Topic 2 - Poverty and Inequality

Question 1

Extreme poverty (for low income countries) definition, according to the World Bank

Answer 1

% of people living with under $1.90 a day in 2022 PPP dollars

This number is based on the cheapest way to achieve min caloric requirements (~2100 calories per day) and other locally relevant minimum basic needs.

Line is updated in accordance with nominal changes in value of the dollar.

Question 2

Head Count Index (HCI)

Answer 2

Proportion of individuals living under the poverty line

HCI = H = Q/N
where
- Q = number of people under the absolute poverty line z
- N = population
- H = measure of extent of absolute poverty

Question 3

Limitations of head count index

Answer 3

• need to agree on a poverty line
• looks only at extent of poverty (number of people below poverty line) but depth of poverty (how far the incomes of these people are below the poverty line)

Question 4

Poverty gap (world bank definiton)

Answer 4

Measures the extent to which individuals fall below the poverty line (the poverty gaps) as a proportion of the poverty line. The sum of these poverty gaps gives the minimum cost of eliminating poverty, if transfers were perfectly targetted

Question 5

Poverty gap (PG) equation

Answer 5

PG = [Q(z-yq)]/z

where
z = absolute poverty line
yq = mean income of the poor
Q = number of people below the absolute poverty line (z)

Question 6

Why care about poverty?

Answer 6

1. Equity
   - care about human welfare
   - social costs associated w poverty
2. Future potential
   - living standards + economy improve if people able to reach fill potential
3. Distributive justice
   - maximize equality of resources
   - veil of ignorance (maximin) - want standard of living to be as high as possible
4. Limits efficiency
   - reduced productivity = bad for growth and development
   - low savings = reduced economic growth and economic instability
   - can lead to market failures
   - risk and time preferences (will not invest in future if cant meet current needs)
5. political stability
   - poverty –> unstable politics –> less productivity –> bad for economy

Question 7

Why do we normalize (divide by z) the poverty gap equation?

Answer 7

the equation becomes
- unitless
- comparable across countries, currencies

Question 8

Average poverty gap

Answer 8

APG = [Q(z-yq)]/[nz]

–> APG = H[(z-yq)/z)]

Question 9

Pros and cons of measuring poverty using income vs consumption

Answer 9

Income pros
1. in an ideal world, can be measured precisely

Income cons:
1. measurement errors lead to income being under-reported
–> disincentives to reveal the truth (lower income –> lower taxes)
–> reporting bias and recall bias
–> in informal economy where large sector is not monitored or is self employment, measuring income can be very difficult
–> survey data may be inaccurate. Difficult to reach ultra rich and ultra poor.

2. requires detailed survey data

Consumption pros
1. less measurement error
- some measurement error because associated with peoples memories but less bad than for income measurements

Consumption cons
1. believed to be a better indicator of permanent income
2. requires detailed survey data

in general - consumption data is more accurate

Question 10

Multidimensional poverty index (OPHI)

Answer 10

A person is poor if they are deprived in 1/3 or more of weighted indicators

10 indicators categorized into three dimensions of poverty (health, education, living standard)

10 indicators:
Health
1. nutrition
2. child mortality

Education
3. years of schooling
4. school attendance

Living Standard
5. cooking fuel
6. improved sanitation
7. safe drinking water
8. electricity
9. flooding
10. Assets (ex livestock)

Question 11

Monetary poverty

Answer 11

• reduced consumption –> higher poverty
• often positively related to multidimensional poverty

Question 12

Income distribution

Answer 12

The amounts of income received by the rich, poor, and middle class individuals or families
- often interpreted as direct measure of welfare
- used to measure inequality
- can be expressed in terms of income deciles (tenths), quintiles (fifths), or quartiles (fourths)

Question 13

Social welfare

Answer 13

How well off a society is without considering how evenly income is distributed among its citizens

Question 14

the lorenz curve

Answer 14

Depicts the cumulative distribution of income

y axis = percent of income
x axis = percent of population

in an egalitarian society, income distribution creates a diagonal line at 45 degrees

In real societies, income distribution is represented by the lorenz curve, which is a bowed line located beneath this 45 degree line

The greater the curvature of the lorenz curve, the greater the degree of inequality .

Question 15

constructing lorenz curves

Answer 15

calculate the cumulative shares of income for each decile (0%, 10%, …, 100%)
- add % share of total income in previous decile to % share in current decile to get cumulative share of total income in current decile

Plot cumulative shares for each decile of population to create lorenz curve

Question 16

Gini coefficient

Answer 16

Gini (G) is a way to collapse information from the lorenz curve into a single number. This number gives income distribution but does not allow for comparison of incomes between countries.

G = twice the area between the diagonal line and the lorenz curve

G=0: perfect equality
G=1: perfect inequality

In reality, G=1-2S
where S = area under lorenz curve

Question 17

comparing lorenz curve and gini coefficient

Answer 17

If gini coefficient is the same for different income distributions, the lorenz curves cross. If these lines cross, you cannot compare inequality.

Question 18

Evolution of distribution of income and world being among world citizens 1820-1992

Answer 18

Study by Bourguignon and Morrisson found
- worsening of world income distribution from 18201-wwII
- stabilized or worsened more slowly since wwII
- 19th century - inequality due to within-country inequality
- 20th century - inequality due to difference between countries

• currently seeing trend reversal since article published

Question 19

Kuznets curve

Answer 19

U-shaped relationship between development/ growth and inequality

possible explanation: shifting out of agriculture (but little empiracle evidence for this)

Question 20

Poverty targeting

Answer 20

Designing policies specifically aimed at reducing poverty among beneficiaries

Question 21

Why target policies toward the poor?

Answer 21

1. maximize coverage
2. Minimize leakage to the non-poor

Question 22

tradeoffs in anti-poverty policies

Answer 22

1. equity vs efficiency
   - costs more to reach higher accuracy in reaching the poor
2. administrative costs vs asymmetric information
   - administrative costs: government/agency and costs for the poor of filling out forms, traveling etc
   - asymmetric information:
   –> adverse selection: attracting the non-poor
   –> moral hazard: program transfer may alter behaviour

Question 23

Mechanisms for targeting

Answer 23

1. Indicators: based on some characteristics (eg income, land, age, gender, etc)
   - means testing: if a persons income is below a certain level per year the person will receive benefits
   - strong incentive effects: people will identify as having certain characteristics to receive benefits
2. self-targetting: self-identity (eg workfare, placement of benefits office in urban informal settlements, food subsidies, etc)
3. participatory wealth rankings: community based
   - used especially in rural areas where difficult to get individual income based measures

Question 24

Perfect targeting anti-poverty policy

Answer 24

Want to give everyone below poverty line exactly enough to bring up to poverty line. Financed through taxation of non-poor

transfer function
T=f(y) where y is individual income, given a poverty line z

Total Transfer = sum from i=1 to Q (z-yi)

where
z = absolute poverty line
yi = mean income of individual
Q = number of people below the absolute poverty line (z)

pros
- most equitable

cons
- administratively costly
- incentive effects (people working less hard get same income –> disincentivizes hard work)
- need a good tax system
- political costs

Question 25

Universal program anti-poverty policy

Answer 25

Total transfer = zN

Pros
- adminstratively costs low
- no incentive effects
- no need for a good tax system

Cons
- total costs very high
- difficult to finance

Question 26

Mixed program anti-poverty policy

Answer 26

total transfer = zQ + z(y)

pros
- administrative costs relatively low
- possible incentive effects
- need a good tax system
- total costs between perfect and universal targeting

Question 27

Conditional cash transfer anti-poverty programs

Answer 27

• Conditional cash transfers prototyped in Mexico as PROGRESA (now OPORTUNIDADES)
• typically conditional on children attending school and health checks
• benefits commonly given to moms

Question 28

How can cash transfers help solve market failures

Answer 28

2 types of market failures
- externalities: underinvest in children’s schooling and health
- intra-household decision-making –> decisions dont reflect women and children’s interests

cash transfers address these by..
- externalities –> make conditional on education and health
- intra-household decision-making –> empower women by targeting them with transfer

Question 29

Expected and unexpected impacts of cash transfers

Answer 29

expected impacts
- improved schooling of children
- improved health of children
- increased women’s empowerment

potential un-expected consequences
- effect on women economic empowerment
- effect on martial outcomes
- effect on fertility
- general equilibrium effects

Question 30

pros and cons of conditional cash transfers

Answer 30

Pros
- deals with discincentive effects
- directly linked w outcomes donors care about

cons
- seen as paternalistic
- more administratively costly
- sub-optimal for households compared to unconditional CT

Question 31

Unconditioned cash transfer anti-poverty program

Answer 31

Give money directly

A study found that unconditioned cash transfers had a small effect on schooling, whereas conditional cash transfers increased enrollment and attendance.

Question 32

Universal basic income anti-poverty program

Answer 32

UBI transfers all families with enough money to meet their basic needs, without earnings or other transfers. could be a poverty line.

Not targetted at poor specifically and is unconditional on labor earnings.

Question 33

What issues is UBI designed to solve?

Answer 33

1. robotization, increased inequality and labor income stagnation
2. welfare traps in existing social protection programs
3. existing programs do not reach all needy groups

Question 34

Pros and cons of UBI

Answer 34

pros
- large enough to cover basic living expenses on its own
- untargeted, available to large population so guarenteed to reach all those who need it

cons
- slow or no phase out
- general equilibirum effects
- question of how to finance