1 chapter 10 growth, poverty, and income distribution: some basic facts © pierre-richard agénor...

1

Chapter 10Growth, Poverty, and Income

Distribution: Some Basic Facts

© Pierre-Richard Agénor

The World Bank

2

A Long-Run Perspective Some Simple Arithmetic Some Basic Facts

3

Key Motivation in the Study of Economic Growth: Observation that average annual growth rates vary

substantially across countries. Conventional neoclassical theory (attributing growth

to technological progress) has proved incapable of explaining the wide disparities in per capita output growth rates across countries.

4

A Long-Run Perspective

5

Highest per capita growth rates since 1820 concentrated in those countries that were already the most prosperous in the early nineteenth century (Maddison, 1995).

Overall pattern suggests convergence in income per capita levels over the very long run among most advanced industrial countries, but significant divergence between rich and poor countries over time.

From 1870 to 1990, the ratio of per capita incomes between the richest and poorest countries increased by a factor of five (Pritchett, 1997).

Facts:

6

Large disparities in growth behavior within the developing world, both across countries and over time.

From 1973-92 average growth rates per annum: -1.7% in Ethiopia and Peru. 6.9% in South Korea.

7

Some Simple Arithmetic

8

Growth and Standards of Living How Fast Do Economies Catch Up?

9

Growth and Standards of Living Small differences in output growth between countries

result in large differences in standards of livings over long periods.

Consider the U.S. and India: Income per capita in 1992: $21,558 in the U.S.,

$1,348 in India (measured in 1990 U.S. dollars); Apply annual growth rate of 1.8% in the U.S. and

1.2% in India for the next two centuries (based on observed growth rates for 1913-92);

10

By 2100, per capita income will have reached

$21,558(1.018)108 = $148,036 (U.S),

$1,348(1.012)108 = $4,889 (India). India’s income per person, as a percentage of

U.S. income per person, will have fallen to 3.3% in 2100 from 6.3% in 1992. U.S. per capita income will have risen by a factor of 7 while India’s level will have risen by only a factor of 3.63. .

11

How Fast Do Economies Catch Up? Question: Using the growth rates from the last

example, how long will it take each country to double per capita income? For India, doubling income in N years requires that

yN = 21,348 = 1,348(1.012)N

so that,

2 = (1.012)N

and,

N = ln2/ln(1.012) 58.11.

12

For the U.S., the same calculation yields,

N = ln2/ln(1.018) 38.5.Another question: India's objective now is to attain a per capita income

that is equal to 30% of the level of the United States by 2100. By how much should India grow per year? Let y0

US (y0IN) denote per capita income in the

United States (India) in the year 1992, and gUS = 0.018 and gIN the average growth rate over the period 1913-92 for each country.

13

Since it takes 108 years to reach 2100 beginning in 1992, the value of gIN that is to be calculated is the solution of,

0.3y0US(1.018)108 = y0

IN(1 + gIN)108.

Solving for gIN, the target growth rate of output must be about 3.3% per annum---almost three times the level observed during the period 1913-92.

If India grows by a slightly lower number, 3.0% per annum, in the year 2100 its per capita income will be only about 22% of the U.S. level.

14

Some Basic Facts

15

Output Growth, Factor Inputs, and Population Saving, Investment, and Growth Poverty and Growth Inequality, Growth and Development Trade, Inflation, and Financial Deepening

16

Output growth, Factor Inputs and Population Fact 1. Output per worker (or average labor

productivity) tends to grow over time, albeit at widely different rates across countries.

Fact 2. The rate of growth of factor inputs (capital and labor) does not fully account for the rate of growth of output.

Fact 3. The mean growth rate of output is unrelated to the initial level of per capita income across countries (Figure 10.1).

17

Source: World Bank.

Figure 10.1Average Rate of Growth Per Capita and

Proportion of GNP Per Capita to US GNP Per Capita(1980-95)

Ave

rag

e ra

te o

f G

NP

gro

wth

per

cap

ita (

1980

-95)

Proportion of GNP per capita to US GNP per capita (1980, in US Dollars)

0 0.4 0.8 1.2 1.6

-12

-8

-4

0

4

8

12

18

Fact 4. Population growth rates are negatively related with both the level of income per capita and the rate of growth of income per capita across countries (Figure 10.2).

19

Figure 10.2aPopulation Growth and Real Income Per Capita

(Averages over 1980-95)

Source: World Bank.1/ In terms of US dollars at 1987 prices.

21 22 23 24 25 26 27

1

2

3

4

Pop

ulat

ion

(ave

rage

ann

ual g

row

th r

ate)

Log of Real GNP per capita 1/

Côte d'Ivoire

GhanaTanzania

Bolivia

Nepal

Pakistan

Zambia

Morocco

Jamaica

Zimbabwe

Philippines

Colombia

Nigeria

IndiaPeru

Panama

Tunisia

Brazil

Chile

Costa Rica

Venezuela

Bangladesh

Thailand

Indonesia

Korea

Algeria

Malaysia

20

Figure 10.2bPopulation Growth and Real Income Per Capita


Source: World Bank.

-4 -2 0 2 4 6 8

0.5

1

1.5

2

2.5

3

3.5

4

Pop

ulat

ion

(ave

rage

ann

ual g

row

th r

ate)

GDP growth rate per capita

Côte d'Ivoire

Zambia

Nigeria

Algeria

Philippines

Venezuela

Zimbabwe

Bolivia

Tanzania

Peru

Ghana

Morocco

Brazil

Panama

Tunisia

Jamaica

Costa Rica

Bangladesh

Nepal

Pakistan

ColombiaIndia

Chile

Malaysia

Indonesia

Thailand

Korea

21

Saving, Investment, and Growth Fact 5. Saving rates are positively related to the

level and the growth rate of income per capita (Figure 10.3).

Fact 6. Both the rate of growth of investment and the share of investment in output are positively related to the rate of growth of income per capita. See figure 10.4.

Figure 10.5 also displays the role of human capital accumulation in the growth process through two proxies: the gross enrollment ratio and the adult literacy rate.

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Figure 10.3aSaving Rate and Per Capita Income


Source: World Bank.1/ In terms of US dollars at 1987 prices.

2.1 2.2 2.3 2.4 2.5 2.6 2.7

0

5

10

15

20

25

30

35

Gro

ss d

omes

tic s

avin

gs (

% o

f GD

P)

Log of Real GNP per capita 1/

Côte d'Ivoire

Ghana

Tanzania

Bolivia

Nepal

PakistanZambia

MoroccoJamaica

ZimbabwePhilippines

Colombia

Nigeria India

PeruPanama

TunisiaBrazil

ChileCosta Rica Venezuela

BangladeshThailand

Indonesia Korea

AlgeriaMalaysia

23

Figure 10.3bSaving Rate and Per Capita Income


Source: World Bank.

-4 -2 0 2 4 6 8

0

5

10

15

20

25

30

35

40

Gro

ss d

omes

tic s

avin

gs (

% o

f G

DP

)

GDP growth rate per capita

Côte d'Ivoire

Ghana

TanzaniaBolivia Nepal

Pakistan

Zambia

Morocco Jamaica

Zimbabwe

Philippines

ColombiaNigeria

IndiaPeru

PanamaTunisia

Brazil

Chile

Costa Rica

Venezuela Bangladesh

ThailandIndonesia

KoreaAlgeriaMalaysia

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Figure 10.4aInvestment Growth and Growth


Source: World Bank.

Rea

l gro

ss d

ome

stic

inve

stm

en

t gro

wth

Real GDP growth per capita

-4 -2 0 2 4 6 8-10

-6

-2

2

6

10

14

NigeriaZambia

AlgeriaBolivia

Venezuela TunisiaMorocco

Philippines

Zimbabwe

PeruBrazil

Ghana

Jamaica

Nepal

BangladeshPakistan India

Costa RicaMalaysia Korea

Colombia ThailandChile

Indonesia

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Figure 10.4bInvestment Share, and Growth


Source: World Bank.

Gro

ss d

om

est

iciIn

vest

me

nt (

% G

DP

)

-4 -2 0 2 4 6 85

10

15

20

25

30

35

India

Jamaica

Thailand

Korea

NepalChile

Bangladesh

Morocco

Bolivia

Brazil

Nigeria

Philippines

Indonesia

Malaysia

Côte d'Ivoire

Tunisia

PanamaZambia

Ghana

Pakistan

Tanzania

Zimbabwe Peru

Venezuela

Costa Rica

Colombia

Algeria


26

Figure 10.5aEnrollment Ratio and Growth

Source: World Bank.

1/ The gross enrollment ratio is the ratio of total enrollment, regardless of age, to the population of the age group that officially corresponds to the level of education shown.

-4 -2 0 2 4 6 8 10

20

40

60

80

100

120

140

160

Pri

ma

ry s

cho

ol e

nro

llme

nt

in p

erc

en

t, 1

98

5 1

/

Pakistan

BangladeshCôte d'Ivoire

Nigeria

Morocco

NepalThailand

Ghana

Zambia Honduras

India

Colombia

Bolivia

Costa Rica

Malaysia

IndonesiaBrazil

Algeria

Jamaica

Panama

Tunisia

Venezuela

Botswana

Philippines

Zimbabwe

Chile

Singapore

Peru

Korea

GNP per capita annual growth rate (%), 1985-96

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Figure 10.5bLiteracy Rate and Growth

Source: World Bank.

2/ The adult illiteracy rate is the proportion of adults aged 15 and above who cannot, with understanding, read and write a short, simple statement on their everyday life.

GNP annual growth rate (%), 1980-93

-4 -2 0 2 4 6 8 10

0

10

20

30

40

50

60

70

80

90

Adu

lt ill

itera

cy r

ate

(in

pe

rcen

t),

198

5 2/ Pakistan Bangladesh

Côte d'Ivoire

Nigeria Morocco

Nepal

Thailand

Ghana

Zambia

Honduras

India

Colombia

Bolivia

Costa Rica

Malaysia

Indonesia

Brazil

Algeria

JamaicaPanama

Tunisia

Venezuela

Botswana

Philippines

Zimbabwe

Chile

Peru

Korea


Singapure

28

Poverty and GrowthTwo indicators typically used to measure poverty: poverty headcount index: measures the proportion

of individuals or households earning less than a given absolute level of income;

poverty gap: average shortfall of the income of the poor with respect to the poverty line, multiplied by the headcount ratio.

29

Ravallion and Chen (1997) used both types of indicators and arrived at the following results (Figure 10.6):

incidence of poverty in developing countries, measured by headcount index, fell between 1987 and 1993, from 31% to 29%;

depth of poverty (average distance below the poverty line), changed little;

rural poor are still poorer than urban poor; differences across regions; poverty incidence fell in

East Asia, South Asia and the MENA region and rose in Eastern and Central Europe, Latin America, and sub-Saharan Africa.

30

Figure 10.6Developing Countries: Poverty Measures, 1987-93

Source: Ravallion and Chen (1997, p. 374).

1/ Using an international poverty line of $1 a day per person at 1985 purchasing power parity exchange rates.

East Asia

Eastern Europe and

Central Asia

Latin America and

the Caribbean

Middle East and

North Africa

South Asia

Sub-Saharan Africa

Total

Total, excluding

Eastern Europe and

Central Asia

0 20 40

Percentage of population consuming less than $1 a day

1987 1990 1993

East Asia

Eastern Europe and

Central Asia

Latin America and

the Caribbean

Middle East and

North Africa

South Asia

Sub-Saharan Africa

Total

Total, excluding

Eastern Europe and

Central Asia

0 10 20

Poverty gap index(percent)

31

Fact 7. Durable reductions in poverty rates require maintaining sustained rates of economic growth over time. See Figure 10.7.

Other factors important; Agénor (1999) suggested that inflation has a significant effect on the poor.

Figure 10.8. Londoño and Székely have suggested that, at least in

Latin America, poverty is strongly associated with a skewed distribution of income.

Other important variables are access to education, health services and employment opportunities, and the degree of urbanization.

32

Figure 10.7aUrban Sector: Growth and People in Poverty

(Period average, in percent)

Source: World Bank.1/ Proportion of the population earning one U.S. dollar or less, in 1985 ppp-adjusted U.S. dollars, various survey years.

-4 -2 0 2 4 6 8 10

0

10

20

30

40

50

60

70 Urban sector


KoreaThailand

MalaysiaUruguay

Argentina

Sri LankaTunisia

NepalPakistan

Madagascar

Costa Rica

MoroccoVenezuelaEgypt

India

Brazil

Philippines Colombia

PeruBangladesh

Ghana

Peo

ple

in p

over

ty 1

/

33

Figure 10.7bRural Sector: Growth and People in Poverty

(Period average, in percent)

Source: World Bank.1/ Proportion of the population earning one U.S. dollar or less, in 1985 ppp-adjusted U.S. dollars, various survey years.

-4 -2 0 2 4 6 8 10

0

10

20

30

40

50

60

70

80 Rural sector

Korea

ArgentinaUruguay

Malaysia

ThailandCosta Rica

Pakistan

Tunisia

MoroccoEgypt

Sri Lanka

Madagascar

Venezuela

Nepal

Colombia India

BangladeshGhana

Philippines

PeruBrazil

Peo

ple

in p

over

ty 1

/


34

Figure 10.8aLatin America: Poverty and Inflation, 1970-96, 1/

Source: Londoño and Székely (1997).

1/ Extreme poverty is one U.S. dollar a day, in 1985 PPP-adjusted U.S. dollars. Moderate poverty is two U.S. dollars a day, in 1985 PPP-adjusted U.S. dollars.

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 19940

10

20

30

40

50

0

100

200

300

400

500

600 Poverty and Inflation

Extreme PovertyModerate poverty

Inflation (Percent change, right scale)

35

Figure 10.8bLatin America: Poverty and Income Inequality, 1970-96, 1/

Source: Londoño and Székely (1997).

1/ Extreme poverty is one U.S. dollar a day, in 1985 PPP-adjusted U.S. dollars. Moderate poverty is two U.S. dollars a day, in 1985 PPP-adjusted U.S. dollars.2/ For 13 countries.

Extreme PovertyModerate poverty

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 19940

10

20

30

40

50

50

51

52

53

54

55

56

57 Poverty and Inequality Gini index (Weighted average, right scale) 2/

36

Inequality, Growth, and Development Three indicators of income inequality:

Share of the top to the bottom income deciles or quintiles--only attaches weight to the two tails of the income distribution.

Gini Coefficient. Theil Inequality Index is decomposed into two

terms: one that captures inequality due to differences between groups, and another that captures inequality within groups.

37

Gini coefficient: Derived from the Lorenz curve which displays

cumulative share of total income received by cumulative shares of the population.

Measures the area between the Lorenz curve for a population and the line of perfect equality; it varies between 0 (maximum equality) and unity (maximum inequality). See Figure 10.9.

38

Figure 10.9The Lorenz Curve and the Gini Coefficient

0 10 20 30 40 50 60 70 80 90 100

0

20

40

60

80

100

Cu

mu

lativ

e p

erc

en

tag

e o

f to

tal i

nco

me

Line of equal incomes

Cumulative percentage of total population

A

A'

B

B'

39

Evidence on Growth and Income Distribution Data does not show clear pattern between the rate

of growth of income per capita in developing countries and two measures of income inequality: the ratio of the share of the richest 20% to the share of the poorest 20%, and the Gini coeficient. See Figure 10.10.

40

Figure 10.10aGrowth and Income Distribution

(Average over 1981-93)

Source: World Bank.


Rat

io o

f in

com

e s

hare

of

the

high

est

20%

to lo

wes

t 20

%

-5 -2.5 0 2.5 5 7.5 10

0

5

10

15

20

25

30

35

Côte d'Ivoire

Zambia

Peru

Algeria

Bolivia

Venezuela

Philippines

Ghana Nepal

Bangladesh

India

Pakistan

Indonesia Korea

Thailand

SingaporeMalaysia

Costa Rica

Colombia

KenyaBotswana

Chile

Zimbabwe

Honduras

Panama

Brazil

Tanzania

Tunisia

Morocco

NigeriaJamaica

41

Figure 10.10bGrowth and Income Distribution

(Average over 1981-93)

Source: World Bank.

GIN

I in

dex


-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7

20

30

40

50

60

70

Pakistan

IndonesiaIndia

GhanaNepalNigeria Tanzania

Algeria Morocco

TunisiaPhilippines Jamaica

BoliviaPeru Costa Rica

Thailand

ZambiaMalaysia

Colombia

Honduras

Venezuela

ChilePanama

Zimbabwe

Kenya

Brazil

Bangladesh

Côte d'Ivoire

42

Link between inequality, the pattern of growth, and development:

Kuznets hypothesis: income inequality increases in the early stages of development and then decreases. Inverted-U shape reflects view that economic

development involves a transition from a low-productivity, agrarian economy to a high-productivity, industrial economy.

Industrial incomes, distributed less equally than agricultural incomes, become more important during industrialization, leading to greater inequality.

43

Industry then takes over, average incomes rise, earnings differentials fall.

Growth is first unequalizing, then equalizing. Early evidence broadly confirmed inverted-U patter

with inequality lowest in low-income and high income countries and highest in middle-income countries.

Recent studies (Bruno, Ravallion, and Squire, 1998 and Fishlow, 1995) have failed to corroborate this result.

Fact 8: The link between income inequality and growth appears to be non-linear, but there remains some controversy about the nature and robustness of this relationship.

44

Education Inequality and Income Distribution Psacharopoulos et al. (1995) and Londoño and

Székely (1997) suggest strong relationship between educational inequality and income inequality.

Lipton and Ravallion suggest that the relationship is nonlinear: During first phases of growth in education, income

inequality actually rises; for example, an increase from 1 to 2 years of education is typically associated with a 3 -point increase in the Gini coefficient.

45

Turning point arises when work force attains between 5 and 6 years of education. e.g. on passing from 6 to 7 years, Gini falls by .5 point, from 9 to 10 years, Gini falls by 2 points.

Other Factors and Income Distribution Cardoso et al. (1995) identified inflation and

unemployment as determinants of income inequality in Brazil during the 1980s.

Relationship between inflation and income inequality as nonlinear (Bulir, 1998); inflation reduction from very high levels reduces income inequality while further reductions towards very low levels bring on negligible improvements.

46

Trade, Inflation, Financial Deepening Fact 9: export and import volume growth both

positively related output growth. evidence on correlation between openness and growth less robust.

Figure 10.11. Figure 10.12. Fact 10: inflation-growth relationship; negative and

nonlinear, key for advocating macroeconomic stability; nonlinear: reductions in inflation from a low (high)

base have negligible (significant) impacts on growth.

Figure 10.13.

47

Figure 10.11aExports and Growth


Source: World Bank.

Gro

wth

in e

xpor

t vol

umes


-4 -2 0 2 4 6 8

-5

0

5

10

15

20

Zimbabwe

Nigeria

Côte d'Ivoire

Bolivia

VenezuelaAlgeria Jamaica

MoroccoTanzania

Peru

Brazil

Ghana

Philippines India

Costa Rica

ChilePakistan

Korea

ZambiaPanama

Indonesia

MalaysiaNepal

Thailand

Colombia

BangladeshTunisia

48

Figure 10.11bImports and Growth


Source: World Bank.

Gro

wth

in im

port

vol

umes


-4 -2 0 2 4 6 8

-10

-5

0

5

10

15

Zambia Algeria

NigeriaZimbabwe

Côte d'IvoireMorocco

Brazil Bangladesh

India

Tunisia

Tanzania

JamaicaPanama

IndonesiaNepal

PakistanVenezuela

Ghana Chile

BoliviaPhilippines Costa RicaKorea

Colombia Malaysia

Thailand

Peru

49

Figure 10.12Openness and Growth(Averages over 1980-95)

1/ Openness is measured by the ratio of the sum of exports of goods and services and imports of goods and services (both at current prices), relative to GDP at current prices.

Source: World Bank.

Ind

ex o

f o

penn

ess

(in p

erce

nt)

1/


-4 -2 0 2 4 6 8

0

50

100

150

200

Zimbabwe

Nigeria

Côte d'Ivoire

BoliviaVenezuela

Algeria

Jamaica

MoroccoTanzania

Peru

Brazil

Ghana

Philippines

India

Costa RicaChile

Pakistan

Korea

Zambia

Panama

Indonesia

Malaysia

Nepal

Thailand

ColombiaBangladesh

Tunisia

50

Figure 10.13Inflation and Growth

(Average annual % change, 1980-95)

Source: World Bank.

-4 -2 0 2 4 6 8

0

10

20

30

40

50

Infla

tion

Panama

MalaysiaThailand

KoreaMorocco

Tunisia

BangladeshCôte d'Ivoire

Indonesia

Pakistan

India

Nepal

Philippines

Chile

AlgeriaCosta Rica

Zimbabwe

Colombia

Jamaica

Tanzania

Ghana

Venezuela

Nigeria

Zambia


51

Fact 11: financial system development is positively related to the rate of growth of output.

Figure 10.14.

52

Figure10.14Private Sector Credit and Growth

(Average annual % change, 1980-95)

Source: World Bank.

-4 -2 0 2 4 6 8

0

10

20

30

40

50

60

70

80

90

Cre

dit t

o p

rivat

e se

ctor

( in

per

cen

t of G

DP

)

Panama

Malaysia Thailand

Korea

Morocco

Tunisia

Bangladesh

Côte d'Ivoire

Indonesia

Pakistan

India

Nepal

Philippines

Chile

Algeria

Costa Rica

Zimbabwe

ColombiaJamaica

Tanzania

Ghana

Venezuela

Nigeria

Zambia


Bolivia

Peru

Brazil

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