Chapter 9

Economic Development in Asia

Chapter 10 – Poverty & Income Distribution
Poverty and Income Distribution
• Despite substantial economic growth in many countries,
poverty remains widespread.
• Estimates vary but at least 1.4 billion people live in
poverty worldwide (about 25% of the world’s population)
• The gap between the richest and poorest countries has
grown.
 Poverty and Income Distribution

• Poverty tends to perpetuate itself since the children of the poor

tend to remain poor.

• This is sometimes called the “vicious circle” of poverty.

• Poverty tends to be concentrated in countries that are in the

“tropics”.

• This has led some to believe in a “climate” theory of

development.
Poverty and Income Distribution

• The “climate theory” receives support when it is

recognized that these regions in the tropics have greater
difficulties with diseases and also with achieving rapid
growth in agricultural productivity.

• Singapore, Thailand and Mexico are several exceptions

to this rule.

• Nevertheless, the evidence is strong (Figure 9.1).

 Measures of Poverty
• There are several ways to measure poverty.

• The head count ratio is the simplest and most widely

used (q/n) where q is the number of people below the
poverty line and n is the population size.

• Other measures include the poverty gap.

 Measures of Poverty
Some Issues in Measurement:

• Absolute v Relative Poverty?

• Which poverty line or ‘threshold’ to use?.
• What is the depth of poverty? How is that measured?
• Household poverty or individual poverty?
this issue is particularly relevant when some household
members are systematically deprived of food and shelter
– often girls and women.
 Measures of Inequality
• Inequality is pertains to the ‘fairness’ in the distribution of
income in the population

• In other words, the gap between the rich and the poor

• What is ‘fair’ and ‘not fair’ is highly subjective

 Measures of Inequality
• Objective measures satisfy certain criteria:

(i) independence of scale and the size of the population.

(ii) It should also be sensitive to transfers of income

within the income distribution at all income levels.
 Measures of Inequality

(iii) An additional desirable feature is decomposability –

that is, the measure can be broken into several different
components.

The range, mean absolute deviation and coefficient

of variation and the variance of the logarithm of
income are some measures of income distribution that
have been used.
 Measures of Inequality
• The so-called Kuznets income ratio is also popular –
the ratio of the income shares of the poorest 20% and
richest 20% of the population.

• The most widely used measure, however, is the Gini

coefficient, which varies between 0 and 1.
 Measures of Inequality
• The Lorenz curve is a graphical representation of the
relationship between the cumulative share of income and
the cumulative share of the population (Figure 9.2).

• The Gini coefficient can be derived from the Lorenz curve.

It is the ratio of the area between the 45° line and the
Lorenz curve to the total area in the triangle formed by the
X and Y axes and the 45° line.
Trends in Poverty and Inequality
• Using a poverty line of US$ 1.00 per day and US$2.00
per day, the World Bank has compiled a number of
poverty measures for countries around the world (Table
9.1).

• By continent: Africa is the worst off, followed by Asia and

then Latin America
Trends in Poverty and Inequality
• In Asia: of the 9 countries shown in Table 9.1 & using the
$1.00 a day cut off, only India has a HCR > 30% i.e. 30
percent of the population is in poverty

• In Africa: there were 3 countries out of 7 sampled have

HCRs greater than 30% (all three were in fact over
55%!)

• In Latin America: there were 4 out of 10 countries

sampled have HCRs greater than 30%
 Trends in Poverty

• Within Asia, dramatic reductions in poverty occurred in

the last 30 years (see Table 9.2 & 9.3).

• Poverty alleviation outcomes have been most impressive

in East Asia, in many countries in Southeast Asia and Sri
Lanka.

• There has been less progress in all other South Asian

countries.
 Trends in Social Indicators &
Income Distribution
• Social indicators have improved in East Asia and
Southeast Asia – reductions in illiteracy, higher life
expectancy and lower infant mortality (Table 9.4).

• Income distribution has improved in some Asian

countries
• Income is generally better distributed in Asia than in
Latin America (Table 9.5).
 Trends in Income Inequality
• Another way to look at the distribution of income is by
considering the income shares of the lowest and highest
20 percent of the population (Figure 9.6).

• Of the countries in this table, the richest 20 percent of

the population has at least a 35 percent share in the
nation’s income.

• Inequality is worst in Vietnam and Malaysia, where

almost 50% of the nation’s income accrue to the richest
quintile of the population
 Poverty Elasticity

• The rate of change in poverty divided by the rate of

change in income defines the elasticity of poverty
with respect to income, Ep.

Ep = rate of change in poverty

rate of change in income

 Poverty Elasticity
• In many Asian countries, these elasticities are less than
1.

• Poverty elasticity in Asia is thus inelastic suggesting that

a substantial increase in income is needed to reduce the
rate of poverty.
 The Kuznets Curve

• “How does income inequality change as income

changes?”
• The Simon Kuznets’ Curve says that inequality follows
an inverted U shape – inequality is low at low levels of
income, then deteriorates rapidly as income increases
(with development); inequality levels improve again at
higher levels of income.
• This inverted U shape is explained by the greater
variation in incomes that come about during the early
phases of industrialization
 Kuznets Curve

• There is virtually no evidence of a Kuznets curve for

countries that have a large number of observations, with
the exception of England, which did have an upsurge in
inequality during the industrial revolution.
 Kuznets Curve
• For a cross-section of developing countries, there is
greater evidence of an “inverted U” shape for income
distribution.

• This may be because of Latin America, where incomes

are average and income inequality is large.

• When Latin America countries are removed from the

study, no “inverted U” is observed.
 Kuznets Curve
• The issue of worsening inequality as a necessary
condition for growth is still unresolved.

• What we do know is that lifting rates of growth is an

effective way to deal with poverty.

• We also know that income distribution changes only

slowly over time.
 Kuznets Curve
• Furthermore, a dramatic shift in income distribution
would be required to achieve the same impact on
poverty reduction as a doubling of the rate of economic
growth.

• Therefore it may be better to pursue growth objectives

just so long as they do not have a strong negative impact
on income distribution.
 Inequality and Openness
• World Bank data suggests that the intensity of trade
(trade openness) and income distribution are inversely
related.

• This suggests that there may be a “virtuous cycle”

going on in East Asia.

• Human capital has been developed and income

distributions improved within the context of an open and
dynamic export based orientation.
 Inequality and Openness
• The World Bank study also suggests that having a
substantial natural resource base may serve to inhibit
the rate of growth.

• While the level of average education is about the same

in Latin American and Asia, it may be that resource
based economies have not been able to fully utilize
human capital in new and dynamic industries requiring
skill and know how.
 Inequality and Openness

• Trade openness allows Asian economies to take

advantage of externalities in marketing and distribution
that help exporters lower costs.
The Unequal Burden of Poverty
• Women, children, the elderly and ethnic minorities are
more likely to be poor than other groups.

• Children are poorer mainly because the poor have larger

families.

• The elderly are poor because there is no social safety

net in most developing countries.
The Unequal Burden of Poverty
• Ethnic minorities are poor because of
discrimination and because they are
usually based in rural areas.

• If you are a female, single parent from an

ethnic minority or a girl born into such a
family, your chances of being poor are
extremely high.
The Unequal Burden of Poverty

• Why are people poor? No stock of human and/or

physical capital, and discrimination.
• Lower education and health are main reasons for higher
poverty among women.
• Those who have skills and capital are more productive
and are paid higher wages (or allocated more resources)
in line with marginal productivity theory.
The Unequal Burden of Poverty
• Within households, those who are denied
resources are generally the least
productive within the family – elderly,
females and children.

• Many of the decisions to share resources

within a family and in society in general are
in basic agreement with the principles of
allocation of resources.
 Aspects of Rural Poverty

• Poverty is usually associated with the lack of ownership

of productive assets.

• Lack of physical resources in rural areas relates primarily

to land and agriculture.

• Education and educational opportunities are also low in

rural areas and this inhibits mobility out of agriculture.
 Aspects of Rural Poverty

• With little knowledge, the rural poor have difficulty in

adopting new technology.

• Medical problems among the rural poor - stemming from

limited access to clean water and good sanitation - can
sap resources.
 Aspects of Urban Poverty

• Migrants from rural areas to the city

constitute the bulk of the urban poor.

• Lack of human capital is the main reason

for poverty in urban areas.

• Poverty rates are lower in urban areas,

despite the influx of migrants from the
countryside (Table 9.6).
 Aspects of Urban Poverty
• Poor in urban areas are primarily self-
employed or working in small scale
establishments.

• These include food stalls, selling lottery

tickets, newspapers and cigarettes,
repairing cars and bicycles, street side
shoe repair, operate pedicabs and
motorized tricycles, garbage collection
and recycling.
 Labor Absorption &
Employment
• Most Asian labor markets are characterized by “market
dualism”.

• Wages are much higher in the formal sector than in the

informal sector.

• Most of the poor are precluded from the formal sector

because of a lack of skill.
 Labor Absorption &
Employment
• Despite the experience of the miracle economies,
industrialization alone cannot be relied on to solve the
unemployment problem in the poorest countries.

• There has to be job growth in other sectors as well,

including the service sector and in agriculture.
 Labor Absorption &
Employment
• Restrictive wage practices that lift the minimum wage
above the acceptable subsistence wage will serve to
further limit employment growth.

• Discrimination against those having highest rates of

poverty – women, minorities and the elderly who want to
work – has to be reduced.
 Policies to Further Reduce
Poverty
• Removal of distortions that stimulate capital intensive
production technology such as subsidies and tax breaks,
preferential tariffs and undervalued exchange rates.

• Redistribution of physical assets, insofar as politically

feasible, including land and physical capital including
buildings and equipment.
 Policies to Further Reduce
Poverty
• Give the poor better access to education, on the job
training and short training courses to develop specific
skills.

• Implement a progressive tax program without loopholes for

the rich and also a tax on intergenerational transfer of
wealth.

• Increase subsidies and direct transfers to the poor.

 Specific Policies to Address
Rural Poverty
• Uplift the status of women including more emphasis on
truck farming and livestock and more education.

• Relax tenancy regulations allowing tenancy to expand

and to be legalized.

• Expand the availability of rural credit within a market

framework. Avoid expensive schemes that lend money
to the already rich absentee landlord.
 Specific Policies to Address
Rural Poverty
• Encourage labor migration out of unproductive areas to
urban areas or overseas.

• Provide additional appropriate rural infrastructure such

as roads in farming areas.

• Make sure exchange rates are not overvalued, where

these tax exports and subsidize imports.
 Specific Policies to Address
Rural Poverty
• Establish property rights where possible – particularly for
tenants who can sell these rights and use it to borrow in
formal credit markets at favorable rates.
 Specific Policies to Address
Urban Poverty
• Accelerate economic growth.

• Provide a higher level of social services by careful

targeting – Kerala province of India and Sri Lanka are
good examples.

• Provide more economic opportunities for slum dwellers

or “squatters”- who comprise at least a third of urban
residents in Asia
 Specific Policies to Address
Urban Poverty
• Finally, develop a more rational land use policy in urban
areas that does away with rent controls, do away with
large military encampments in urban areas and provides
a reasonable amount of land for the poor to relocate.
 Summary

• Measures of poverty and inequality.

• Poverty and income distribution in Asia.

• Relationship between inequality, openness and

economic growth.

• Who are the poor?

• Suggested policy recommendations.