Poverty Part II

How does family composition tend to vary between the poor and non-poor in developing countries? How does your answer depend on the way in which individual welfare is measured?

As noted above, poorer families tend to have more children. In one study, for poor families 34% of members were twelve years of younger, compared to 20% for non-poor. However, these numbers change when economies of scale are taken into consideration.

How has India differed from China in reducing poverty?

Both India and China are very large countries (both in population and geographic size) that have historically been very poor. However, India has not fared so well in terms of economic growth and poverty reduction as China has. The reason may be due to the differences in the initial conditions each country faced. India had a much more unequal distribution of land, and inequalities in both health and educational attainment. India's major reforms began in the early 1990s, and strong economic growth followed. However, there has been a strong divergence between mean incomes in urban and rural areas, with rural areas benefitting little from growth.

What empirical evidence is there on the link between urbanization and poverty reduction?

Both the Lewis model and the Harris-Todaro model link urbanization to higher wages and therefore lower rates of poverty. In Chapter 7, however, many countries have experienced an increase in the share of the urban population but little or no reduction in urban poverty. There is empirically a positive correlation between GDP per capita and the share of the urban population. There is also a negative correlation between the national headcount index and the urban share of the population, suggesting that urbanization is good for poverty reduction.

What is a CCT? How many developing countries currently have a CCT program? What incentive effects are built into a CCT? How do CCTs address distributional issues within the household?

CCT is a conditional cash transfer. The household receives a transfer from the government if they comply with some rule e.g. sending children to school. Incorporates both a protection and promotion aspect into poverty reduction. Many developing countries have CCTs e.g. Bolsa Familia, Progresa. Addresses incentive effects - families send their children to school and not to work. Only partly addresses distribution within the household. Children are benefitting from education, but there's no guarantee that they will receive any of the monetary transfer given to the household.

What is "capital flight" and why is it a problem for developing countries?

Capital flight occurs when assets begin to flow out of a country, often in response to a crisis or shock. For example, a period of political instability may lead foreign investors to transfer their assets to a less risky environment. This has implications for the country's exchange rate (it will fall) and balance of payments. Capital flight can also be illegal, such as when a country's assets are taken outside the country (e.g. development aid that is captured by elites and kept in an overseas safe haven).

Why might cutting aid assistance in response to a political shock exacerbate long-term institutional development?

Cutting aid in response to bad institutions can actually worsen the quality of institutions. Loss of aid may increase instability within a country (which is likely already very unstable) and lead to rent seeking by elites. The country could then find itself stuck at the bad equilibrium.

How did early classical economists typically view the relationship between economic growth and poverty? How does this differ from modern day views?

Early classical economists were largely pessimistic about the possibility for economic growth to reduce poverty. Due to Ricardo's law of diminishing returns, redistribution would be the only way to redistribute poverty i.e. economic gains as a zero sum gain. Furthermore, any real gains to the poor would be squandered away, e.g. through an increase in the population. Modern economists instead argue that economic growth can be poverty reducing under the right conditions.

How did East Asia benefit from a broad-based educational system? Contrast East Asia's experiences with India's.

East Asia in particular has benefited greatly from widespread education. In one report, primary education was said to be responsible for between 58% and 87% of GDP growth. This share is larger than private investment. India has not been as successful in providing public education. States that did have broad-based education were found to have much more pro-poor growth than other states.

In what region of the world has the least progress against poverty been made over the last 30 years? Where has had the most progress?

East and South Asia have made huge progress with poverty reduction. In 1981 East Asia had the highest incidence of poverty (77%), in 2012 it had fallen to 14%. Sub-Saharan Africa has made much less progress, with poverty rates actually rising towards the end of the 1980s and only falling beginning in the early 2000s.

What is the typical relationship between income per-person and health outcomes?

Health outcomes on aggregate tend to improve with higher levels of GDP. However, there is large variation in health outcomes at a given income level. There may also be omitted variables that are confounding the true relationship between health and income (not to mention the direction of influence is unclear). Controlling for key variables suggests that the relationship is much weaker.

Why might a public information campaign to teach people their rights under the law work better in some settings than others?

Information campaigns aim to increase program participation and ensure that their rights are respected. These type of campaigns have had mixed success. In the US, anti-poverty programs have been found to work better in places with greater access to public radio. However, a study in India found less impact in the context of improving monitoring of education service providers. There are several possible explanations for this. Firstly, information may reduce participation if some people decide that they don't want to be involved in the program. Secondly, people may not be accessing services for reasons other than lack of information. Thirdly, there is also heterogeneity in the quality of information - better information may lead to higher participation.

Can you say conclusively that poverty rates have fallen in the developing world for all poverty lines and poverty measures up to the U.S. line between 1981 and 1999? Why or why not?

It is not possible to say conclusively that poverty rates have fallen for all poverty lines and measures between 1981 and 1999 - the claim is robust up to $5 per day only. This is because the CDFs intersect at lines above $5 per day (first dominance fails). It is, however, possible to say conclusively that poverty rates have fallen for all lines and measures between 1981 and 2008.

Describe the issue of "missing women". Are there regions in which this issue is more prevalent?

Missing women refer to the discrepancy between the actual counts of women and the expected counts based on sex ratios at birth. Sen argued this is due selective abortion, however more recent work has shown that many of these women are from older age groups. For example, HIV infection and maternal mortality. Lack of old age support is also a problem for women. Missing women are mostly found in Sub Saharan Africa but also in East and South Asia.

How does Piketty define capital? What role does it play in his argument regarding the rise in income inequality?

Piketty defines capital as all non-human wealth, which includes physical capital, financial capital and property. It excludes human capital. Note that not all the types of capital in this definition are productive, e.g. a rise in property prices will increase the value of one's capital, but will not necessarily lead to an increase in output. Inequality arises when the growth rate of GDP per capita is sufficiently low relative to the rate of return to capital. By broadening the definition of capital, Piketty argues that the rate of return to capital has been much higher than the growth rate in GDP per capita, which increases inequality.

How does schooling tend to vary by household income? Why might this be problematic for long-term poverty reduction?

Research has found that poor individuals tend to have less schooling as compared to the non-poor. Furthermore, children from poor families get less schooling. There are also stark socioeconomic differentials in child development, for example, performance in the Peabody Picture Test. This is an issue for long-term poverty reduction as education is a key determinant of labor earnings. On average, individuals with less education will earn less than their educated counterparts.

What is a structural adjustment program? Does this necessarily hurt poor people?

Structural adjustment programs refer to the type of programs the Washington Consensus advocated. They were not typically pro-poor. Removing tariffs and subsidies will result in a fall in the price of domestic goods. While this is good for exporters, firms that do not export (e.g. those that provide non-traded goods) will suffer. Unemployment in these industries may result. Even with relatively cheaper prices for some goods, other goods such as food may rise in price. Wages will adjust more slowly.

What is the Young Lives Project? What have been the main findings from this project?

The Project looked at living conditions of children in four countries (Ethiopia, India, Peru and Vietnam) to study the relationship between poverty and adult under-nutrition. Measures of stunting and wasting were found to be correlated with measures of poverty, and also the poorer families had consistently worse anthropometric outcomes for their children. This study provides evidence of the transmission of the health impacts of poverty.

What is the "Washington Consensus"? List some of the major criticisms of the consensus.

The Washington Consensus refers to a set of policies advocated by International Financial Institutions (IFIs) starting from the late 1980s. Some policies include fiscal discipline, cutting subsidies, tax reforms, liberalizing trade, competitive interest rates and privatizing state-owned resources. These policies have come under criticism for being a 'one size fits all' approach that didn't take into consideration individual country needs. Rich countries that left little bargaining power for the countries in which these reforms were being implemented also imposed them.

In the example in Box 10.3, the BIG does not eliminate poverty. What would a BIG that did so look like?

A BIG that eliminates poverty is one in which the net transfer for those below the poverty line pushes their incomes above the poverty line. That is, the final post-benefit transfer quantile function is everywhere above z.

What is the difference between a cash versus in-kind transfer payment? What are arguments for and against in-kind payments?

A cash transfer is a monetary transfer, while in-kind is a transfer involving a particular good or service. For example, food stamps in the U.S. are in-kind, while unemployment benefits are cash. Cash transfers man that the recipient can spend the money on whatever they choose, while in-kind transfers either imply that the money must be spent on a particular good (e.g. food) or that you receive the good itself (for example, receiving a bundle of food from a food bank). In-kind transfers are more paternalistic than cash transfers, and may be less efficient (go back to the example on food stamps).

Explain the cross-country growth regression model in Box 8.19.

A cross-country growth regression aims to see how an initial value of GDP affects a country's growth rate. If initial mean income has a negative coefficient (i.e. a high initial income is associated with a lower growth rate), then this suggests that there is conditional convergence where poor countries grow faster and catch up to rich countries (for a given set of initial conditions).

What is a geographic externality and how does it contribute to a geographic poverty trap?

A geographic externality is some feature of the geographic area that makes capital less (or more) productive. This is different to many poor people living in one area - a geographic externality is a feature of the surroundings (say, mountains which make it hard to build roads). Geographic externalities can lead to a geographic poverty trap, whereby people living in a particular area become stuck in poverty.

Explain the concept of a "poor institutions trap".

A poor institutions trap occurs when countries need a minimum level of institutional quality in order to reach the equilibrium with good institutions. Limited commitment argues that potential beneficiaries of better institutions have no credible means of compensating those currently in power. Thus, elites will find it optimal to block reforms, since they will likely lose from better institutions.

What is a "social safety net" (SSN) policy? On average, have SSN's been effective in reaching the poor in poor countries? How does this differ to rich countries?

A social safety net program typically involves a direct transfer (usually income) to poor families. While the number of families covered by these types of programs is rising in the developing world, it seems that poorer countries are less effective in reaching the poor (could be as little as one-third of families in poorest quintile, though there is considerably variation across countries). However, the coverage rate for the poor does tend to exceed that of the population, suggesting that the poor are more likely to be receiving the benefits of these programs.

What is a "steady-state equilibrium"? What is a "stable equilibrium"?

A steady state equilibrium is an allocation that is constant over time. A stable equilibrium is similar to a steady state equilibrium, but is robust to slight perturbations. For example, if wealth is increased (or decreased) slightly, the wealth path should lead the individual or household back to the same point.

How do absolute and relative inequality measures tend to vary with economic growth rates? What about absolute and relative poverty measures?

Absolute inequality tends to increase with economic growth, while relative inequality does not. Growth in developing countries tends to be distribution neutral on average, which means that each percentile of the income distribution grows at the same rate (roughly). China, India and the US have seen increases in inequality, while other countries have seen decreases. Note that the correlation between total inequality and economic growth is relatively weak (only 0.116). Similarly, economic growth tends to decrease absolute poverty, but increases relative poverty (though this seems sensible given that as countries become richer, relative poverty becomes more of a concern).

What are the main findings related to aid and economic growth?

Aid is typically not intended to stimulate economic growth; however there may still be impacts. Testing this hypothesis is difficult as aid is delivered to a non-random sample of countries (i.e. countries that need aid), which leads to results such as aid is associated with lower rates of saving (aid is endogenous). Other studies have found small, positive impacts. In one study, aid equal to 10 percent of GDP boosts growth by approximately one percentage point on average.

Describe the intervention that utilized the movie as a way to teach people about NGRES. What were the impacts of the movie on awareness? Did people typically retain information about the scheme?

An initial survey on NREGS revealed that public awareness about the scheme's rules and processes was low. An entertaining movie aimed to inform people about the scheme was created and shown in a random selection of villages. The movie was found to be successful in informing people about their rights under the scheme. However, it did not result in increased attendance, and there was heterogeneity in information retention.

What factors have constrained China's progress against poverty? What about India's poverty progress?

As discussed earlier, China has made huge gains in poverty reduction, with growth in the primary sector accounting for much of this. However, the pace of reduction could have been even faster if the growth rates in rural areas had been the same as the growth rate in the urban areas (i.e. where secondary and tertiary sectors tend to exist). The lagging growth rates of the primary sector as compared to the aggregate growth rate constrained progress against poverty. India's path of poverty reduction has been much different. India's service sector has seemed to be the most poverty reducing, primarily due to the unequal distribution of agricultural resources in rural areas. While growth in the primary sector is poverty reducing for India, this sector has not experienced the same levels of growth as other sectors.

How might credit market failure arise? Draw a graph that shows how borrowing constraints can lead to a poverty trap.

Asymmetric information is often a cause of credit market failure. Asymmetric information may arise when a lender cannot be sure of a potential borrower's ability (or willingness) to repay the loan. This can occur when a potential borrower cannot provide proof of income or collateral for the loan, for example. Borrowing constraints imply that an individual needs to have a certain amount of wealth (for collateral, say) before he will find someone to lend to him. This means that the recursion diagram in Box 8.11 will shift to the right, as in Box 8.14.

How did Brazil's economic reforms from the 1970s onwards affect poverty and inequality?

Brazil suffered from issues of hyperinflation, huge budget deficits, and trade distortions, and underwent major macroeconomic changes to address fundamental issues with its economy. Modest economic growth resulted, but with a smaller change in poverty than expected. Brazil's initial high inequality meant that the poor did not capture many of the gains from growth. However, Brazil has seen a decrease in overall inequality, including inequality between regions as well as urban and rural areas.

Describe the findings of Card and Krueger's study on minimum wages in America. What are some other effects (aside from employment) that a higher minimum wage rate might have?

Card and Krueger looked at the impact of a minimum wage increase in New Jersey, using Pennsylvania as a comparison. They found that a higher minimum wage actually increased employment. Other effects that minimum wage increases may have are decreasing poverty and inequality. There may be negative effects on owners of firms that employ minimum wage workers (as their inputs are now more expensive). There may also be price effects, as the goods produced by minimum wage work become more expensive.

How did China's accession to the WTO impact poor people? Who tended to gain from this accession and who tended to lose?

China's accession to the WTO resulted in some households gaining and others losing. Those who tended to gain were urban households. Rural households generally saw a negative impact.

List some reasons why China has seen so such progress against absolute poverty since around 1980.

China's poverty rate fallen from 84% in 1981 to 13% in 2008. In part, this is due to wide-sweeping land reforms throughout the 1940s to 1970s, which resulted in a more equal distribution of land across the country. Furthermore, the Communist regime had invested heavily in health and education, particularly in rural areas. This meant that when the economy started to develop, the gains from growth were shared by a large part of the population. Of course, these favorable initial conditions contributed to the impressive growth rates experienced by China over the last few decades (e.g. a large, literate and healthy workforce to draw from).

What is "community-based targeting"? How could a poor administrative structure actually lead to more leakage?

Community-based targeting relies on local level information to determine who is poor and who is not. The idea is that local administrations may have more/better information. However, if the local administration is corrupt, this could lead to officials receiving part of the transfers (either through skimming or misclassifying themselves as poor).

What are some arguments for compulsory schooling? Under what conditions may compulsory schooling actually hurt the poor?

Compulsory schooling is seen as a way to ensure that all children receive a basic education. Education is seen as a way for poor children to escape a poverty trap or increase their lifetime earnings. Goldin and Katz estimate the education is a key factor in US growth rates between 1940 and 1980. Compulsory education can also reduce inequality. However, compulsory education can impose costs on poor families in the form of foregone earnings (children may have been at work rather than school) and resources needed to attend school (e.g. uniforms, books and transportation).

What econometric model would you use to evaluate welfare impacts of price changes due to a trade reform? Why is it important to consider vertical and horizontal impacts?

Determining price changes due to trade reform is a difficult task. Computable general equilibrium (CGE) models can be used to simulate what happens to prices and household welfare after a trade reform. Vertical impacts are usually considered (how the difference between the rich and the poor change). Horizontal impacts are also important (how policy impacts households at the same level of income pre reform). Variation in horizontal impacts implies that some households are gaining and others are losing, which impacts overall inequality.

Why can access to piped water improve health outcomes? Why might it not be as effective in reality?

Diarrhea and related health problems stem from unsafe drinking water, which is often a result of poor sanitation and sewerage disposal. Piped water systems allow for access to clean water and better disposal of waste. However, it is often the case that piped water still needs to be treated in some manner before drinking. This may be a burden for poor families (or they may not be aware that the water has to be treated). Studies have found that health gains from piped water largely by-pass children in poor families, particularly when the mother is poorly educated. It may be that better infrastructure should be supplemented with public awareness campaigns on the issue.

Both China and India have seen uneven growth rates across regions and sectors. What are these sectors? Why might this be a problem for further poverty reduction?

Different sectors of the economy were found to matter for poverty reduction between China and India. For China, the agricultural sector played a major role, while in India the modern industrial and services sectors were more important. This is likely due to the initial distribution of assets between each country. With an unequal distribution of land among rural Indians, shared growth was harder to attain. The slow growth of the agricultural sector in India is likely a reason why poverty reduction hasn't been as great as China. Since most poor people live in rural areas, a slow growing agricultural sector suggests that overall poverty reduction will be low.

How is economic growth typically measured? What are some limitations in using this measure as an indicator of progress?

Economic growth refers to increases in GDP per capita. The rate of growth is the annual percentage change in GDP per capita. GDP is an aggregate of the production of all goods and services in an economy. Market prices are used to value quantities of production, then these are added up to get total GDP. Several criticisms of GDP are that it is not measured well in practice, particularly for developing countries; doesn't take into consideration environmental consequences of growth; can be a poor measure of average economic welfare of a population; doesn't explain how income is distributed.

What is a "basic income guarantee" (BIG) scheme? How does it differ from perfect targeting? Why might this type of scheme be difficult to implement?

Everyone receives the same transfer, regardless of his or her income. Implies that those with the lowest incomes have a minimum standard of living. This type of scheme has no targeting. Perfect targeting is where only those who are deemed poor receive the transfer. Administrative costs for BIGs are low, but certainly not zero. There is also the possibility of double dipping, whereby some people may receive the transfer twice. The scheme also has to be financed, which may also be costly.

What is meant by the "feminization of poverty"? What are some possible explanations for this?

Feminization of poverty refers to the issue that women appear to face greater obstacles to escaping poverty than men, and are therefore more likely to be in poverty. Some causes are longer work hours, fewer opportunities (particularly for young, single women), discrimination, and a greater vulnerability to shocks and violence.

List some reasons why external aid hasn't had more of an impact on poverty.

Firstly, aid tends to be bilateral and given strategically depending on the goals of the donor government (which is not necessarily poverty reduction). Secondly, aid is often tied to specific goods and services produced by the donor country. These projects are also not well coordinated with other donors.

What are "fungibility" and "flypaper" effects? Why is fungibility important in determining the impact of external aid?

Fungibility refers to the idea that aid can be spent on whatever the government sees fit. For example, the government receives $1 million to spend on infrastructure. If the government had already budgeting $1 million for infrastructure, then the infrastructure is built and there is $1 million left over to spend on another project. Flypaper effects are when aid sticks to a sector. For example, now $2 million is spent on infrastructure. Fungibility makes it hard to evaluate what the external aid was spent on and how much effect it had. Evaluating the infrastructure project may not properly reflect the impact of aid - it would be better to evaluate the new project.

List some macroeconomic crises that have affected developing countries in recent years. Is there evidence of lasting impacts of some crises?

High inflation rates often affect poor people disproportionately, given sticky wages and the proportion of income spent on items such as food and housing. Poor members of the population are also more vulnerable to macroeconomic shocks, either through a higher risk of job loss or inability to consumption smooth. The effects from some crises can be long lasting. For example, poor nutrition at birth and a higher infant mortality rate. It may also take some time to rebuild asset holdings or see rising wages.

Why has the urban sector often been favored in development policy making? What are the arguments for focusing more on the rural sector?

Historically, the urban sector has had the incentive to keep rural wages low as much of the urban labor force was drawn from the rural sector. More recently, agriculture is seen to be an unproductive sector of the economy, and developing the urban sector will lead to higher wages (see for example the Lewis model and Harris-Todaro model). Labor migration from the rural sector to the urban sector (where the wages are higher) leads to a reduction in poverty. However, given that most poverty can be found in rural sector, growth in the rural sector is likely to be more poverty reducing than growth in the urban sector. This could come through increasing the marginal productivity of rural sector workers, e.g. through technology gains.

Explain the cross-country regression model for testing whether trade openness benefits an economy. Has trade volume been found to be a significant predictor of growth? Why might trade volume be an endogenous variable?

Identifying the causal impact of trade openness is difficult. To find the impact, a cross-country regression can be run where the dependent variable is GDP growth and the independent variables are trade openness and relevant controls. There is some support for the view that trade openness is good for growth (significant in about two-thirds of regressions). However, trade volume is likely an endogenous variable, such that it can't be used for causal inference (the direction of causality is unclear, maybe growth leads to trade openness).

Consider the figure in Box 9.2. Why is school enrollment nonlinear? Find the stable and unstable equilibria and circle the area where a "trap" may occur.

If we assume that the harassment cost is nonlinear, and is a decreasing function of schooling, then the enrollment rate for girls will also be nonlinear. For example, at very low levels of schooling, the harassment cost is high and in the next period few (or fewer) girls will enroll in school. In Box 9.2 there are three equilibria. The stable equilibria occur at (0,0) and (1,1), i.e. when no girls are in school or all girls are in school.

The evidence for India suggests that the incidence of reported sexual violence within the household tends to fall as maternal education rises, but it also falls with rising income. At the same time, education tends to be positively correlated with income. How would you go about researching which of these is the more important factor, higher income or better education for women?

In a regression equation, the relationships above can be written as: where Viol = sexual violence against women within a household (say an index which increases in value the more violence there is), FemaleEd = education of the oldest female in the household (usually the wife of the head of the household) and Income = household income or consumption. Based on the relationships described above, we should expect β and γ to be negative. If the correlation between education and income is not too strong, t-statistics on the coefficients can be used to determine how significant these variables are in explaining the violence variable.

Describe the standard trade model based upon comparative advantage. What goods will a country import and export? How might trade under this model lead to a reduction in poverty and inequality? Under what circumstances might trade lead to an increase in inequality?

In the basic trade model (say two goods, two factors of production and two countries), each country specializes in producing the good it has a comparative advantage in, and trades with the other country (who is also specializing). Comparative advantage is determined by who has the lowest opportunity cost of producing a good, or in other words, who is better relatively at producing a good. If a country has an abundant factor of production (e.g. labor), then the country will be better relatively at producing the good that is labor intensive. The country will export the good it has the comparative advantage in and import the other good. The price abundant factor will increase (e.g. wages) which can lead to a decrease in poverty and inequality. However, it may also be the case that the reverse is true - if the price of some factors of production are increasing, other factors will see their price decrease (relatively) and inequality may actually increase.

Is the incidence of absolute poverty in the developing world higher in urban or rural areas in general? Is the nominal urban poverty line typically higher or lower than the rural poverty line? Why?

In the developing world, poverty is typically higher in rural areas, though that is changing. In 2008, the rural poverty rate is more than double the urban rate. However, the rural poor are urbanizing fast than the population as a whole (urbanization of poverty). This may (mistakenly) suggest that rapid progress has been made against rural poverty. In general, urban poverty lines tend to be about 30% higher than rural lines to reflect higher cost of living in urban areas.

Box 9.5 discusses the welfare gains from price changes. Ivanic et al. (2011) refer to changes in price (food prices specifically) as "short-term" impacts. What reasons can you think of as to why the longer-term impacts could differ from those implied by the above calculations?

In the long-run, individuals can adjust their behavior substantially. For example, if the price of what has increased, consumers will switch to a cheaper staple, and/or farmers will begin growing wheat. This may imply that in the long-run, the impacts on poverty from an increase in the price of wheat may not be so severe.

Explain what is mean by the "information" and "incentive" constraints on antipoverty policies. Give an example of a policy with a 100% marginal tax rate.

Information constraints arise when it is difficult to identify who poor people are. This affects how well targeted a program is. Incentive constraints occur when recipients of transfers are disincentivised from working, often because any additional income will mean loss of part or the entire transfer amount. An example of a policy with a 100% MTR is one in which for every extra dollar earned from employment, a dollar is lost from the total transfer received.

Why would self-targeting policies be more appropriate for developing countries with a large informal sector?

Information constraints mean that the government does not know who is poor, making targeting difficult. Self-targeting programs overcome information constraints as individuals self-select into the program. For example, if an individual chooses to work on a workfare program, it implies that he or she is poor.

Explain the term "initial distribution". Why might the initial distribution matter for poverty reduction?

Initial distribution refers to the distribution of incomes at the first time period considered (not necessarily the beginning of all time). It's used often in theoretical analysis when considering how a distribution changes over time. Initial distributions matter greatly to poverty reduction. For example, a country that starts with a high rate of poverty may find it hard to accumulate capital and grow. As mentioned above, countries with high levels of inequality may find growth rates affected. China provides a good example of how a country that started with relatively high levels of education and land ownership was able to grow faster than countries that might have started with a less equal initial distribution.

What is meant by the "poverty-inequality" trade off? Has there been such a trade-off in the developing world? Explain.

It has been suggested that a reduction in poverty is accompanied by a rise in inequality. The evidence, however, seems to be weak, particularly when absolute poverty is considered. The correlation between total inequality and absolute poverty is only 0.140. For relative poverty the number is slightly higher, at 0.256. Correlations, of course, are just associations and the causal direction of this relationship, along with any confounding influences, in unclear in this analysis.

What is meant by "labor augmenting technical progress"? Give some examples of industries both where technical progress is typically labor augmenting and not labor-augmenting.

Labor-augmenting technical progress is a change that increases the demand for labor in production (e.g. in the production function, L increases). The technology sector could be argued to be labor augmenting e.g. through demand for programmers. The car industry is usually thought to be not labor augmenting.

Why are land-use rights (and property rights in general) important for poor people? How can land rights be enforced?

Land is the main non-human asset of poor people, and as a result, secure land rights are crucial to their welfare. Without secure land rights, land may be appropriated at any time, which creates both a direct loss of a valuable asset if the land is appropriated, as well as uncertainty (which affects investment decisions). Proper land titling is key in ensuring land rights, as are social institutions, which support individual ownership titles and land tenure (i.e. both de jure and de facto land rights are important).

A country has had administrative (non-market) processes for allocating agricultural land. Discuss the possible implications (potentially in both directions) for poverty of switching to a market-based allocation system, based on private ownership.

Land reforms can constitute and important part of progress against poverty if the initial distribution of land in a country is highly unequal. However, it is not clear why a market-based method of allocating land would benefit the poor. Market-based land ownership may mean that small farm-owners will see an increase in the value of their land. On the other hand, those without land may find it increasingly expensive to attain it.

How do urban/rural poverty numbers vary across various regions? How have these numbers changed between 1990 and 2008?

Latin America and the Caribbean have the highest urban share of the population, and also the highest urban share of the poor (almost half of LAC's poor live in urban areas). 30% of SSA's poor live in urban areas. Only 16% of East Asia and the Pacific's poor live in urban areas, which is incredible considering that almost half of the population is urban. The share of urban poor is increasing over time in South Asia, SSA, East Asia and the Middle East. Though, in all those countries, the share of the urban population has also grown.

What is meant by "leakage" with regard to SSN's? Explain the model presented in Box 10.4 and why fighting corruption can sometimes backfire and reduce the benefits of a policy.

Leakage occurs when the non-poor captures some benefits of a program. This can be due to non-poor individuals pretending to be poor or because of corruption at some level of government. Fighting corruption increases the marginal cost of corruption, shifting the MC curve to the left. This decreases the equilibrium employment offered by the scheme (increases rationing). One way to avoid this situation is to ensure that there is no rationing, i.e. the officials cannot limit the amount of employment available. Making workers aware of their rights has also been found to help.

Why might high levels of crime and violence prevent poor people from escaping poverty?

Many poor people face violence, or fear of violence, in their daily lives. Safety concerns for poor people are an issue in both urban and rural areas. High levels of crime may stop poor people from escaping poverty as it leads to an inefficient allocation of resources (money must be spent on protection or losses from crime rather than more productive activities) as well as psychological harm (e.g. a sense of powerlessness). Women in particular can face substantial violence.

Why are non-income dimensions of welfare important to consider, particularly for poverty reduction?

Non-income dimensions of welfare refer to things such as health, education and living conditions (among many others). They are important determinants of a person's overall well-being and welfare. Considering income only as an indicator of welfare may be misleading. For example, someone who has poor health and lives in an unsafe area should be expected to have a lower level of welfare than someone who does not, all other things held constant (including income).

What are some explanations that have been given for the rising obesity rates in the United States, particularly among the poor?

Obesity has become a major concern for public health, particularly for poor families. Some reasons are that access to healthy foods can be a problem, though along a small proportion of the US population is thought to live in "food deserts". Poor areas tend to have closer proximity to fast-food restaurants. Unhealthy foods are also cheaper.

How has inequality changed since 1980? What component of inequality is this change mostly due to?

Overall, total inequality in the world has decreased since 1980. This has mostly been due to a decrease in between country inequality as poor countries have begun to catch up to rich countries. However, the gains to reducing inequality have been tempered by increases in within country inequality, particularly for countries in Latin America and the Caribbean. Inequality within East Asian countries has also risen over this time period. Other regions such as the Middle East and North Africa have seen falling average inequality.

Why might perfect targeting undermine any broad political consensus for an anti-poverty policy? Why might information constraints make perfect targeting impossible?

Perfect targeting implies that only those who are poor are receiving the benefit. Without perfect targeting, some members of society who are not poor are able to access benefits, for example, government officials. Without the guarantee that there may be monetary benefits to implementing a particular program, it may be that officials prefer to implement a different policy (or even no policy at all). Information constraints can hinder perfect targeting as it becomes difficult to figure out who exactly is poor and who is not. Imperfect information can lead to leakage to the non-poor.

What has been the trend over the last 30 years for the headcount index and the number of people living under poverty lines at both $1.25 and $2 a day? What if China is excluded from the calculations?

Poverty at a $1.25 per day has halved over the time period considered. Those living under $2 per day have also fallen dramatically. If we consider the number of people living below those lines (rather than the percentage), there has also been substantial progress (though at a lower rate). However, much of this progress is due to China's reduction in poverty. Excluding China, the progress against extreme poverty has been much lower. Furthermore, the number of people living between the two lines has doubled over the period considered, implying that many people have escaped extreme poverty, but barely.

What role do protection and promotion policies play in eliminating poverty traps? Explain the difference between the two policies with the help of a poverty trap diagram such as in Box 8.14. Why can there be poverty in society even if there is no one caught in a poverty trap?

Protection policies aim to stop people from falling into a poverty trap by keeping their incomes above a minimum level (kmin in Box 8.14). Promotion policies aim to help people escape poverty traps by getting their wealth above kmin. Poverty can still exists regardless of whether there is a poverty trap. A poverty trap implies that there is some level of wealth that will "trap" people in poverty, such that incremental gains in income will not be enough to eventually escape poverty. In a society without a poverty trap (such as in Box 8.11), incremental gains in income will lead someone to escape poverty in the long run.

Why would a protectionist trade intervention help protect against external price shocks? What are some alternative policies that could be used to protect against these shocks without causing substantial price distortions?

Protectionist trade policies can help stabilize prices. Short-term global price fluctuations can have long-term impacts on some groups. For example, a farmer that cannot sell his crop for a high price may find that he is left in debt and unable to borrow again the following season. Alternative protectionist policies could be subsidies for farmers, better credit and lending infrastructure, and risk-sharing farming practices.

What is the aim of rent controls? Why might they not work as intended?

Rent controls aim to stop rent in private sector housing from rising too quickly (i.e. above the inflation rate). It aims to ensure that there is some availability of affordable housing. However, rent controls imply that the rental price is below market price, leading to excess demand. As a result, it may be very difficult to obtain a rent controlled dwelling. Landlords also have less incentive to provide maintenance and other services. It might also be less efficient than other policies such as direct subsidies.

Recall the model sketched in Box 9.2 on social norms in girl's schooling. What data might you collect to assess whether this model is valid?

Since the model in Box 9.2 is a dynamic one, information on enrollment or attendance over time is needed. That is, a panel that follows girls over two or more time periods.

What is the difference between "social insurance" and "social assistance"?

Social insurance is a public provision of untargeted transfers to cover adverse shocks, for example spells of unemployment or poor health. Social assistance is a targeted transfer, often with conditions attached as to the requirements for receipt of the transfer and the length of time that the assistance can be accessed.

How did China and Vietnam differ in their approach to agricultural land-rights after switching from socialist agricultural systems?

Socialist agricultural systems are typically not as efficient as the family-farm model as farmers receive less than their marginal product of labor under socialist agriculture, and therefore have less incentive to produce. Both Vietnam and China shifted to the family-farm model in the 1980s and 1990s. China's land reforms involve administrative land allocation. Vietnam's land laws allowed for voluntary exchange and on the whole were found to be pro-poor, though there were some gainers and losers.

What is meant by a "state-contingent" SSN? Give an example. Why might this type of policy create severe fiscal stresses?

State-contingent policies refer to policies that depend on what state of the world one is in. For example, unemployment benefits begin after a person loses his or her job. They are a type of targeted transfer. The state of the world can be temporary or permanent (e.g. temporary unemployment or a permanent disability). This type of policy can create severe fiscal stresses, for example, in times of an economic downturn. With lower economic growth, there are fewer tax revenues and more people whose income falls below a threshold and they are eligible for benefits.

What are the two widely used measures for assessing the nutritional status of children? How is adult nutritional status measured?

Stunting (height-for-age) and wasting (weight-for-height) are most commonly used to assess children's nutritional status. Children below two standard deviations of the median height (weight) are deemed to be stunted (underweight). Adults are judged using BMI, where someone with a BMI under 18.5 is deemed to be underweight.

Review the poverty trap model in Box 8.14. Discuss the dynamic gains from an exogenous increase in wealth to people at different levels of initial wealth. How is inequality affected? What about if income is redistributed from rich to poor?

Suppose that everyone gains an increase in w that is less than kmin. Those with initial wealth between the equilibrium points B and C will see their incomes converge to point C (no change in the equilibrium point for this group). Some people stuck in the poverty trap will escape poverty, but so long as the gain in wealth is less than the threshold, some people will still find themselves stuck in a poverty trap. There are now more people at the upper end of the distribution at point C, but there will still be some stuck at point A. Similarly, redistribution from rich to poor will also have little impact on inequality if there are still some people stuck in the poverty trap, and the amount of wealth redistributed from the rich small enough to ensure they stay at point C.

How does the Harris-Todaro model differ from the Lewis model? Why would the rural wage rate not be driven down to eliminate unemployment?

The Harris-Todaro model also tries to explain how an economy develops but through the scope of urban unemployment. A key feature is that the urban wage rate is fixed at a level above the urban wage rate. The labor surplus assumption is dropped. Rural workers are attracted to the city by higher wages, but not all find work. Equilibrium occurs when the wage rate is such that rural workers no longer want to move. Because of the higher wage rate, there is excessive migration and some urban residents find themselves without jobs. Note that the equilibrium condition is that the rural wage rate equals the expected urban wage rate, which is necessarily below the actual urban wage rate so long as the probability of getting an urban job is not 1.

What is the Kuznets Hypothesis?

The Kuznets hypothesis explains how inequality changes as an economy grows. It follows an inverted U shape: at low levels of growth, everyone is poor. As the economy grows, some people benefit while other do not. Richer countries care about inequality and redistribute income towards the poor (or the poor begin to share in the gains of growth more than the rich).

How do researchers test the Kuznets hypothesis? Does the data support the hypothesis?

The Kuznets hypothesis traces out how inequality changes with economic growth. To test the KH, a researcher can run a regression with a country's Gini index as the dependent variable then GDP per capita and GDP per capita squared (plus appropriate controls). The squared GDP term is important since the inverted U shape represents a non-linearity between income and the Gini index. If the KH is correct, both the GDP variables should be significant, with GDP per capita positive and GDP per capita squared negative. In general, there is weak evidence for the KH. Cross-sectional data (across many countries in one time period) has found some evidence, though there is much less evidence that countries evolve according to KH over time.

How does the Lewis model explain economic development? What are the main criticisms of this model?

The Lewis model explains economic development through technological change that increases the size of the modern sector. It assumes that there are two sectors, urban (modern) and rural. There is a labor surplus in the rural sector that implies that the marginal product of labor in the rural area is constant. The wage rate in the urban sector is determined by the marginal product of labor in the urban sector and is above the wage rate in the rural sector. Technological change means that more workers can be employed in the urban sector. As more workers move to the urban area, the labor surplus is absorbed. Eventually, the economy will reach the Lewis turning point and wages in the rural sector will begin to increase. The Lewis model traces out the Kuznets curve.

What is the (approximate) aggregate poverty gap for the developing world in 2010 (for a poverty line of $1.25/day)? How is this gap calculated? Discuss why the cost of eliminating poverty could be much greater than the aggregate poverty gap.

The aggregate poverty gap in 2010 was $166 billion per year. This gap is calculated by taking summing the difference between actual income and the $1.25/day poverty line for everyone below the poverty line. (See the discussion on the poverty gap index in Part 2). In other words, it is the area below the poverty line but above the curved quantile function. Incentives, targeting and leakage are some of many reasons why simply transferring $166 billion to poor people may not eliminate poverty.

Do you think it is it plausible that labor can be withdrawn from the rural economy without any loss of rural economic output, as assumed by the Lewis model (Box 8.7)? How might that happen? What does it assume about the behavior of those left behind?

The assumption of the labor surplus is one of the more criticized aspects of the model. If the assumption is true, it implies that the rural sector is producing the exact same amount of output with one less worker. This means that either the marginal product of labor is zero, or that another member(s) will increase their work to make up the difference. This seems implausible in many settings. If the labor surplus assumption is dropped, the result is an upward sloping marginal product curve and rising wages that come with increased technological progress.

Show how the distribution of income in an economy changes when a BIG is introduced, funded by a proportional tax on income.

The black line is the initial distribution of incomes. A proportional income tax applied to all individual moves the distribution to the dotted line. Finally, adding a BIG shifts the distribution to the red line. Overall, this policy mix has resulted in a less unequal distribution of incomes. SEE PHOTO ON SHEET

Recall Peter Bauer's comment that: "If...the conditions for development are not present then aid ... will be necessarily unproductive and therefore ineffective." (Bauer, 1971, p.98). Based on this chapter and your readings and observations what would you identify as the required "conditions for development" for aid to work?

The existence of a "poor institutions trap" may inhibit the effectiveness of aid. With poor institutions, aid may not necessarily be used appropriately, and is subject to a greater chance of leakage to the non-poor. However, as shown up, not giving aid to these countries may lead to a worsening of the quality of the institutions. Instead, conditions for development may be as simple as the government's willingness to help those in need.

In what region of the world do we now find the highest incidence (%) of absolute poverty? What about for total counts of poverty (Figure 7.19)? How has this changed between 1990 and 2008?

The highest incidence of absolute poverty in 2008 was in Sub Saharan Africa. The rate has decreased slightly between 1990 and 2008. As noted earlier, both South and East Asia have seen large reductions in absolute poverty over the past 30 years. Though the rate of poverty is now very low, East Asia and South Asia continue to have the highest number of people in poverty.

What is the hukou system? How might it have mattered to poverty reduction?

The hukou system in China are restrictions on internal migration aimed to control the expansion of urban population. By stemming the inflow of people to urban areas, local governments can avoid the creation of urban slums and also control spending on health, education and housing. The end result on poverty is somewhat ambiguous. It can be argued that the hukou system benefits urban residents, as their wages remain high due to the restricted labor supply as compared to rural areas. With free mobility, it might be that wages tend to equalize, as more people choose to migrate to urban areas. However, it is likely that not all these migrants will find employment, and some may be worse off than they were in the rural area.

List some criticisms of the Harris-Todaro model. What happens when urban wages are assumed to be flexible?

The idea of a fixed urban wage rate is often criticized (e.g. why is it fixed?). It also assumes that unemployed urban workers are idle, i.e. there is no informal sector for them to work in. There is no heterogeneity in workers in both sectors, for example a type of worker may be more likely to migrate than others. There is also no unemployment in the rural sector.

What is the definition of "middle class" in the developing world? How has the middle class changed between 1990 and 2005?

The middle class in the developing world is defined as living above $2 per day but below the US poverty line of $13 per day. The upper middle class is those living above $9 per day but below $13 per day (i.e. not poor by any developing country standard). In 1990 one-in-three people were defined as middle class (in the developing world) and this rose to one-in-two by 2005. Much of this has come from an increase in those living between $2 and $6 per day. Only a very small share of the growth in the middle class are considered as upper middle class.

What were the main findings from the Morocco trade policy simulations?

The policy simulation, which involved a hypothetical reduction on, imported cereal tariffs also found differing effects across households. In aggregate, there was only a short-term impact on the poverty rate. Urban households tended to gain from cheaper food prices, while rural households lost as their price of their produce fell. There was a small drop in vertical inequality but a larger rise in horizontal inequality.

How does the quality of institutions tend to vary by a country's GDP? What are some of the long run economic costs of poor institutions?

The quality of institutions and GDP per capita show a strong positive correlation - poorer countries have poorer institutions. The capacity and performance of administrations tend to be weaker in these countries, leaving room for inefficiencies and corruption. One study found that institutions are of lower quality in countries with a high infant mortality rate. Better institutions have also argued to be responsible for the US's better living conditions, as compared to Mexico.

What is the "truly global" poverty rate? How has it changed between 1990 and 2008?

The truly global poverty rate combines absolute poverty with social inclusion needs. This satisfies the conditions for a weakly relative poverty line, where social inclusion needs refer to poverty lines typical of the country an individual lives in. The global poverty rate has been falling steadily since 1990. This is mostly due to falling absolute poverty rates for the developing world. However, rising relative poverty rates offset some of the gains. Poverty for high-income countries has stayed relatively constant over time (slightly increasing).

Explain the formula for the weakly relative poverty line. What are the two ways to interpret the weakly relative poverty line?

The weakly relative line is Zit = $1.25 + max(Mit - $1.25, 0) / 2 , where M refers to country i's median (or mean) income at time t. If a country's median income is below $1.25 per day, then the weakly relative poverty line for that country is the global extreme poverty line of $1.25 per day. For countries with median incomes above $1.25, the line increases at a rate of ½ of the difference between the median and $1.25. For example, a country with a median income of $2.25 per day will have a weakly relative poverty line of $1.75. The two interpretations of this line is to be poor an individual must be neither a) absolutely poor by the $1.25 per day line nor b) poor by the standard of the particular country, given a global standard of welfare.

What are some possible explanations for the convergence of poverty rates between high and low-income countries?

There are a number of reasons why poverty rates may have converged. Firstly, the rate of poverty reduction for low-income countries has been very high over recent decades (see previous sections). Regardless of what line is used, progress against poverty in the developing world should imply some convergence in rates. Secondly, low-income countries tend to use absolute poverty lines, while high-income countries use relative lines. With distribution neutral economic growth, low-income countries will always see a decrease in poverty while high-income countries will not.

What are the limitations of using market exchange rates in measuring global poverty and inequality? How are those limitations addressed?

To make the global poverty line comparable across countries, it is first adjusted for PPP and converted into local currency in 2005 prices (or whatever year the global poverty line was measured in). Finally, it is adjusted to current prices using a local CPI. There are several issues that can arise using this method. One is that market exchange rates do not take into consideration non-traded goods and services. In developing countries, the price of labor may be very low and goods with a large labor input may be priced disproportionally lower. Recent PPP conversions have been adjusted to take this into consideration.

List some reasons as to why high inequality can limit economic growth.

Typically, it is argued that growth leads to inequality. However, it is also possible that the direction of causality runs in the opposite direction, that is, inequality affects growth. Several theories could plausibly explain this interpretation. One is that poverty fosters a high rate of population growth, which leads to lower economic growth, as per standard models of economic growth (in which an increase in n leads to a lower capital-labor ratio). Another explanation (which suggests that inequality may be good for growth) is that given that the rich save a higher proportion of their incomes, a higher rate of inequality means higher aggregate savings and therefore higher growth (though, alternatively, it could be that higher inequality implies higher poverty and therefore lower savings). High inequality can also lead to long run problems in an economy, for example, lower levels of education, poorer health outcomes, and therefore less productive workers within a subset of the population. Credit constraints may also be an issue and further exacerbate growth.

Are birth rates for poor populations higher than for the wealthy? If so, what is a possible explanation?

Typically, poor families tend to have higher birth rates. DHS data suggest that the fertility rate for families in the poorest quintile is 6.2, while only 3.3 for the richest quintile. There are several possible reasons for this. Firstly, poor families may have less access to contraception and family planning services. Secondly, if poor families face higher infant mortality rates, a higher birth rate will be needed to achieve the same expected family size. Finally, children can play an important role in supporting older members in later years, which is particularly important for those living in countries without formal social security systems in place.

What is "underemployment" as distinct from "unemployment"? Why might underemployment be a significant problem in developing countries?

Underemployment refers to those who are employed but not working as much as they would like to. In developing economies with seasonal work, many workers find themselves underemployed at certain times of the year. For example, a worker may be employed full-time during harvest season but not during other times of year.

Why hasn't urbanization in Sub-Saharan Africa been poverty reducing?

Urbanization in SSA on aggregate has not been poverty reducing. This could reflect greater regulation of urban labor markets, as well as existing agricultural policies that prevented growth in agricultural productivity. A stagnant agricultural sector may have led to excessive urban migration, excessive urban unemployment, and little poverty reduction.

How might user fees discourage poor people from seeking healthcare?

User fees are the fees that users of healthcare pay to receive the services. Depending on the size of the fee, poor people may be discouraged from using the services, particularly for minor issues. This may not be optimal given that good health has externalities.

Has there been any progress against relative poverty in developing countries between 1990 and 2008? How does the share of relative poverty in developing countries compare to the share in developed countries?

While absolute poverty has decreased, relative poverty in the developing world has increased. For developed countries, relative poverty has grown from 5 to 8%. In developing countries, the change is from 22 to 48%. This suggests the weakly relative poverty is a problem of the developing world, rather than the developed world. This also varies across regions. Latin America and the Caribbean has the highest rate of purely relative poverty and SSA the lowest, though it is important to note that relative poverty has increased across all regions of the developing world.