Chapter 6
Poverty, Inequality and Development
In Chapter 6 contains 2 classes of key terms - empirical & normative. I will examine each in turn.
Absolute poverty A situation where a population or section of a population is, at most, able to meet only its bare subsistence essentials of food, clothing, and shelter to maintain minimum levels of living. See also international poverty line and subsistence economy.
Decile A 10% portion of any numerical quantity; a population divided into deciles would be divided into 10 equal numeric groups. See also quintile.
Disposable income The income that is available to households for spending and saving after personal income taxes have been deducted.
Factor share distribution of income See functional distribution of income.
Factors of production Resources or inputs required to produce a good or a service. Basic categories of factors of production are land, labor, and capital.
Factor-price distortions Situations in which factors of production are paid prices that do not reflect their true scarcity values (i.e., their competitive market prices) because of institutional arrangements that tamper with the free working of market forces of supply and demand. In many LDCs, the prices paid for capital and intermediate producer goods are artificially low because of special capital depreciation allowances, tax rebates, investment subsidies, etc., while labor is paid a wage above its competitive market value partly because of trade union and political pressures. Factor-price distortions can lead to the use of inappropriate techniques of production. See also neoclassical price-incentive model and appropriate technology.
Forster-Greer-Thorbecke (FGT) index A class of measures of the level of absolute poverty, which include as special cases the headcount ratio and the normalized income shortfall, but in other cases, notably the P2 measure, satisfy all four axioms for desirable poverty measures, including distributional sensitivity
Functional distribution of income The distribution of income to factors of production without regard to the ownership of the factors.
Gini coefficient An aggregate numerical measure of income inequality ranging from 0 (perfect equality) to 1 (perfect inequality). It is measured graphically by dividing the area between the perfect equality line and the Lorenz curve by the total area lying to the right of the equality line in a Lorenz diagram. The higher the value of the coefficient, the higher the inequality of income distribution; the lower it is, the more equitable the distribution of income.
Human Poverty Index (HPI) Index measuring deprivation in basic human development in a country. Variables used are the percentage of people expected to die before age 40, adult illiteracy rate, percentage of people without access to health services and safe water, and percentage of under-weight children 5 years of age.
Income inequality The existence of disproportionate distribution of total national income among households whereby the share going to rich persons in a country is far greater than that going to poorer persons (a situation common to most LDCs). This is largely due to differences in the amount of income derived from ownership of property and to a lesser extent the result of differences in earned income. Inequality of personal incomes can be reduced by progressive income taxes and wealth taxes. See also Gini coefficient and Lorenz curve.
Kuznets curve A relationship between a country’s income per capita and its equality of income distribution such that as per capita incomes increase, the distribution of income at first worsens and later improves from very low levels. Named after Nobel laureate Simon Kuznets, who first statistically identified this relationship for developed countries.
Lorenz curve A graph depicting the variance of the size distribution of income from perfect equality. See also Gini coefficient.
Personal distribution of income See size distribution of income.
Poverty gap The sum of the difference between the poverty line and actual income levels of all people living below that line.
Quintile A 20% proportion of any numeric quantity. A population divided into quintiles would be divided into five equal numeric groups. See also decile.
Size distribution of income The distribution of income according to size class of persons - for example, the share of total income accruing to, say, the poorest 40% of a population or the richest 10%, without regard to the sources of that income (whether it comes from wages, interest, rent, or profits). See also functional distribution of income, Lorenz curve, and Gini coefficient.
Asset ownership The ownership of land, physical capital (factories, buildings, machinery, etc.), human capital, and financial resources that generate income for owners. The distribution of asset ownership is a major determinant of the distribution of personal income in any non-socialist society. See also income distribution.
Character of economic growth The distributive implications of the process of economic growth; for example, participation in the growth process or asset ownership. In other words, how that economic growth is achieved and who benefits.
Indirect taxes Taxes levied on goods purchased by the consumer (and exported by the producer) for which the taxpayer’s liability varies in proportion to the quantity of goods purchased or sold. Examples of indirect taxes are customs duties (tariffs), excise duties, sales taxes, and export duties. They are a major source of tax revenue for most LDCs as they are easier to administer and collect than direct taxes (e.g., income and property taxes).
Land reform A deliberate attempt to reorganize and transform existing agrarian systems with the intention of improving the distribution of agricultural incomes and thus fostering rural development. Among its many forms, land reform may entail provision of secured tenure rights to the individual farmer, transfer of land ownership away from small classes of powerful landowners to tenants who actually till the land, appropriation of land estates for establishing small new settlement farms, or instituting land improvements and irrigation schemes.
Progressive income tax A tax whose rate increases with increasing personal incomes, such that the proportion of personal income paid in taxes by a rich person is higher than that paid by a poorer person. A progressive tax structure therefore tends to improve income distribution. Compare regressive tax.
Redistribution policies Policies geared to reducing income inequality and expanding economic opportunities in order to promote development. Examples include progressive income tax policies, provision of services financed out of such taxation to benefit persons in the lower-income groups, rural development policies giving emphasis to raising levels of living for the rural poor through land reform, and other forms of asset and wealth redistribution.
Regressive tax A tax structure in which the ratio of taxes to income tends to decrease as income increases. Relatively poor people will pay a larger proportion of their income in taxes than relatively rich people. A regressive tax therefore tends to worsen income distribution. See also progressive tax.
Subsidy A payment by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy). Examples are export subsidies to encourage the sale of exports: subsidies on some foodstuffs to keep down the cost of living, especially in urban areas; and farm subsidies to encourage expansion of farm production and achieve self-reliance in food production.
Workfare A poverty program that requires program beneficiaries to work in exchange for benefits, such as a Food for Work Program. The term work-fare is used as a contrast with “welfare,” which provides benefits without work requirements.