Development Economics

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Development Economics

• Poverty

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Poverty

• Most of the people in the world are poor, so if
  we knew the economics of being poor we would know
  much of the economics that really matters. Most
  of the worlds poor people earn their living from
  agriculture, so if we know the economics of
  agriculture, we would know much of the economics
  of being poor
•  T.W. Schultz (1980)

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Measuring poverty

• Subjective or qualitative method Participatory
  Rural Assessment self-assessment.
• Definition of poverty lines based on income or
  consumption

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Relative or absolute poverty

• Absolute poverty notion of basic needs. Includes
  achieving full participation in the society. The
  necessary income level to satisfy these needs
  depends on the level of development of the
  economy.
• Poor people are often treated badly by the
  institutions of state and society and excluded
  from voice and power in those institutions (WDR
  2000)
• Relative poverty poverty lines is defined as a
  function of income distribution in the economy.
• E.g. ,people are identified as poor if they live
  with less than half the median (or mean) income.

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Nutrition based definition.

• Cost of buying enough to eat.
• Rowntree (1901) Poor families are those where
  total earnings are insufficient to obtain the
  minimum necessities for the maintenance of merely
  physical efficiency
• But there are other basic needs (clothing,
  housing)
• In 1999, the average rural indian household
  dedicated 62 of its expenditures to food,
  against 70 in 1983.
• With growth, it becomes difficult to think of
  poverty entirely in terms of food. (Engels law).

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• Nevertheless, taking into account the nutritional
  needs to define poverty remains an accepted idea.
• Many countries calculate poverty lines by
  computing the minimal cost to obtain 2000
  calories a day.
• But this is obtained with a monotonous and
  uninteresting, and hence unacceptable diet
  (Stigler 1945).
• Other solution look at what people actually eat
  and estimate the relation between the calories
  content of the food and the (log of) total
  expenditures ( calorie Engel curve ). The cost
  of obtaining 2000 calories is infered from this
  estimation.

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Limits

• Nutritional needs might not be the same for
  everyone (men, women, children).
• Consumption is measured at the household level
  and not at the individual level
• Household structure needs to be taken into
  account
• Intra-household resource allocation
• Agregating rural and urban areas
• Price differences between areas, between social
  categories
• Actualisation is needed for both inflation and
  structural changes.

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• Whatever the definition, there is some
  arbitrariness in considering two individuals with
  very similar incomes but situated on each side of
  the poverty line as being in fundamentally
  different situations.
• Researchers have tried to see whether
  discontinuity in behaviour could be observed so
  as to endogeneously determine a poverty line, but
  unsuccessfully.

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Poverty measures some desirable characteristics

• Monotonicity (the increase of the income of a
  poor people must reduce the index)
• Any regressive transfer through the poverty line
  should induce an increase in the poverty index,
  and the more so that the individual transferring
  income is far from the poverty line (transfer
  sensitivity).
• Population principle
• The index must increase if the propostion of poor
  increases.
• Decomposability if poverty increases in a
  sub-group of the population, the agregated index
  must increase as well.
• The index must not be affected by income levels
  above the poverty line.

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Measures.

• let z be the poverty line.
• FGT family of indices
• P??yiltz(z-yi)?/nz?
• If ?0, P is the Headcount ratio, number of poor
  people/total population.
• Easy to communicate, but not sensitive to income
  distribution below the poverty line.

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• If ?1, P is the Poverty Gap
• It represent the total transfer that would be
  necessary to bring all the poor to the poverty
  line level (sometimes expressed as a proportion
  to mean income).
• It is not sensitive to regressive transfers among
  the poor.

P1?yiltz(z-yi)/nz
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• If ?2,
• If poor is assigned a weight equal to the
  distance between his income and the poverty line.
  
• If ??, only the income of the poorest is taken
  into account.
• Sens index SP0GP1(1-G)
• where G Gini coefficient among the poor.

P2?yiltz(z-yi)2/nz2
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Vulnerability

• Risk for an individual or a household to face one
  episode of poverty.
• Measure?
• Coefficient of variation of income
• Negative shocks and positive shocks are dealt
  with in a symmetrical way
• No temporal dimension
• Set of indicators related to the capacity to face
  negative shocks assets ownership, income
  diversification, social network, access to credit
  and insurance)

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Functional impact of poverty

• Notion of poverty traps
• Difficulties to access credit (no collateral),
  and hence
• No possibility to realize investments that could
  be productive in the future
• No possibility to optimally invest in education.
• Efficiency wages undernourished individuals are
  less productive and then less capable of
  generating income.