Unit 3 - Growth, Inequality & Poverty

Question 1

Major international development paradigms since 1950:

Answer 1

1950/60 - Modernisation - growth through industrial promotion - state led

1970 - Basic Needs - redistribution of growth - state led

1980/90 - Structural Adjustment - market reforms - market led

2000 - MDG’s - HD concerns incl. Monetary poverty reduction by growth - market led

2015 - SDG’s - growth, poverty reduction and HD - market led

Question 2

How did the Asian tigers grow while keeping inequalities so low?

Answer 2

1. Promotion of labour intensive manufacturing, with some capital intensive industries on the side: Priority to employment for the many over higher wages for a more limited workforce
2. Continued investment in agricultural sector
3. Investment in education, health and other public services for poor people - especially in rural areas. Should be combined with job creation.

Question 3

What is a regressive tax?

Answer 3

A tax that penalises the poor relatively more than the rich (opposite of progressive tax)

Tax rates do not on average rise with inequality, high inequality may be associated with and sustained by regressive tax systems (Ferranti et al, 2004) as wealthy groups controll the policy making process to their own advantage.

Question 4

What are poverty traps?

Answer 4

Reasons why individuals or hh cannot participate in growth.

Micro level: asset based poverty trap (linked to shocks, savings and investment)

Meso level: low level equilibrium trap
High input costs, low output prices: modest agro-ecological potential means former surpluses are likely low. Limited competition for traders, adverse prices for farmers. Coordination of provisions and services would stimulate this but due to modest agro-ecological potential and geography no parties are interested in this.

Macro level: Collier’s 4 growth traps:

1. Conflict
2. Natural resource
3. Landlocked with bad neigbours
4. Bad governance in small country

Question 5

Why do high levels of inequality also reduce the effectiveness of economic growth in reducing poverty?

Answer 5

• market opportunities might be missed due to lack of investment
• the poor find it difficult to connect to and benefit from growth processes
• especially where the state fails to invest in high quality public education services

> > unless growth includes high demand of unskilled labour, the poor are unlikely to benefit from new employment opportunities.

Question 6

Critical note of Saad-Filho (2010) on inclusive growth

Answer 6

1. an attempt to reassert the primacy of economic growth in development and poverty reduction, following a period in which the multidisciplinary nature of poverty was increasingly recognized.
2. An attempt to depend and sustain policies that promote market liberalisation (which he sees as bad for the poor and inequality)
3. Inclusive is PR speak to disguise interventions that will be anything but inclusive.

Question 7

At Macro Level poverty traps tend to focus on considerations of political economy and pure economics.

The interaction of political and economic power can explain the economic history according to Acemoglu and Robinson (2013). There are two types of institutions:

Answer 7

1. Extractive Institutions - run by a small political elite with accompanying economic power
2. Inclusive institutions - competitive political AND economic system. No overpowering one group.

Question 8

Measuring inequality in capability indicators, commonly compare scores by decile or quintile of population in two ways:

Answer 8

1. All are ranked based on the score for the specific indicator and means for decile/quintile are compared
2. All are ranked according to another indicator (income/wealth) and the mean scores of the specific indicator are compared across the income/wealth deciles/quintiles.

Question 9

The debate on how to reduce poverty, 2 groups

Answer 9

1. Growth - as all eventually benefit from greater economic activity
2. Human Development / Multidimensional view - public investment in education, health, water and sanitation etc is necessary at strategic level, not as spillover from growth.

Question 10

How does growth effect inequality?

Answer 10

Growth has no systematic effect on inequality.

Inequality depends on the starting conditions and on the nature of the growth.
What types of activities prosper as a result of the growth and who is linked to these activities.

Kuznet - during economic development inequality will increase first and than decrease.
People on short term will move from low paying agri work to higher paid labour positions (factory). On long term the reducing number of people in agri will result in remaining rural people to process more land etc. (Consolidation of agri production)

Timmer (2009) saw the same and saw rural/urban inequality decrease when GDP’s/capita reached around 5000USD. His study also showed growth is quicker when gov invest heavily in sector.

Question 11

World Bank’s 2 new goals as announced in 2013

Answer 11

1. Poverty reduction - less than 3% below IPL (further than MDG1)
2. Shared prosperity - more aspiration than goal: ensure that growth is inclusive. The incomes of the bottom 40% of the population should rise in absolute terms (but not necessarily inn relative terms compared to the rest of the population).

Question 12

OECD definition of inclusive growth

Answer 12

Economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non monetary terms, fairly across society.

Question 13

Explain the Gini Coefficient

Answer 13

Gini = 0 when perfectly distributed
Gini = 1 when 1 person obtains all income

Lorenz curve plots the share of income against share of population (example: 65% of people earn 20% of total income)

+45 degree line of complete equal income

Than the Gini Coefficient is A / (A+B)

Gini of 0.5 or higher is high inequality
Of 0.6 and higher is very high inequality

Question 14

Timmer, 2009

Countries that started to close the gap, ie reduce rural-urban inequality did so at an average per capita GDP of…

Answer 14

1965-1974 = 1109USD
1974-1994 = 6000 - 8000 USD
1994-2000 = 15000 USD

Asean = 1600 (faster economic growth and more support to agri sector during early stages).

Question 15

What is the reason for inequality according to the Economist (2012)

Answer 15

The combined effect of globalisation of markets and the spread of communications technologies such as the mobile phone & internet

Question 16

What is the definition of ‘inclusive growth”?

Answer 16

The benefits of growth should be broadly spread within the population

The poor should be major beneficiaries from the growth process

Ex post outcomes of growth and ex ante opportunities for the poor to participate in growth.

Improve poor’s access to non-income dimensions of well-being that are particularly important for promoting economic opportunities.

Question 17

3 types of measurements of inequality

Answer 17

1. Ratio - average income of top decile/quintile compared with bottom decile/quintile (to 10% earns 50x more than bottom 10%)

Downside: this is only partial, as the middle can have many changes but it is not picked up on.

2. Share - example top 1% earns the same as the remaining 99% worldwide (Oxfam)
3. Gini coefficient

Question 18

How does inequality effect growth?

Answer 18

Ravallion (2013) high levels of inequality

• make it harder to grow the economy
• make it harder for the growth that occurs to help poor people

Question 19

Oxfam briefing paper (2015) on inequality

Answer 19

Richest 1% own more than the remaining 99%
The wealthies 80 individuals have as much as the poorest 50% of the global populations

(All share measurements)

Question 20

What were Kuznet’s findings on inequality?

Answer 20

During economic development they will first increase (inequality) before it reduces.

Kuznet 1955

Question 21

3 theories as to why inequality might be bad for economic growth

Bourguignon (2004)

Answer 21

1. Poor people lack access to capital (due to imperfect credit markets) and cannot make use of opportunities therefore
2. Political pressures for redistribution - at the expense of public investment which is desirable for economic growth.
3. Rising/high inequality triggers social conflict - which reduces growth by discouraging investments/trade or by destroying productive assets.