Micro for Development - Poverty and inequality

Question 1

Poverty definition

Answer 1

• Common definition: Lack of command over commodities; “..a severe constriction of the choice set [over commodities]”
• More narrow definition: Lack of specific consumptions (e.g. too little food energy intake)
• Less narrow definition: Poverty as lack of “welfare” e.g., lack of “capabilitiy”: inability to achieve certain “functionings” (“beings and doings”)
• core axioms for measuring poverty
  
  • focus: small change in economic welfare for the non-poor cannot change measure of poverty
  • monotonicity: a small increase in economic welfare for the poor must reduce the measure of poverty
  • sub-group monotonicity: increase in poverty for any sub-group must incerase aggregate measure of poverty
  • transfer principle: small transfer of income from a poor person to someone who is poorer must decrease the measure of poverty (also called “weak transfer axiom”)
• most common poverty measures do not satisfy the axioms (headcount only satisfies the focus axiom)

Question 2

why measure poverty?

Answer 2

• Inform program design
  
  • Who are the target groups?
  • How should transfers be allocated?
  • How much impact will they have on poverty?
• Monitoring progress
  
  • Has poverty increased? Did growth help the poor?
• Foster evidence based policy making
  
  • Who were the losers and winners from economy-wide policy reforms? (ex-ante vs. ex-post)
  • Social spending: who benefits from government subsides? Who will be hurt by retrenchment?
• But…can inform or misinform anti-poverty policies

Question 3

how to measure poverty

Answer 3

1. Identify the “space” in which poverty is going to be measured
2. Identify “who are poor”: dichotomize the population between poor and non-poor. Tool: Poverty line (z): Poor = x_i<z>i≥z</z>
3. Aggregation: Construct an index that summarizes the information and gives an overall picture of poverty. A poverty measure is a function: P(x,z):D_x→R which indicates the level of poverty in each distribution x

Question 4

sources of information - surveys

Answer 4

Differ according to:

• the unit of observation (household/individual)
• no. observations over time (cross-section/panel)
• living standards indicator (consumption/income)

Question 5

Four sets of issues to consider concerning data:

Answer 5

• Survey design
  
  • Does sample frame cover entire population?
  • Response bias?
  • What is the sample structure (clustering, stratification)?
• Goods coverage and valuation
  
  • Is the goods coverage comprehensive?
  • Is the survey integrated (e.g. price analysis)?
  • Are there valuation problems?
• Variability and the time period of survey
  
  • Is there significant variability over time?
  • Can this be encompassed within the recall period?
  • What are the implications for the choice between consumption and income?
• Inter-personal comparisons
  
  • Is consumption a sufficient statistic?
  • What other variables matter? (Prices, demographics, publicly provided goods)

Question 6

how to measure poverty 1 - identify measurement space (welfare indicator)

Answer 6

• Consumption expenditures per capita
  
  • capture destruction of goods and services by use
  • consumption valued at prices paid (whether or not there was an actual transaction)
• Income per capita
  
  • maximum possible expenditure on consumption without depleting assets
  • Poor indicator when incomes vary; hard to measure
• Nutritional indicators
  
  • “Welfarist” critique (welfare and nutrition are different things); nutritional requirements/ anthropometric standards.
• Common practice
  
  • Use comprehensive consumption measure, spanning consumption space
  • Choice between income and consumption is largely driven by the greater likelihood of accuracy of information on consumption.
  • Recognize the limitations of consumption based measures; look for supplementary measures, esp access to public services, subjective welfare as a clue to measuring objective welfare.

Question 7

constructing the consumption measure

Answer 7

• The consumption measure is the foundation over which all poverty analysis rests
• Principles:
  
  • Goal is to be able to rank individuals in terms of welfare
  • Should be comprehensive
  • Retain transparency and credibility
• Important clarifications
  
  • Consumption: destruction of goods and services by use
  • Expenditure: consumption valued at prices paid
  • Income: maximum possible expenditure on consumption without depleting assets
• Common steps
  
  • Construct a food consumption measure
  • Add basic non-food items (from consumption module)
  • Add other non-food items (other modules)
    
    • Do not confuse investment with consumption expenditures
  • Add housing expenditures
  • Often based on hedonic regressions, given that owner occupiers do not report rent payments
  • Add use-value of consumer durables
    
    • Impute a stream of consumption services rather than purchase expense of “lumpy” consumption items

Question 8

how to measure poverty 2 - identify who are the poor (poverty line)

Answer 8

poverty lines depend on our notion of poverty

• subjective poverty lines: based on people’s perception of poverty
• relative poverty lines: increasing function of the average standard of living
• absolute poverty lines: command a fixed standard of living over the domain of poverty comparisons

Question 9

subjective poverty lines

Answer 9

• subjective/self-rated methods: based on the subjective idea of what constitutes a socially acceptable standard of living
• typical question: what income is minimum in that you could not make ends meet with less
• answers may be correlated with actual income

Question 10

relative poverty lines

Answer 10

• related to average income or consumption in a country
• key policy question: has poverty decreaed?
• challenging to compare across time (and across countries) - if everyone’s income / consumption doubles, relative poverty rates should (but need not) stay unchanged
• tend to be used more in rich countries (also more in countries that have more focus on distributional concerns)

Question 11

absolute poverty lines

Answer 11

• absolute level below which consumption is considered to be too low to meet min. welfare level acceptable
• typically used in low or middle income countries, but also US
• main principle: consistency - fixed in terms of welfare level (standard of living)
• two main methodologies
  
  • food energy intake (FEI)
  • cost of basic needs (CBN)

Question 12

absolute poverty lines - food energy intake

Answer 12

• Calorie income (expenditure) function… as income (expenditure) rises, food energy intake rises monotonically
• Find the income (expenditure) at which food-energy requirements are met on average
• what about consistency? (graph 2)
  
  • Different subgroups attain the food-energy intake at different standards of living, in terms of consumption expenditures
• Advantages
  
  • Computationally simple
  • Avoids the need for price data to cost out a basket of goods
• Limitations
  
  • Consistency is not guaranteed
  • The caloric income function depends on other factors as well as income. For instance: tastes of the household (preferences), level of activity of household members, relative prices, publicly-provided goods

Question 13

absolute poverty lines - cost of basic needs

Answer 13

• based on estimated cost of bundle of goods adequate to ensure that basic needs are met
• cost of food basket necessary to attain minimum energy intake is calculated; allowance for non-food expenditure is added
• steps
  
  • pick nutritional requirement
  • choose basket of goods that allows you to meet that requirement:
    
    • Select a “reference” population (e.g. 2-5th deciles of expenditure distribution);
    • Calculate the budget shares –> identifying k commodities (k = 1,…,K) which reflects habits of households near the poverty line (average or median across reference group)
    • Calculate the average or median quantity consumed of each commodity k by the reference group (q ̅kbar)
    • Convert the basket of quantities into caloric values using a food nutrition table: (k=1 to K)Σ(qbar_k*c_k) (c_k=unit calorie value of commodity k)
    • see screenshot for steps 4-5
  • estimate cost
  • add non-food component
• CBN poverty line given by z^BN = z^F + z^NF
• problems
  
  • needs vary across individuals (age, sex) and over time–>solution: take estiamte (e.g. 2100 calories)
  • which basket to use? (e.g. Laos: 32 items, Kenya 100)
  • estimating non-food component
    
    • bundle of goods (pick bundle and price it; same issues as food)
    • food-share method: use share of food of total expenditure of some groups of households (typically those closest to poverty line) to obtain nonfood allowance

Question 14

remarks on poverty lines

Answer 14

• choice of poverty line is ultimately arbitrary and must conform with social norms
• poverty lines imply discontinuity in well-being, might not be real
• multiple poverty lines reflecting different levels of poverty can help
• important to carry out sensitivity analysis (sensitive to choice of poverty line)

Question 15

how to update poverty line

Answer 15

• update old poverty line using new prices: answers question: how many people can afford the old basket now?
• update new poverty line using old prices; answers question: how many people could afford new basket in the past?

Question 16

poverty measures: headcount

Answer 16

• H=q/n with q=#people deemed poor, n=population size
• advantage: easily understood
• disadvantage: insensitive to dostribution below poverty line, e.g. if poor person becomes poorer nothing happens to H
• Example: A: (1,2,3,4) B: (2,2,2,4) C: (1,1,1,4) let z=3, HA=0.75=HB=HC

Question 17

poverty measures: poverty gap

Answer 17

Question 18

poverty measures: squared poverty gap

Answer 18

Question 19

poverty measures: FGT measures

Answer 19

some desirable properties

• Symmetry (or Anonymity): names do not matter
• Normalization: if nobody is poor in the society, poverty should be zero
• Population Invariance: poverty should be invariant to the population size
• Scale Invariance: if all incomes and the poverty lines are scaled by the same factor, poverty does not change
• Focus: If some incomes of individual above the poverty line change but do not fall below the poverty line, poverty does not change
• Weak monotonicity: if the income of some poor individual increases, poverty should not increase
• Weak Transfer Principle: a regressive (progressive) transfer among poor individuals should not decrease (increase) poverty
• Transfer Sensitivity: a regressive (progressive) transfer has a greater effect the lower in the distribution it occurs
• Subgroup Consistency: For fixed subgroup populations, if poverty rises in one subgroup and does not increase in the others, overall poverty should increase
• Additive Decomposability: Overall poverty is the population-weighted average of subgroups poverty levels

Question 20

poverty measures: examples

Answer 20

Example 1

• Effect of the change in price of domestically produced goods on welfare.
• Price of rice in Indonesia:
• Many poor households are net rice producers, the poorest households are landless laborers and net consumers of rise.
• Policy A - Decrease in price of rice: small loss to person at poverty line, but poorest gains;
• Policy B - Increase in price: poorest loses, but small gain to person at poverty line.
• So HA > HB yet SPGA < SPGB
• Which policy would you choose?

Example 2: attachment

Question 21

poverty profile

Answer 21

• Key policy questions: Who are the poor? Where are they? Why are they poor (what are critical constraints/bottlenecks?)
• provides an entry point to such questions
  
  • Can be simple cross-tabulation, or based on multiple regressions
  • Remains descriptive, not yet a causal analysis
• Important challenge to poverty economist is to produce a detailed, pertinent, robust poverty profile
• challenge in creating a robust profile: adjusting for family composition and size
  
  • goal is to work with a money metric of individual welfare.
  • Consumption (and income) aggregates are usually constructed at the level of the household.
  • Convention is to divide household consumption by the number of family members to arrive at a measure of per capita consumption.
  • This approach sidesteps two issues:
    
    • Different people may have different needs
    • The cost per person of reaching a certain welfare level may be lower in large households than small ones

Question 22

poverty profile - difference in needs

Answer 22

• In principle equivalence scales can be used to adjust for differences in needs.
  
  • E.g. If a child needs half as much as an adult, then a two adult - two child household will consist of three equivalent adults.
  • If the total consumption of household is 120 then equivalent-consumption will equal 40. All four individuals will be allocated this equivalent-consumption.
• Where do equivalence scales come from Huge range of candidate scales
• Nutritional scales – derived from health studies. At best can be used to deflate food expenditures.
• Behavioral scales – econometric estimates based on observed allocations. Major difficulties with identification. For example, if we observe that female children get less, do they need less? Or is it that they are systematically discriminated against?
• Little guidance as to which scales are best. One option to conduct sensitivity analysis. (India example)
• We often find that poverty profiles do not change much as a result of equivalence scale adjustments.
• Use of per capita welfare measure may not be too misleading
• This is an empirical question that needs to be checked on a case-by-case basis.

Question 23

poverty profile - economies of scale in consumption

Answer 23

• The use of a per capita measure of consumption imposes an assumption of no economies of scale in consumption.
• Where might such economies come from?
  
  • Consumption of public goods within the household (radio, water pump)
  • Bulk purchase discounts on perishable food items
  • Economies in food preparation (fuel, time)
  • Suppose money metric of consumer’s welfare has an elasticity of θ with respect to household size. Then welfare measure of a typical member of any household is measured in monetary terms by: continue screenshot

Question 24

poverty profile - constructing a spatially disaggregated poverty map

Answer 24

• Poverty analysis is generally based on household survey data
• Such data are typically representative at the national, and possibly some broad, aggregate, sub-national, level.
• Policy makers want poverty data at the local level
  
  • Decentralization
  • Targeting
• what are the options
  
  • Collect larger samples
    
    • expensive
    • some kind of data compromise
  • Combine the limited information available in data sources like the census, into some proxy of welfare (e.g. “basic needs index”)
    
    • ad-hoc
    • often widely disputed (multiple maps)
    • limited usually to a notion of poverty
    • how to interpret? (poverty=low income?)
  • Impute a preferred measure of welfare (e.g. comprehensive real consumption) from household survey into census, using statistical prediction methods: small area estimation
    • Produces readily interpretable estimates:
    • Works with exactly the same concept of welfare as traditional survey-based analysis.
    • Statistical precision can be gauged
    • Encouraging results to date
    • But, non-negligible data requirements
• Features of the small area estimation method
  
  • Separate regressions per stratum, including census means as regressors
  • Clustered error term to capture spatial influence on consumption/income
  • Use cluster weights where significant
  • Allow for non-normality of disturbances
  • Heteroskedasticity in individual-specific component of disturbances.
  • Estimation of standard errors alongside point estimates

Question 25

inequalities and theories of social justice - utilitarianism

Answer 25

• 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)

Question 26

inequalities and theories of social justice - Rawlsian liberalism

Answer 26

• 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.

Question 27

inequalities and theories of social justice - Libertarian theories of justice

Answer 27

• 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.
• •

Question 28

how to measure inequality

Answer 28

• 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.

Question 29

The Atkinson class of inequality measures

Answer 29

• 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.

Question 30

general entropy class of inequality measures (decomposing inequality)

Answer 30

Question 31

inequality measures recommendations

Answer 31

• 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.

Question 32

Lorenz dominance

Answer 32

Question 33

inequality measurement concerns

Answer 33

• 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.

Question 34

probing between-group inequality

Answer 34

Question 35

spatial targeting

Answer 35

• 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?)

Question 36

spatial targetin - procedure & findings

Answer 36

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

Question 37

benefit incidence analysis

Answer 37

• 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.

Question 38

inequality definition

Answer 38

• 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)

Question 39

pro-poor growth

Answer 39

• 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

Question 40

growth and distribution - two-way relationship

Answer 40

• 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

Question 41

high poverty & inequality –> low growth?

Answer 41

• 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

Question 42

inequality or poverty that matters for growth?

Answer 42

• 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

Question 43

growth sufficient to combat poverty?

Answer 43

• 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

Question 45

how to achieve more pro-poor growth

Answer 45

• 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