Distributional aspects of

Economic Development
March 11, 2024
The central question?

• Poverty, Inequality, and Development: A Distributional Approach by

Gary Fields Journal of Policy Modeling (1981).
• Who benefits how much from economic development and why?
Subsidiary Questions
• What is known about the distributions of income and poverty in the
poor countries of the world?
• What are the correlates of the observed patterns?
• What are the main sources of inequality?
• What indices should be used to measure the participation of the poor
in economic development?
• What is the welfare economic basis for this choice?
• What extent have individual countries alleviated their poverty and
reduced their inequality in the course of economic growth?
How would you rank development?

• 1. Rapid growth, good distributional performance.

• 2. Rapid growth, poor distributional performance.
• 3. Slow growth, good distributional performance.
• 4. Slow growth, poor distributional performance.
• 5. Non-growth
The question itself becomes…
• Does the typic of distributional pattern found in a country promote or
hinder growth?
• Instead ask, do the rate and type of growth promote or hinder
distributional goals?
• What explains different countries’ performances?
Measuring who benefits from economic
development

• Present data on the growth of national income and change in relative

income inequality.
• Social welfare depends positively on the level of national income and
negatively on the inequality in the distribution of that income.
But,
• Countries A, C, and E are the same country, and countries B, D, and F
are the same country.
• Real-world economic development histories and policy projections
are often presented in these different ways.

How we do it matters!
Approaches
• Example 1. Relative inequality approach, which looks at various
groups’ income changes relative to others.
• Example 2. Absolute income approach, which looks at changes in
various groups’ incomes. A special case of the absolute income
approach is:
• Example 2. Absolute poverty approach, which looks at the proportion
of poor and the incomes received by those who remain poor.
• Example 3. Relative poverty approach, which looks at changes in the
absolute income of a fixed percentage at the bottom of the
distribution.
Assessment
• By the absolute income and absolute poverty criteria, B-D-F clearly is
preferable to A-C- E.
• Using the relative inequality criterion, it is difficult to judge: Although
B-D-F grew faster than A-C-E, inequality seems to have worsened.
• Finally by the relative poverty criterion, both appear equally
unsatisfactory, since neither country seems to have made progress in
alleviating poverty; in fact, poverty was being alleviated in both and at
different rates.
The How matters!

• How income distribution is studied— whether in terms of relative

income inequality, absolute income, and absolute poverty, or relative
poverty—may lead to fundamentally different judgments about the
success or failure of economic growth—even to questioning whether
there was any development at all.
Welfare Analysis
• 1. In assessing the distributional consequences of growth, welfare
judgments are inevitable. Do we wish to give greater weight in our
judgments to the alleviation of absolute poverty or to the narrowing
of relative income inequality?
• 2. What is it about the process of economic development that causes
the various approaches to differ in the example?
• 3. How suited are the various approaches to the alternative kinds of
development?
Absolute/Relative measurements

• Poverty is an absolute condition requiring analysis in absolute terms.

The predominant emphasis in this approach is given to data on
changes in the number of poor, the average extent of their poverty,
and possibly to the degree of income inequality among them.
• Others give great weight to the subjective feelings of the poor who
may feel relatively worse off if others’ economic positions are
improving and theirs are not.
Nature of Economic development

• We regard the economy as consisting of an advanced “modern”

sector and a backward “traditional” sector,
• “Modern sector enlargement growth.”
• The essence of modern sector enlargement growth is that the
economy is assumed to grow by enlarging the size of its modern
sector, the incomes (or wages) within the modern and traditional
sectors remaining the same.
Follows that,

• 1. The absolute incomes of the poorest 40% are unchanged; and

• 2. the Lorenz curve shifts downward at its lower end, so those Lorenz-
curve-based measures of relative income inequality that are sensitive
to the lower end of the income distribution register a “worsening” of
the income distribution.
Relative Inequality
• Relative inequality necessarily rises in the early stages of modern
sector enlargement growth, reaches a peak, and then declines as
modern sector enlargement growth continues, thus tracing out
Kuznets’ (1955) famous inverted-U pattern.
• Most observers interpret the inverted-U in modern sector
enlargement growth as signifying that in a true economic sense “the
distribution of income must get worse before it gets better.”
Is it an artifact?
• The only change is for the better, a movement of people out of the
low-income traditional sector into the higher-income modern sector.
• Fields conclude that the apparent “worsening” of the income
distribution in the early stages of modern sector enlargement growth
is a statistical artifact without social welfare content.
On Inequality in different stages of
Development
• Inverted-U shape - inequality rises in the early stages of economic
development and falls in the middle and later stages.
• None of the existing studies finds a statistically significant relationship
between the level of inequality and the short-run rate of economic
growth.
• They also fail to establish any substantial correlation between
inequality on the one hand and the importance of tax systems and
agricultural productivity improvements on the other.
• None of these correlates of inequality is decisive, in the sense of
accurately discriminating between high and low inequality countries.
No general relationship
• Inequality rose in seven countries (Argentina, Bangladesh, Brazil, El
Salvador, Mexico, the Philippines, and Puerto Rico),
• Fell in five (Costa Rica, Pakistan, Singapore, Sri Lanka, and Taiwan),
and is
• Mixed but leaning toward a slight decline for one country (India).
• No general relationship has thus far been encountered between
changing inequality on the one hand and initial level of inequality,
level of GNP, or rate of growth of GNP on the other.
Decomposing Inequality
• Source decomposition studies determine which income sources
account for how much of overall income inequality.
• Labour income
• Sector decomposition studies ask how much inequality occurs within
each sector or region of a country and how important are these
intrasectoral inequalities relative to intersectoral inequality.
• Within the region
• A third group of decomposition studies breaks down inequality by
income-determining characteristics.
• Personal characteristics
Absolute incomes and absolute poverty
• To analyze the determinants of absolute incomes.
• characteristics of the individual (such as education, age, sex, and
other demographic attributes), demand side of the labour market.
• Absolute poverty
• What produces poverty? Is absolute poverty being alleviated with
economic growth?
• Poverty profiles
Poverty profile

• The poor are disproportionately young, female, and in large families.

• If employed, it is more apt to be in agricultural occupations and rural
areas or in petty commerce, services, and other backward sectors.
• A disproportionate number of the poor are self-employed, and if in
agriculture, own disproportionately little land.
Absolute poverty and growth?
• The data show ten countries (Bangladesh, Brazil, Costa Rica, Mexico,
Pakistan, Puerto Rico, Singapore, Sri Lanka, Taiwan, and Thailand) in
which poverty has diminished to varying degrees.
• Absolute poverty was not ameliorated in the other countries
(Argentina, India, and the Philippines), poverty increasing noticeably
in all three.
General conclusion
• Growth reduces poverty.
• Some countries have alleviated poverty substantially despite little
economic growth.
• Others have experienced substantial economic growth, yet the data
show no demonstrable reduction in absolute poverty.