of social welfare could be achieved with much lower average income. * So IA would be large. * Everything hinges on the degree of inequality aversion in the social welfare function. * With no aversion, there is no welfare gain from redistribution so Y_EDE is equal to μ and IA = 0. * A key role here is played by the distributional parameter ε. In calculating IA you need to explicitly specify a value for ε. * When ε=0 there is no social concern about inequality and so IA = 0 (even if the distribution is “objectively” unequal). * When ε=∞ there is infinite weight to the poorer members of the population * How to choose ε? * from Wikipedia: Greater weight can be placed on changes in a given portion of the income distribution by choosing epsilon, the level of "inequality aversion", appropriately. The Atkinson index becomes more sensitive to changes at the lower end of the income distribution as epsilon approaches 1. Conversely, as the level of inequality aversion falls (that is, as epsilon approaches 0) the Atkinson becomes more sensitive to changes in the upper end of the income distribution. The Atkinson epsilon parameter is often called the "inequality aversion parameter", since it quantifies the amount of social utility that is assumed to be gained from complete redistribution of resources. For epsilon=0, (no aversion to inequality) it is assumed that no social utility is gained by complete redistribution and the Atkinson index A_epsilon is zero. For epsilon=infinity (infinite aversion to inequality), it is assumed that infinite social utility is gained by complete redistribution in which case A_epsilon=1}. The Atkinson index A_epsilon then varies between 0 and 1 and is a measure of the amount of social utility to be gained by complete redistribution of a given income distribution. Different income distributions may be compared by calculating the Atkinson index at that epsilon value, with lower values of epsilon indicating lower social utility to be gained, higher values indicating more. Lower values of A_epsilon thus indicate a more equal distribution than higher values, given a particular degree of inequality aversion.

Answer 6

* No inequality measure is purely ‘statistical’: each embodies judgements about inequality at different points on the income scale. * To explore the robustness of conclusions: * Option 1: measure inequality using a variety of inequality measures (not just Gini). * Option 2: employ the Atkinson measure with multiple values of ε. * Option 3: look directly at Lorenz Curves, apply Stochastic Dominance results.

Answer 7

* Concern #1: When income inequality is decomposed by population subgroup in practical applications, the contribution to total inequality from group differences is usually quite low. * Anand (1983) decomposes Malaysian inequality and finds a between-group contribution of only about 15% * Cowell and Jenkins (1995) decompose U.S. inequality by groups defined in terms of age, sex, race and earner status of the household head, and finds that most inequality remains “unexplained” * Elbers, Lanjouw, and Lanjouw (2003) use poverty maps to show that between-community inequality (across many hundreds of communities) is still vastly outweighed by within-community inequality. * Such findings have left some observers worried: * Kanbur (2000) states that the use of such decompositions “…assists the easy slide into a neglect of inter-group inequality in the current literature”. He argues that social stability and racial harmony can (and does) break down once the average differences between groups go beyond a certain threshold. * Concern #2: It is difficult to compare decompositions across settings * Over time * Across settings * Example: The shares of income inequality attributable to differences between racial groups in Brazil, and South Africa are 16%, and 38%, respectively. In the U.S. the between-race inequality share is only 8% * Should South African and Brazilian policy-makers worry much more about racial differences in incomes than do their American counterparts? * Does the small percentage of income inequality attributable to race in the U.S. mean that racial inequality is not a pertinent economic and social issue? * In each country, the mean income of the non-white groups is much below that of the white group, but the non-white groups form the majority in South Africa (80%), half of the population in Brazil (50%), and a minority in the U.S. (28%). Is the difference in between-group inequality observed between these three countries in fact due mainly to the difference in population shares of the racial groups instead of the differences in relative mean incomes of these groups? * There is also the issue of how to define these groups: see for example caste groupings in India. In addition, one can imagine similar concerns arising when making comparisons in a given country over time, with population shares changing. * Concern #3: Does the conventional decomposition capture “salience” of group differences in all the ways we might wish? * From the perspective of measuring inequality of opportunity, conventional decomposition has some undesirable properties. * Imagine a country with two population groups of equal size: serfs and landlords; mean income of serfs is low while that of landlords is high; suppose initially that all serfs have the same income and all landlords have the same income. * In Period 1, there is no within-group inequality. Inequality is entirely attributable to between-group differences * Suppose in Period 2 some random noise, εi, (luck, measurement error) is added to each income. But suppose that distributions don’t overlap. Conventional between-group contribution will fall. But has salience of group differences (for example, inequality of opportunity) fallen? After all, the richest serf is still poorer than the poorest landlord. (Note, at least some polarization measures suggest that distribution 2 is more polarized than 1) There is some appeal to the idea that a measure of inequality of opportunity should not change from period 1 to period 2.

Answer 8

* Ex-Ante Simulation * Assume central government has a fixed budget and wants to transfer it in such a way so as to reduce poverty. * Assume that government has information on the spatial distribution of poverty at a variety of different levels of spatial disaggregation: * No knowledge on the distribution of poverty (benchmark) * Province-level poverty rates * District-level poverty rates * Commune-level poverty rates * Simulate transfer of budget to different geographic units ranked by poverty * Uniform transfer in the case of no knowledge of poverty distribution (benchmark) * Assess impact of transfer on poverty * Impact on measured poverty * Assess how conclusions change over time * Caveats * We assume that budget is exogenously determined * Political economy considerations are ignored * We assume budget can be transferred costlessly * i.e. no differential cost for different levels of aggregation * No behavioural responses * e.g. migration (more likely with targeting at lower levels?)

Answer 9

Procedure * We utilize the unit record databases that underlie poverty maps (“dump files”). * Let y_ch denote the per capita expenditure of household h (with m members) living in locality c. * Lump-sum supports ac that differ across localities. Thus, after-support expenditures are y_ch + a_c. * The government wishes to minimize expected FGT2 after transfers subject to the constraint that total transfers are limited by the budget S * Rank communities by FGT1. * Transfer to the poorest community until its FGT1 is equal to that of the next poorest community. * Transfers should then continue to these two communities, and so on, until budget is exhausted. Findings * In Vietnam, the potential role for spatial targeting has become greater as overall poverty levels have fallen * Effectiveness of geographic targeting improves significantly when targeting is directed at smaller administrative units. * Best strategy may be to combine spatial targeting of localities with household-level targeting within localities

Answer 10

* Survey-based estimate of how the odds of participating in a public program varies with consumption * Typically, average participation rates for a specific program are tabulated against household expenditure per person * A subsidy rate for each category of spending is then applied to participation numbers to infer the incidence of the gains from public spending. * Limitations * Subsidy per unit of usage may not be a good indicator of “benefit"; level of utilization of publically supplied goods is unlikely to reveal the values that consumers attach to those goods * Average benefits (even when correctly measured) need not capture well the distributional impact of an expansion or contraction of a given program. * Early Capture: suppose the non-poor were able to capture the bulk of the gain when a program was first introduced, but are now satiated at the margin. * The poor will then gain a large share of the marginal benefits from program expansion. * Late Capture: as a program gets scaled up, the rich are able to bribe officials or exercise influence so as to get access without becoming conspicuous * Marginal odds of participation: increment to the program participation rate of a given quintile associated with a change in the size of the program. * How to estimate MOP? * With panel data, fairly straightforward * However, typically only cross-section survey data are available. * Calculating MOP * Data on program participation across geographic areas (“regions”) within states. * Calculate average participation rates for a given program for each quintile and region. * Regress quintile specific participation rates across regions on average state participation rates (all quintiles, all regions) for each program.

Answer 11

* core axioms of inequality (not universally accpeted) * anomymity: it does not matter who has which income level * transfer principle: transferring income from the poor to the rich must increase inequality * income scale independence: multiplying all incomes by a constant doe snot change the inequality measure--\>relative inequality measures, but absolute ones also matter * population replication independence: simply replicatin the original population cannot incerase inequality * decomposability: total inequality = inequality between groups + inequality within groups * relaxing scale independence: relative inequality is about ratios, absolute about differences (absolute also matter: state has incomes 1,000 and 10,000; now 2,000 and 20,000; ratio has not changed, but rich can buy 10x more from the change than the poor)

Answer 12

* definition 1: pro-poor growth = growth with pro-poor redistribution - changes in distribution are poverty-reducing, i.e. poverty falls by more than one would have expected holding distribution constant * however, by this definition distributional changes can be pro-poor with no absolute gain to the poor, or even falling living standards for poor people * equally well, pro-rich distributional shifts may have come with large absolute gains to the poor * definition 2: pro-poor growth = growth that benefits poor people

Answer 13

* growth--\>disitributional change (higher inequality initially + loewr poverty) * high poverty and inequality --\> low growth --\> slow progress against poverty * Kuznets hypothesis: realiative ineqaulity increases in early stages of growth in a developing country but begins to fall after some point, i.e. relationship between inequality (vertical axis) and average income (x-axis) is predicted to trace out an inverted U * implications for poverty and growth: absolute poverty will tend to fall with growth * stage 1: rising inequality, but this will not be sufficient to eliminate gains to poor from growth, given that it comes through higher incomes * stage 2: failling inequality will magnify impact of growth on poverty

Answer 14

* theories of distribution-dependent growth * inequality resticts efficiency-enhancing cooperation amongst people, such that public goods needed for growth are underprovided or efficiency-enhancing policy reforms are blocked * political economy models of redistribution argue that high inequality leads democratic governments to implement distortionary redistributive policies * theories based on credit-market failures * market-failure attributed to information asymmetries, notably that lenders are imperfectly informed about borrowers * key analytic feature: a suitably nonlinear relationship between an individual's initial wealth and her future wealth (the recursion program) * with diminishing marginal products of capital, the mean future wealth will be quasi-concave function of the distribution of current wealth * thus higher current inequality implies lower future mean wealth at a given value of current mean wealth, i.e. lower growth * a neglected implication of such models: poverty also impedes growth * lasting adverse productivity effects of poor nutrition, esp in childhood * model with borrowing constraint: those with suffucient wealth will reach their constrained optimum, equating the marginal product of capital with the interest rate; but the wealth poor, for whom the borrowing constraint is binding, will not be able to do so; model shows that higher inequality in such setting implies lower growth; however, model also implies that higher current wealth poverty for a given mean also implies lower growth * much evidence: 0 correlation between changes in inequality and economic growth * empirical support for view that Gini index of inequality impedes growth a country level, but not all supportive; when not supportive mostly due to including country-fixed effects * distribution neutrality on average does not mean that the distribution is unchanging, in fact, it changes a lot * large fluctuations in measured inequality even when no long-run trend * some of this is measurement error * but even small changes in Gini coefficient can mean large welfare changes for the poor * distribution netuality does not mean that incomes of the poor rise by as much as everyone else - given existing inequality, the rich will capture a much larger share of the gains from growth than poor

Answer 15

* some growth theories suggest that it is high initial poverty that matters rather than inequality per se * theories based on borrowing constraints * theories postulating lasting productivity effect of poor nutrition

Answer 16

* heterogeneity in impact of growth on poverty holds clues as to what else needs to be done on top of growth * combine growth-promoting economic reforms with * right social-sector programs and policies to help the poor

Answer 17

* develop human and physical assets of the poor * help improve markets of poor, esp credit and labor * remove biases against poor in public spending, taxation, trade and regulation * promote agricultural and rural development * provide effective safety net