A. R. M. Ritter May 20, 2010

1. ECON 3510African Economic DevelopmentSpring 2009Poverty, Income Distribution and Development(Text, Chapter 7) A. R. M. Ritter May 20, 2010

2. Agenda • Significance of Topic • Concept and Measurement • Poverty Measures • Income Distribution Measures • Equity, Poverty and Well-Being • Comments on Evidence re Poverty and Income Distribution • The Roots of Poverty and Income Mal-distribution • Kuznet’s “Inverted U Hypothesis” • Policies for Pro-Poor Growth • Milennium Development Goals

3. Significance of Topic Central development issue in Africa: reduce poverty! “Make poverty history!” Central focus of development efforts and of this course The focus of the “Millennium Development Goals” Is Poverty a “bad thing”? Why? • Amartya Sen’s concepts of capabilities and choice • Income and Basic Human Need Fulfillment

4. Income Distribution: Central to our ideas of fairness and justice A more equitable income distribution is supportive of both Growth and Poverty Reduction Growth generally reduces Poverty; But Growth is “Neutral” regarding the “fairness” of income distribution …….. Unless major efforts are made to achieve distributional objectives simultaneously with growth,

5. 2. Concept and Measurement Problems of Measuring Real Incomes Income or consumption? Accurate Information: sources Definition of income: Market generated Income? Or Market generated Income + Transfers Or Market generated Income + Transfers – Taxes? Or Market Income + Transfers –Taxes + In-Kind Subsidies? Or Market Income + Transfers –Taxes + In-Kind Subsidies + Publicly-provided Education + Health Services? Market Income + Transfers –Taxes + In-Kind Subsidies + Education + Health + Home-Produced G $ S Other complications: Home-produced G&S; Differing prices Differing needs in different circumstances

6. Poverty Concepts and Measures 1. The United Nations “Human Poverty Index” Attempts to measure poverty with a composite index including: 1. Probability of not surviving to age 40; 2. Adult illiteracy rate; 3. Population without access to improved water source 4. Underweight children under age five. 2. Arbitrary Income “Cut-Offs” or Measures e.g. population with real incomes (PPP) below some threshold such as $US 1.00 or $2.00

7. Poverty Concepts and Measures, cont’d 3. Calculations of real income necessary to meet basic human needs (used in Latin America – ECLA - and national measures) 4. Canada: “LICO” or lower income cut-off, i.e. 50% of median income; (more a measure of distribution than of poverty) 5. Composite measures of Basic Need Fulfillment in real terms (access to water, literacy, child mortality, etc. (as in example in text)

8. Poverty Measures for Some African Countries, 2005 Source: UNDP. Human Development Report, 2007/2008

9. Human Development Indices, Africa, 1975-2005 Source: UNDP. Human Development Report, 2007/2008

10. 3. Equity, Poverty and Well-Being The Broad-Based Sense of “Fairness” • Religious Basis • Economistic “Games” showing that generally people prefer Fairness • Design of Human Institutions • The law; • United Nations • Welfare states & income taxation • Democracy and human rights • Development assistance • Survey data (see charts)

12. Income Distribution: Central to our ideas of fairness and justice A more equitable income distribution is supportive of both Growth and Poverty Reduction Growth generally reduces Poverty; But Growth is “Neutral” regarding income distribution …….. Unless major efforts are made to achieve distributional objectives simultaneously with growth, Incentives and income Distribution

13. Vote !!

14. Income Distribution Concepts and Measures • Income shares of groups in the population (quintiles or deciles) • Ratios of shares, e.g. income share of top 10% / income share of poorest 10% 3. Lorenz Curve (See text, pp37-41) 4. Gini Coefficient (in class)

15. Income Distribution Measures for Some African Countries Source: UNDP. Human Development Report, 2007/2008

16. 4. Evidence re Poverty and Income Distribution Some International Comparisons

19. “Who are the “’Poor’” in Africa? • Domestic Aspects • Rural character • Regional dimension • Gender & children • Indigenous dimension • Characteristics of the poor: • Assets; • Human capital; • Income vulnerability • Weak access to public services, • Environmentally hostile environments, • Lack of supportive networks

20. 5. The Roots of Income Mal-distribution in Africa (and Poverty to some extent) 1. Historical Inheritance and its Momentum: A. Pre-Colonial Social Structures • Significant levels of equality in pre-colonial eras; • High equality for “hunting and gathering” peoples

21. Impacts of Colonialism • Unequal property rights and institutions imposed by colonial powers • Imperial country living standards for colonizers; traditional levels for Africans • Public services directed at settler peoples, not indigenous peoples • Colonial hierarchies: Social stratification based on Race and Ethnicity

22. 2. Political Factors: • Disproportionate power and influence of elites and moneyed interests (e.g. property, gender, and literacy qualifications to the vote until recently) • Result: • Public Policy has often been shaped in their interests • Thus: • “Urban bias” • “Upper and middle income class bias” and • “Modern sector bias” in public policy

23. 3. The Nature of the “Modernization” Process: • Does a “Rising Tide Lift all Boats”? • Would you expect that a process of modernization / development would improve everyone’s living standards simultaneously? • What forces generate “Inequities”? “Equities”?

24. Note the Latin American Effect

25. 3. The Nature of the “Modernization” process: Forces Generating Inequalities • “Scarce capital” generates high returns for its owners; • Scarce skilledlabour generates higher incomes for those with crucial skills; • Abundant unskilledlabour generates low wages and incomes;

26. 3. The Nature of the “Modernization” process: Forces Generating Inequalities, cont’d • International technological transfer: much recent vintage technology is “labour-saving,” thereby reducing the demand for labour and thus wages and incomes. • “Backwash Effects” of “modernization” and tech. change • Uneven access to opportunities • Prior Elites; • Regional Advantages; • Personal Advantages

27. continued: The Nature of the “Modernization” Process: Forces Generating Greater Equalities • The exhaustion of surplus labour in agriculture and the informal economy? • Increasing productivity generally promotes rising incomes in supporting service-type activities • Broadening Tax Base permits social programs & welfare state type programs • Broadening human development (education health etc.) broadens earning capabilities • Regional and rural-urban spread effects • rising demand for goods and services from elsewhere; • linkage effects

28. South Korea: Causal Factors Shaping Income Distribution and Growth Emphasis on Human Development Successful Export Promotion Good Macroeconomic Management Good Private- Public Gov’t Market Mix Land Reform Coops; Price Policy Well Qualified Labour Force Rapid Growth of Manufacturing Rural Urban Balance Population Deceleration Agricultural Expansion Increasing Taxes Lower LF Growth Rate Rapid Job Creation Activist and Expanding Social Policies Egalitarian Urban Income Distribution Rural-Urban Equity Egalitarian Rural Distribution; Income Growth Rapid Growth, Distributional Equity, Poverty Reduction [HDI: # 28; 1970: .707; 2005 .901; Gini: 0.316; Growth pc, 1975-03: 6.1% pa]

29. Empirical Validity of Kuznets” Hypothesis? Which effects predominate? • Debatable; • Latin American effect in Kuznets “U” • Positives and negatives simultaneously; • Other factors operate • Ultimately “Public Policy” is paramount

30. 4. Nature of Development Strategies (and Theorizing): Early Theorizing: • Capital-Centered theories, • Dualistic Development Models (W.A. Lewis) • The Soviet Model, • Prebisch - UN ECLAC) • Rostow …………. All emphasized Growth first; income distribution later; • Investment in the Modern Sector, esp. Industry; • Import-substituting industrialization; • Investment in physical capital • De-emphasize traditional economy and informal sector

31. “Neo-Liberal” or “Washington Consensus” approach focused on growth first. • Escape from hyper-inflation, macro-economic and external sector unsustainability and debt, led to “structural adjustment” programs • which often generated “short-term pain” hopefully but not always for “long term gain”

32. 5. Demographic and Sociological Factors: • “ThePoor Have More Children:” large family size among the poor • reduces family investment per child and • reduces possible inheritances per child vis-à-vis the rich; • Labour force participation for poor women is low vis-à-vis rich women; • Higher female labour force participation rates for better-off women raise family incomes for better-off groups. • The rural poor sometimes have little alternative to damaging their own environment, often resulting in worsening future poverty.

33. 6. “Market Power” • Concentrated ownership patterns • Monopoly and oligopoly power of enterprise and individuals • The power of professional associations and unions • Political power determining income patterns

34. 7. International Factors • Multinational Enterprise: islands of modernity and higher incomes • Technological Transfer of modern capital-intensive machinery and equipment  higher incomes for some • Internationally transferable skills help generate international income levels for some, while the unskilled remain with low incomes.

35. Policies for Pro-Poor Growth • Possible Approaches and Components of Poverty Reduction and Equity-Oriented Programs • 1. Achieve Sustained Economic Growth • Exceedingpopulation growth rates; • Permitting rising levels of personal or family income and tax revenues; • Permitting significant levels of domestic & national savings • [Note: this is a necessary but insufficient condition for enduring reductions in poverty]

36. 2. Strive for “Equity with Growth” • Make the growth process compatible with equity, that is poverty reduction, improved income distribution and human development for low income groups • Focus sharply on the poorest. • HOW?

37. 3. Emphasize Investment in Human Development • Fairly Allocated • Education, Health, Nutrition, Clean Water, Sanitation, • Family Planning • Build the capabilities of the state to provide necessary public goods • [i.e. effective and efficient Tax Administration • Plus effective and incorruptible public administration.]

40. 4. Increase Demand for the abundant resource of the poor, namely labour, [i.e. rapid job creation] • Improve the appropriateness of technology; • At an Appropriate Time, Switch from Import Substituting Industrialization to Job-creating Export Promotion • Promote labour intensive public works and infrastructure, especially that serving the needs of the poor;

41. 5. Invest in the Physical Assets of the Poor • Support the “Informal Sector” [in various ways;] • Note the role of “Micro-credit” • Support Urban Development for low income neighbourhoods [water, sanitation, sidewalks, streets, electricity, security, etc.] • Support Agriculture and Rural Development, focusing on low income rural peoples • Rural roads; water & sanitation; drainage & irrigation; electrification in time

42. 6. Combat “Modern sector bias” in public policy; [plus “Urban Bias”, “Industrial sector bias,” and “Middle class bias”] Reconsider • Tax policy • Government expenditures and social benefits and their allocation • Tariff policy and protectionism • Infrastructure finance and allocation • Credit policies • All types of subsidization of the modern urban sector

43. Avoid megalo-cephalic urbanization • Agriculture & Rural Development • Regional Development;

44. 7. Redistribute Assets • Land Reform of various sorts; • Democratic ownership patterns; • Cooperative Property forms • Taxation towards equity • Favour small & local enterprise? • Democratization of private ownership • Support Territorial Claims of Indigenous Peoples;

45. 8. Construct Safety Nets and Transfers as possible [for middle income countries] • Target the neediest groups; • Support Human development –promoting activities [e.g. as in Brazil under Lula, financial support for the poorest families that keep their children in school; or as in Chile, where school lunches programs are provided in low income neighbourhoods]

46. The Millennium Development Goals • Millennium Development Goals Website • http://www.un.org/millenniumgoals/ • Introduction: • UN Millennium Declaration (UN September 2000.) • committed its signatories to strive to • reduce poverty, • improve health, • promote peace, • improve Human Rights, and • improve the environment. • Specific measurable targets, to be achieved by 2015; • Most OECD and lower income countries were signatories

47. A Focus on the Neediest Countries is given top priority. This included: • 38 countries in Africa, • 4 in East Asia/Pacific; • 2 in South Asia; • 6 Arab States; • 4 Latin American and Caribbean States, and • 5 in East Europe. How can they escape their poverty traps? This is easy to state but hard to implement. Included in the relevant policy areas are

48. How can they escape their poverty traps? This is easy to state but hard to implement. • Included in the relevant policy areas are • Investing in human development; • Helping small farmers raise their productivity and thence their incomes; • Investment in infrastructure in lagging areas; • Promote non-traditional and especially small-scale enterprise (informal sector ) • Emphasize social equity and strengthen the “voice” of marginalized peoples (aboriginal peoples, rural peoples, and women and girls in some countries.) • Environmental Sustainability

49. Millennium Development Goals and Targets for 2015 • Goal 1: Eradicate Extreme Poverty and Hunger • Target 1: 50% reduction in extreme poverty (Income below $1.00 per day.) • Target 2: 50% reduction in hunger. • Goal 2: Achieve Universal Primary Education • Target 3: 100% coverage for primary education for Males and Females • Goal 3: Promote Gender Equality and Empower Women • Target 4: Eliminate gender disparities in education. • Goal 4: Reduce Child Mortality • Target 5 : reduce it by 67%.

50. Goal 5: Improve Maternal Health • Target 6: reduce it by 75%. • Goal 6: Combat HIV/AIDS, Malaria and other Diseases • Target 7: Reduce the spread of HIV/AIDS by 2015. • Target 8: Halt and reduce incidence of Malaria and other major diseases. • Goal 7: Ensure Environmental Sustainability • Target 9: Reduce by 50% those lacking access to safe water. • Target 10: Incorporate Sustainable Development practices in all policies and programs’