Riassunto esame "development economics", Prof. Patriarca, libro consigliato "Economics of development"

CH:1 The development gap and the measurement of poverty

1.Development gap+ measurement of the world distribution of income: to measure them

we consider: -absolute and relative gap between the richest and poorest countries, -dispersion

of income per capita around the average level of per capita income for all countries, gini ratio.

World bank is referring to income in dividing the countries into groups. It is a good starting

point.

Income GDP, sum of income from different sources.

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Countries are divided into three groups by the World Bank (Bretton Woods Agreement 1944):

Low-income countries; (blue ones) Mainly in Africa, sub-saharian Africa, Niger, Chad,

- Malawi, up to Somalia, Sudan, Madagascar. Outside Africa (Syria, which was not in this

group 10 years ago, but war is one of the main causes of underdevelopment), Nepal,

North-Korea. Basically it is an African issue.

High-income countries, developed countries. OECD, members of an international

- organization. North America, Europe, Argentina, Perù, Australia, Canada, some countries

in Arabia. According to this map, while Emirates are high-developed countries, yemen is

an underdeveloped country.

Middle-income countries: they are divided into two more groups:

- Upper middle-income (sharp red) China, India, Pakistan, Brasil

◼ Lower middle-income (sharp blue)

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How different are these countries?

We do not know how much these countries are different. We need to go further from the bank

definition.

Low income countries are 6 hundred millions of people.

Middle income countries (most important), China, India, Brasil, Russia, Indonesia, Philipines.

Upper and lower middle income are almost equal (China in high and India in low)

Gross national income per capita. Income divided by the number of people in the country, the

population. PCY (per capita GDP).

We can consider this is the income of each individual in the country.

Purchasing power poverty index, cost of living in a country.

Benchmark: purchasing power of 1$ in the USA. In general, when we think about USA we know

they are one of the most expensive countries in which we can live. Higher level of prices in the

USA.

Measures of inequality:

If we want to measure the development gap, the first measures are capital income, purchasing

power, distance between average income in a country and the one in the other country.

Distance between the poorest country and the richest country. (Absolute distance).

Richest in this year (2014) Norway

1. Absolute income Gap: income of the richest country (average yearly income per

capitaNorway 66k dollars a year) – income of the poorest country (Congo 650 dollars a

year) average level of prices in Congo much lower than in Norway. The absolute

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development gap would be the difference between the poorest and the richest yearly

income per capita (average)

We could consider not only the range (the difference), but also the relative (ratio) richest

income per capita divided by the poorest average income per capita. 66 k / 650 = 100 (more

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or less)

The absolute distance grows over time if both the rich and the poor countries experience a

positive growth , whereas the relative distance does not change if they grow at the same rate of

growth.

2. Relative income gap: ratio of per capita income of the richest country with the poorest

country→ necessary condition for it to narrow is that poorest country grows faster than

richest.

A country per capita income depends on economic and demographic dynamics.

An epidemic episode increases the GDP per capita. if many people die, GDP per capita will be

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higher.

If we look at the range (poorest and richest countries) we are only looking at the extremes.

What is happening in the middle is always more important.

In general, since we are not interested in the extremes, we need some measurer of the

development gap not based on two countries, but which contains information on all the

countries.

Deviation of the mean (media, average) of all the countries in the world.

3. Standard deviation how much the countries income is deviating from the mean

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Income – average income = deviation from the mean of each country→ It measures the average

sums of the squared deviations of each country’s per capita income from the average (mean)

income for all countries.

Square of the deviation (y – y)

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Average square deviation of the countries square deviation / number of the countries

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Average square distance from the mean

Square root (radice quadrata) of average square distance standard deviation

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4. Coefficient of variation: standard deviation divided by the mean level of per capita

income of the whole sample. Positive correlation between the mean and standard

deviation.

Variation around the mean of all the countries. The changes do not only concern the richest and

the poorest, but also the other countries.

If we are taking money above the mean and redistributing to a country below the mean, we are

redistributing from the richest to the poorest (redistribution following priority), in this case the

standard deviation will decrease.

This kind of distribution would not affect the absolute or the relative gap, but it is affecting the

standard deviation, because this indicator of inequality would change. If every country is given

the same amount the mean will increase by the same amount, but the standard deviation would

not change, because the distance from the mean of each country would not change. The

standard deviation would not change. Standard deviation should be compared to the mean.

Inequality between countries = international inequality

International inequality is different from global inequality. In a country people are not equal.

Two countries can be equal, but the distribution of income cannot be equal. Inequality among

individuals in a country is different from inequality among individuals in the world.

Inequality within countries and between countries is different.

The standard deviation was weighted with the mean, dividing standard deviation by the mean

to obtain the coefficient of variation. However, standard deviation is a measure of a variable.

How much the phenomenon varies?

There is another index, which is much more important to study inequality, as a measure of

inequality which is affected by all the distribution.

5. Gini index p. 34

Derived from the Lorenz curve (-> distribution of income). Using it we distinguish between: A.

International inequality (it considers each country’s per capita income), B. Global inequality

(distribution of income between countries+ within countries). Main cause of global inequality:

inequality between nations and not within.

Measure of concentration. How much is income concentrated among countries? This has

something to do with how much the different quantile of distribution

One way to define how distribution is divided among people, is to analyse how much the top

10% people possess compared to the 90% of people.

A. International inequality: the gini ratio of international inequality takes each country has

one unit and it assumes that each person within the country has the same average

income. (! Distribution of income within the country is NOT considered). 1952 Gini ratio

at 0.57, declined to 0.50 in 2000: poor countries with large populations must have been

growing faster on average than rich countries with smaller population.

B. Global inequality: the Gini ratio of global inequality takes into account not only

differences in average per capita income between countries but also within. Income

inequality in many countries shows a decrease, mainly in the richer countries. By 1950

within- country inequality accounted for only 40 per cent of global inequality because of

the increase of inequality between countries. (today contribution is about 20%)

All the evidence show a massive degree of inequality in the world distribution of income

which is not improving.

45-degree line shows a an equal distribution of income. THE POSITION OF THE LORENZ CURVE

IN RELATION TO THE 45-DEGREE LINE GIVES A VISUAL IMPRESSION OF THE DEGREE OF

INEQUALITY.

Lorenz curve, the more is close to the axis of share of countries, then we are near to full

concentration, whereas if it is nearer to the axis of share of income, we would be near to

equality. The closer the Lorenz curve the more equal is the distribution. The more bowed the

curve the more unequal the distribution.

Gini index is important.

In certain countries, we have a mass of poor, middle-class and the mass of rich people, so we

could have the same concentration but different distribution.

The Gini index talks about concentration, how much is in the hand of whom?

Coefficient of variation is based on how much difference there is between countries. Link

between standard deviation and Gini index. GINI RATIO: is calculated as the area between the

45-degree line and the Lorenz curve divided by the area of the triangle it lies within. Gini

coefficient is 0 when Lorenz curve coincident with the 45 degree line: complete equality. Gini

coefficient would be 1 if one person receive all the world’s income.

Only one index is never enough to describe this kind of phenomenon.

Measures of inequality

We need information on all countries. Quantile relationships. Kuznets Index considering the

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issue of the distance between the extremes.

What happens in the middle is not important.

Gini index between countries in the world (first column)

International inequality index (first column), Gini index from 1820 up to 2013. This is the Gini

index and we can say that international inequality (between countries) is increasing, and has

increased up to 2005. Why? This was mostly driven by a huge economic growth. Since many

countries exploited the consequences of the three industrial revolutions, the income has

increased. A lot of countries have stayed and remained in an underdeveloped situation.

Other column weighted average.

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China is much bigger than Portugal. If we think about country dimensions we have to take it

into account. For international comparison we need to know whether it is a country which has

improved, or another.

I always consider the capital income, but I give much more weight to one, rather than to the

other. If I weight the Gini Index according to the size of the country, I have different data.

By confronting unweighted and weighted index, we can see there is a huge increase in equality.

In recent times there has been a reduction in the economic concentration of income, due to the

increase in the mass of the population.

International inequality, inequality between countries. One of the drivers of economic

conditions and of the crisis was a huge increase of the world’s inequality. Individual distribution

of income among the world population. not only the difference between countries is taken

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into account, but we also have to consider what happens inside a country. Measure of global

inequality

Inequality among the world’s population, not between countries.

Milanovic and Bourguignon and Morrisson (two important studies). They estimated and took

into account another component of inequality, inequality between people.

Estimation of B&M much higher, we are adding the inequality inside each country.

Polarization effect, rich people get richer and the others stay behind.

Increased inequality inside each country. E.g. CHINA

Many people exited from a poor condition, but it is also true that the top-income of chine grew

more than people moving from the countryside to the cities.

Effects of the last century events: internet revolution, technologicalization, etc, all these events

have led to consequences. In all the countries there has been a growth, but somewhere there

can be more inequality, whereas in other countries there can be less inequality.

We have to try to explain why the countries have different dynamics of inequality, so we have

to try to assess why different countries have lived different results from different events.

Distribution of world income 2001

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Richest 20% of people in the world, who have the 82% of the world income. 26/02/19

Problems concerning measurement and comparability of per capita income across

countries (1) and the measurement of poverty (2) itself.

IMPO:Since we are interested in non-developed countries, in many of them it is difficult to

collect data for statistics. -> problem of illiteracy, people do not know how to make statistics. It

is difficult to get reliable data about people’s income.

1. When we use Per capita income (PCY) to classify countries into rich and poor we have

to remember: 1- problems associated with national income accounting (only goods

produced and sold at a price in the market are included in the value of national income),

2- need to convert each country’s per capita income in domestic currency into a common

unit of account. this leads to PPP: purchasing power parity.

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PPP: Living standards in developing countries are converted into US$ (common unit of

account). National per capita income of country X in US$: GNPx fratto Population diviso

exchange rate.

But: Market exchange rates are basically driven by international trading between countries and

depend on the supply and demand. The demand for foreign money or internal money is driven

by what is sold in the market. living standards depend also on the prices of non traded goods,

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determined by unit labour costs (lower the poorer the country). So, the poorer the country the

more the use of official exchange rate will understate the living standards of developing

countries measured in US$. TO MAKE MEANINGFUL COMPARISONS OF INCOME AND

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LIVING STANDARDS WHAT IS REQUIRED IS A MEASURE OF PPP BETWEEN COUNTRIES.

How to construct a PPP ratio between 2 countries: take a comparable basket of goods and

services in both countries, then take the weighted average of prices, where the weights (wi)

represent the proportion of expenditure on each good in total expenditure. PPP= wiI PiI/wiUS

PiUS. P is he price of goods.

Per capita income as an index of development→ some care must be taken when using a

single per capita income figure alone as an index of development because is arbitrary: it ignores

distribution of income between countries, differences in development potential and other

indicators. But it is still the best single index we have. It can be used as a starting point for

classifying levels of development and then there are other characteristics ( p.41)

Growth ≠development: the first is possible without the second but not viceversa.

Purchasing power parity matters a lot in international computation.

This is very much relevant when we talk about poverty

Measuring poverty→

2. Measurement of poverty:

What is a poor person? The poor person does not have the means to satisfy basic needs.

Basic needs usually include basic health, food and shelter. Poverty is a material condition, but

also a subjective condition. However, we will take for now as valid the hypothesis that poverty

is a matter of satisfying basic needs and that basic needs can be satisfied with basic income.

Threshold of income I have to know how to satisfy my basic needs. Income is the most

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obvious measure of living standard. But it is not enough. UNPD constructs a Human poverty

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index and a Human development index.

When we talk about absolute poverty we are measuring the inability to satisfy my basic needs

as a human. Way to measure poverty in underdeveloped countries. Statistics of poverty in OECD

countries, where poverty exists but they are not poor countries.

Relative poverty median income, (not the mean, la media) which is the income which is

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earned by the country or the individual who is put in the middle. If here in class we are people

under 40s and we rank ourselves from the richest to the poorest we take the person in the

middle of this ranking. In this case the median is lower than the mean income.

Howevery, we take the median income and we say that people having less than 70% or 65% of

median income is relatively poor. That is because we are taking into account the fact that

inequality is a subjective issue. I can feel relatively poor compared to others.

When we talk about development policies we only consider basic needs and absolute poverty.

We have to draw a line below which people are defined poor, because they are not able to afford

basic goods to satisfy basic needs.

In general we have two ways of setting a consumption poverty line:

a way to compute the basic basket of goods which we consume over a period, we compute

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how much is the expense to buy this basket of goods and under this line people are poor (PPP

method)

food requirement (food energy method)

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Different countries have different goods in their basket. The food energy method is a method to

define a minimum of calorie that a person needs, therefore they compute how much money a

person needs to have that energy.

Given the poverty line the simplest way to know how many people is poor we can just use the

head count index, or simply counting people under this line. However this method ignores the

extent to which people fall below this line, so it is better to use the poverty gap concept: it

measures the proportionate gap between the average level of income below the poverty line

and the poverty line itself.

The Bottom Billion: living on less than 1$ per day (Paul Collier), is now becoming the bottom

1.4 billion.

1.4 billions of people living in a condition where they are not able to satisfy their basic needs.

Poverty gap: how much are they poor?

To calculate the growth required we need to determine: the elasticity of the poverty rate with

respect to the level of per capita income. logPi= a+b logPCYi

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Pi: headcount poverty rate for country I; PCYi: level of per capita income; b: level of elasticity.

If the elasticity is 0.73 it means that the poverty rate declines by 0.73 per cent for every one per

cent increase in per capita income. Millennium poverty reduction target: to halve the poverty

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rate by 2015 with respect to 1990.

Case ex 2.1: Although the nature of ill-being and poverty varies among locations and people,

there is a striking commonality across countries. Material we