AE 12 Module 4: Poverty and Income Distribution and the Human between the rich and poor in the society

the society will be perpetuated and perhaps

Resource Development get worse.

GAP BETWEEN RICH COUNTRIES VS POOR COUNTRIES POVERTY

• The richest 10% of the global population currently take home 52% of • In development economics, poverty is generally defined as the
the income. The poorest half of the global population? Well they earn inability to access resources to enjoy a minimal or acceptable standard
just 8%. of living. However, minimum needs or acceptable standards of living
• On average, an individual from the top 10% will earn $122,100, but an vary from country to country, from individual to individual, in
individual from the bottom half will earn just $3,920. accordance with one's cultural, economic, and social norms and
• And, when it comes to wealth (valuable assets and items over and expectations. Hence this broad definition is not useful when
above income), the gap is even wider. The poorest half of the global measuring poverty and even less so when making cross-country
population comparisons.

VICIOUS CIRCLE OF POVERTY AND INEQUALITY

• At the subsistence level, poverty can be defined in more absolute
1. Lack of resources - Children who are born into poor households will terms, and this means identifying the poor based mainly on a
have lesser than those in richer ones. Very young children sent out to universally accepted benchmark of physiological, economic and
earn money by doing jobs such as peddling cigarettes on the streets. requirements for survival. This is a standard approach in development
The children earn (little) money at the expense of attending school. economics which works well to operationalize the concept of poverty.
2. Education - Parents who are uneducated tend not to value education
POVERTY LINE
highly, and even if there were some incentives to educate their
children, the opportunities to send their children to a good school are • Most measures of poverty require that a poverty line be specified. The
limited. Furthermore, the sacrifice required to send a child to school poverty line is a chosen level of income or consumption below which
is substantial even if tuition charges are low. The cost of clothing one is considered poor. This critical threshold point usually represents
uniforms, transportation, and books are quite high relative to the the minimum "acceptable” income or consumption with which
levels of the poor. individuals is able to achieve a minimal standard of living to maintain
3. No peer groups - Children raised in poverty have no peer groups or health and well-being.
role models to instill them the virtues of education and human capital
acquisition. Since everyone around them is poor, there are no • Sometimes it based on the purchasing power equivalent to buy a
opportunities for building up either human or physical capital. In minimum caloric intake and no more. In very poor countries, such as
many cases, drugs and crime (and perhaps sport) are the only ways India for example, poverty lines are calculated by using estimates of
out of this low-level trap. When they are old enough, they begin to have expenditures required to guarantee a minimum consumption of
children and the cycle of poverty is repeated. calories. This caloric estimate would be the intake required to
maintain health and ability to work. In wealthier countries, a clothing
Unless this cycle is broken for many families, the result is the
and shelter component is often added. Since there is no uniform
perpetuation of poverty to successive generations. In addition, the gap
standard for determining poverty lines, it is difficult to make accurate
 comparisons of poverty across countries or even within the same • Where n is the total population, and m is the mean income. The
country. denominator nm in this measure is the total income in the economy. A
closely related measure, called the income-gap ratio (IGR), is also
SOME POVERTY MEASURES - The following are some basic measures
commonly used and defined as
used in poverty assessments. For any given poverty line p, the first natural
measure of poverty that comes to mind is the proportion of poor people
• where p is the poverty line and q is the total number of people in
in the population or the headcount ratio (HCR).
poverty as previously defined. The denominator, p ∙ q is therefore the
• The HCR is defined HCR= q/n. Where q is the number of individuals total income of the poor if they were all to have income at the poverty
below p, and n is the total number of individuals or households in the line.
population. • As can be seen, the PGR gives the ratio of total income transfer
• Poverty analysts rarely rely on the headcount ratio alone as, like necessary to eliminate poverty to gross national income or GNI.
many aggregate measures, it fails to capture and differentiate the The IGR, on the other hand, tells us the total income needed to remove
various "states" of poorness. In other words, the depth or severity poverty relative to the total income of all poor if they all raised to the
of poverty is not reflected at all in the HCR. To see how HCR alone can point where they escape poverty. The IGR will be much larger than the
give a misleading impression of poverty. PGR. The choice between the PGR and the IGR depends on the
context of the problem that they are being applied to. By dividing the
ILLUSTRATION: Consider two countries, A and B, with the same
total income shortfall gap by the total income in the economy, the
headcount ratio. In country A, all households in poverty are very close to
poverty measure may appear to be small and may indicate that the
the poverty line. With a small subsidy from the government, citizens in A
severity of poverty in a highly unequal but wealthy society is not a
could all be lifted out of poverty, in the sense that they would be on or just
major concern. PGR can thus understate inequality. On the other hand,
above the poverty line after the subsidy. In country B, on the other hand,
if we divide the income shortfall by the total amount of resources
incomes of poor households fall significantly short of the poverty line—
needed to lift everyone’s income up to the poverty line as in IGR, we
starvation is widespread and there is very deep poverty for a large
may be overstating the degree of poverty in the economy.
proportion of the poor. Intuitively, country B is in a much worse shape than
country A, yet the poverty estimates using the headcount ratio are ISSUES ON POVERTY MEASUREMENT
identical.
1. Wide degree of variation in what individuals find “acceptable”
• What is needed is a poverty measure that considers the depth of and “minimal” - needs vary between households in different regions
poverty. To achieve this, we take each poor person's income y and note a country, between countries, and between the broad regions of the
its distance from the poverty line p, that is, take (p − y) for all yi< p. We world.
then add all these differences and obtain the total income required to
Examples: a. The families in some rural areas may not see the need for
raise everyone's income to the poverty line, ∑(p − y) for all yi < p. This
post-secondary education for their children, while city families may
is the total income required to eliminate poverty.
believe this is essential.
• This leads to two common and more informative measures of poverty.
The poverty gap ratio (PGR) is defined as b. One may feel poor in Australia if one does not own a car or a color TV,
but in the Philippines, having neither of these conveniences is not
necessarily a hindrance to a good life. As we can see, these “components"
 of the poverty line are evaluated relative to the prevailing socioeconomic Unfortunately, this does not necessarily happen. It is more common
standards. As such, they are important in the determination of a national for the so-called “fruits of development” to accrue to some members
poverty line. of the society more than others. In other words, the rich get richer and
the poor gets poorer.
2. Measure poverty on a household or the individual level - The
standard practice is to treat a household as poor when its total income BASIC PROPERTIES OF INEQUALITY MEASURES: Conflicting results
or consumption level is below a chosen poverty line. Many transfer displayed by conventional inequality measures have been a major source
and benefit schemes and public policies are thus directed toward the of dissatisfaction among practitioners in the field of income distribution
upliftment of the whole household. The basic assumption under this analysis. The overwhelming conclusion, after several years of debate and
approach is that each member of the household— the father, the discussion, is that there is no single best measure of economic inequality
mother, and each of the children in the family—are equally well- off. mainly because the concept is essentially a normative one. Researchers
In practice, however, this is not always true, particularly when today are more confident in using different measure. The choice of a
traditional norms are allowed to play a big role in the distribution of measure is highly dependent on the particular aspect of inequality in
resources within the household. question. There are, however, three basic properties that inequality
measures must satisfy, and they are as follows:
Examples:
1. Mean or scale independence - This properly holds if, when all
a. In many traditional households, boys are often favored over girls when
income levels are increased (or decreased) by the same proportion,
parents have to make a choice on who goes to school and who does not.
the inequality measure remains unchanged. In other words, the
b. In times of a crunch in resources, such as during the Asian financial measure must be independent of the scale of which income is
crisis, the mother may give up some of her share of food for others in the measured.
family at the expense of her health and long-term well-being. 2. Population-size independence - This property holds if, an equal
increase or decrease in population across all income levels does not
result in a change in the inequality measure. Inequality should remain
3. Differences in the needs of individual household members also unaffected if a proportionate number of persons are added at all
arises – On average, children require less to sustain them than adults, income levels. We should then be able to compare the inequality level
and thus household incomes or expenditures need to be adjusted for in the small state of Singapore and the large country of India or China.
such demographic differences so that figures across households are 3. Pigou-Dalton transfer sensitivity - This property holds if an income
comparable. Adult-equivalent scales, which are weights applied to transfer from a wealthier person to a poorer person that does not
household members to represent relative needs, are often used to make the latter wealthier than the former brings about a decrease in
address it. the inequality measure. This property requires requires that the
inequality measure be sensitive to transfers at all income levels.
INEQUALITY
• Economic inequality refers to the uneven distribution of income In many studies analyzing income distribution, a fourth property called
or expenditure across population groups. When an economy achieves decomposability is added. An inequality measure has this property if it
economic growth and development, the benefits are ideally filtered can be broken into several components—either by source or by
down to each one (individual or household) in the society.
population. Ibis is a useful property for identifying sources of In this measure, squaring the differences of each income from the
inequality populations. mean does this. This measure is thus defined as

SOME INEQUALITY MEASURES. Some of the most common measures of

inequality are presented below. The notation used is as follows: Let x,
• This measure has many desirable properties. It satisfies both the mean
denote the income of any individual i, in a population consisting of n
independence and population size (or scale) independence
individuals. It is often useful property to arrange incomes from lowest to
properties. More importantly, it always satisfies the Pigou-Dalton
highest, that is property of transfer sensitivity.

• The sum of all incomes in the population is denoted by and the

• Sometimes, researchers find it more appropriate to make conclusions
average or mean income μ is defined by Note that the total about inequality issues through analysis of the logarithm of incomes.
income of all individuals in the economy can also given as μn. The first In this case, the measure of inequality used is the variance of the
measure is the range, simply defined as the difference between the logarithm of income defined by
where μ is the geometric mean of the distribution. Like the CV above,
highest and lowest income, that is,
this measure satisfies both the mean independence and population
• xmax and xmin refer to the highest and lowest levels of income in the
size independence properties although it is not totally sensitive to
population, respectively. This measure will give an idea of the spread
transfers for the whole range of incomes. This is, nonetheless, often
of incomes but is often limited because it ignores the distribution
desirable because it is decomposable by income source.
between the two extreme points.
• The Kuznets income ratio is another popular way to analyze
• The mean absolute deviation is a better measure of inequality that the
inequality in income distributions. This approach considers the
range in the sense that it takes advantage of the information on each
income shares of different income groups in the population.
income in the entire distribution of incomes. This measure adds up all
Specifically, individuals are grouped into income quintiles and no
the (absolute) differences of each income xi from the mean, and the
inequality occurs when each quintile group has an equivalent 20
total is then taken as a proportion of the total income in the
percent share of the nation's total income. The top and bottom ends of
population. Thus we have
the distribution are of particular interest. Some inequality occurs if
income accruing to the poorest 20 percent of the population is less
• The mean absolute deviation does account for the overall income
than 20 percent of national total income. By the same token,
distribution but still remains unsatisfactory because it violates the
inequality results when the richest 20 percent of the population has
property no. 3 above—the sensitivity of transfers between individuals
more than a 20 percent share of the total income. This
in the middle points.
information was first used by Simon Kuznets (1955) to come up
with a simple measure of inequality. The Kuznets income quintile ratio
• The coefficient of variation, CV, is a popular inequality measure which is the ratio of the income earned by the top 20 percent of the
avoids this particular weakness of insensitivity to transfers by population to that received by the lowest 20 percent. A ratio of 1.0
attaching greater weight to incomes which are further from the mean. indicates perfect equality, and the greater the value of the ratio over
1.0, the more unequal is the distribution of income in an economy.
• In general, this ratio can be obtained for any given proportion of the curve. This is done by plotting the pairs of (cumulative) income and
population, such as the top and bottom 10 percent, or deciles. Such population shares in a unit box, as in Figure 10.2.
ratios are useful for initial assessments of the inequality.
• The diagonal line AC represents zero inequality while the curve
THE GINI COEFFICIENT AND THE LORENZ CURVE: Of all the inequality
tracing the points ABC is the Lorenz curve. If total income is equally
measures, the Gini coefficient is the most widely used. Using the same
distributed among members of the population, the Lorenz curve will
notation above, the Gini coeffictent is defined as
be the diagonal line AC, which runs from the lower left corner to the
• Which effectively sums up all possible pairs of incomes in the upper right-hand corner of the unit square in Figure 10.2. In this case,
distribution, normalized by representing the number of all possible any given proportion of the entire population enjoys the same
pairings multiplied by the mean income μ of the distribution (x1, x2, proportion of total income.
..., xn). Note that the income pairings are counted twice, hence the • Hence, this line is referred to as the egalitarian line. In the case where
sum of all differences is further divided by 2. total income is not equally distributed, the lower income groups
• The value of the Gini index ranges from 0 to 1. A value of 0 implies that usually have a smaller share d total income in the economy. In such a
all incomes are shared equally among each unit (individual or distribution pattern, all pairs of income and population shares will
household) in the population (perfect equality), while a value of 1 form a line similar to ABC, which is the Lorenz curve for that
means that all incomes accrue to only one person or household in the population. The distance of the Lorenz curve to the diagonal line
entire distribution (imperfect inequality). Low inequality populations indicates the extent of inequality: the further the curve is away the
have Gini ratios of 0.4 or less for their distribution, hIgh inequality diagonal line, the greater the degree of inequality.
populations have Gini ratios greater than 0.4. Note that the Gini • Gini coeffcient G is easily derived from a Lorenz curve by noting that it
coefficient is sometimes expressed in percentage form, as is the is the ratio of the area bounded by the diagonal and the Lorenz curve
practice by the World Bank. In this case, we simply multiply the to the total area in the (lower) triangle. That is
obtained Gini by 100.
Trends in Poverty and Inequality
• The Gini coefficient appears in various forms and one conventional
formula that is computationally convenient is written as • This section discusses the statistical trends of poverty and inequality
indicators for the world and the Asian region.
• Where n, refers to the cumulative share of income, and πt is the Poverty and Inequality in the World
cumulative share of population. One appeal of the Gini coefficient is
that it is a very direct approach to inequality measurement, taking World Bank
note of the difference between every pair of incomes. It is, by far, the • The World Bank is an international development organization owned
most popular measure of economic inequality. by 189 countries (as of November 2020). Its role is to reduce poverty
• The Gini coefficient is often viewed in relation to the Lorenz curve, by lending money to the governments of its poorer members to
which is a graphical representation of the relationship between the improve their economies and to improve the standard of living of their
cumulative shares of income and the cumulative shares of the people. The Bank is also one of the world's largest research centers in
population. In fact, the observed pairs (n1π1), (n2π2), ..., (nnπn) used development. It has specialized departments that use this knowledge
in the computation of the coefficient are used to construct a Lorenz advise countries in areas like health, education, nutrition, finance,
 justice, law and the environment. • In contrast to that countries in South Asia had been struggling;
• - The headcount ratio in Bangladesh and Sri Lanka increases.
International Poverty Line
• - Bangladesh increases 1.9 percent and Sri Lanka increases 1 percent
• The international poverty line is set as the typical national poverty line • Data are computed base on the poverty line of 1 dollar per day
in the world’s poorest countries. The World Bank converts those lines
POVERTY LINE
into a common currency by using purchasing power parity (PPP)
exchange rates to estimate global poverty. • The estimated minimum level of income needed to secure the
• The World Bank sets the international poverty line at periodic necessities of life.
intervals as the cost of living for basic food, clothing, and shelter • If an individual has income below poverty line he or she is
around the world changes. The international poverty line has been considered poor.
revised from $1 a day in 1985 PPPs to $1.08 with 1993 PPPs, to $1.25
with 2005 PPPs, and to the $1.90 line with 2011 PPPs that is used QUESTION DURING THE DISCUSSION: Last October of 2015 the poverty
today. This means that anyone living on less than $1.90 a day is line was recalculated by the world bank and come up with the new
considered to be living in extreme poverty. poverty line which is $1.90. If a dollar is equal to Php. 52.91 compute for
• The World Bank managed to conduct surveys across countries so that the new poverty line in peso or How much in peso is the income needed
international comparisons of poverty can be made. to secure the necessities of life in a day ?

Poverty Rate ANSWER: $1.90 x Php 52.91 =Php 100.529 or Php 101

INTERPRETATION OF THE 3RD AND 4TH COLUMNS:

• The proportion of families/individuals with per capita income less
than the per capita poverty threshold to the total number of • National poverty lines are income levels that are chosen by the
families/individuals. countries themselves to measure poverty based on self assessed local
POVERTY AND INEQUALITY IN ASIA economic and social condition.
• Not internationally comparable
• HEAD COUNT RATIO - The population proportion that exists, or lives, • Pictures different poverty situation
below the poverty line. This measures the population ratio of people • Almost all countries in Asia registered improvements except the
who have income lower than the poverty line. Philippines and Indonesia.

• POVERTY- GAP RATIO - Measure of the intensity of poverty. - This CHRONIC POVERTY IN ASIA
measures the severity of the poverty If a family below the poverty line for a sustained period of time let’s say a
few years or longer, then we can say that the family is chronically poor .
INTERPRETATION OF THE FIRST 2 COLUMNS: QUESTION: Base on the given definition of “chronically poor” what is the
• East and Southeast Asian economies has been successful in lifting meaning of chronic?
their citizen out of poverty. ANSWER: CHRONIC -persisting for a long time or constantly recurring.
• - As you can see on the given table their head count ratio decreases.
QUESTION: Can you guys consider a family chronically poor if they come • Since in last column all Asian countries has less than 10 percent
in and out of poverty depending of circumstances that is temporal in figures, this is strongly indicative of highly unequal income
nature? let say they undergo temporary illness or temporary distribution in Asia.
unemployment.
INCOME INEQUALITY COMPARISON
ANSWER: No, they are not classified as chronically poor but they are
• INCOME INEQUALITY- The extent to which income is distributed in an
classified as temporarily poor.
uneven manner
WHO ARE THE CHRONIC POOR IN ASIA? • Gini index is a measure of the distribution of income across a
population.
• Base on Adam and Jane (1995), Chronic poverty is indicated if the
family is in the poorest quintile of income distribution for three SELECTED ECONOMIC ISSUES ON POVERTY
successive years.
ELASTICITY POVERTY TO CHANGES IN INCOME AND THE DISTRIBUTION
• Base on McCulloch and Baulch (1999), put chronic poverty down to
OF INCOME
five years. It is not easy to identify chronic poverty at a point in time
as poverty trend can mask poverty dynamics.

ACCORDING TO CHRONIC POVERTY RESEARCH CENTER (2008, P.9) • If we have time series information on change in income poverty and
income distribution, we can calculate a series of elasticity measures that
• Chronic poverty in South Asia is quite substantial.
give us a better insight into the relationship between income growth,
• South Asia alone accounts for close to 40 percent of the chronic poor
changes in the distribution and the extent of poverty reduction. Consider
in the world.
first the elasticity of poverty with respect to a change in income and call it
THE POVERTY GAP RATIO Ep.
• 2In Vietnam, between 1990 and 2007, poverty incidence fell from 50.9%
It represents the proportion of nation income required to eliminate
to 19.5%, about 62% in total or roughly 3.4 percent per year.
poverty by raising each poor man’s income to poverty line.
• If the growth of income in the country during that period was 6.2% per
ILLUSTRATION: Poverty line= Php 100 annum, then by dividing 3.4% percent by 6.2%, we get a poverty elasticity
of about 55%.
To help uplift the person with income of P 40, some input from the other
people would have to go to the person with P40 income for him or her to TWO PARTS OF POVERTY ELASTICITY
meet the poverty line.
➢ PURE GROWTH EFFECT
• The Higher the Poverty Gap Ratio the more domestic resources it
requires. ➢ INCOME INEQUALITY EFFECT

SHARE OF POOREST QUANTILE IN NATIONAL CONSUMPTION PURE GROWTH EFFECT

• Figures that is close to 20 percent shows low inequality • Percentage change in poverty when the income distribution does not
• Low figures (less than 10 percent) shows higher inequality change
INCOME INEQUALITY EFFECT • Lindert and Williamson (1985) gathered longitudinal data for analysis
and found that inequality declined with increased income.
• The change is poverty of inequality changes and income does not.
• In the case of the most Asian countries, both of these effects have been
• While their results are useful, it would be hard to generalize because
pro-poor----- that is, the income distribution has become more equal
the data they used covered only a few countries. For other countries,
overtime. The income effect will always be positive.
there is some evidence of an inverse U shape in the postwar period,
THE KUZNETS MODEL that is, that inequality worsens as a country gets richer.

• SIMON KUZNETS - Developed a two-sector growth model. He

• When data are pooled and a regression is run, we are implicitly
postulated that as a labor moved from the agricultural sector to the
assuming that all countries have the same income-inequality
individual sector, there was a tendency for the overall distribution of
relationship-that is, the curve relating these two variables is the same
income to deteriorate and for inequality to grow with initial economic
for all countries. If the structural pattern is different, then a regression
growth.
of this type will have no meaning

• Agricultural sector was characterized by a low-level of income

• When researchers introduced a dummy variable for Latin America,
inequality and industrial sector as greater inequality. Kuznets
they were assuming that all the other countries had the same
suggested that this process would reverse itself at higher levels of
relationship "among themselves," while Latin American countries had
income and as economic progress become more widespread
a different relationship "among themselves." When more flexibility is
introduced to reflect differences in slopes and intercepts for different
• It appears to be Kuznets “inverted U curve” when the income, usually countries, the Kuznets curve disappears.
expressed in logarithms is regressed against the share of income of the
lowest quantile, which is 20%.
• When we studied the process of economic growth earlier, we reviewed
the work of Barro (1997) and others. In its simplest form, these
• These cross-section regression have been performed for a number of economists regressed economic growth on the level of per-capita
countries withbdifferent income levels. This finding may be due what income in the base period
is termed the Latin-American effect.
• Then they added variables, such as education and other measures of
• The Latin-American countries tend to have greater inequality because initial human capital endowments. They found some tendency for
of their colonial history. Their per-capita incomes lie mid-way income growth to be higher when human capital endowments were
between the distribution of incomes of the poorest countries in Asia higher
and Africa.
• In the same spirit. Alesina and Rodrik (1994), and Deininger and
• With this evidence, they think that these countries may be a Squire (1998) augmented Barros variables with initial inequality of
responsible for the inverted U shape. When a control is put on this income and inequality of land.
Latin-American effect, the inverted U-shape disappears.
• They found that both inequality distribution variables entered the growth. In this sense, some people need to be rich to be able to perform
equation significantly and in such a way that lower inequality of land this role in the economy. Accordingly, higher inequality is equated with
and income, particularl land, was positively related to economic higher growth and any attempts at redistribution (of income or assets)
growth. A dummy variable for democracy was insignificant. These two will only lead to lower growth. Such redistribution attempts are thus seen
studies provide some support for the argument that land as defeating the purpose of lower growth. Such redistribution attempts
redistribution is a good way to increase growth. Remember, however, are thus seen as defeating the purpose ofdevelopment as it can only lead
that these studies are subject to the same caveats as the studies on the to longer periods of inequality. The trouble comes in establishing a
Kuznets curve. They were conducted on a cross-section of countries connection between this and economic productivity. As Bernstein notes,
over time, with no slope dummy variables to account for different citing an index from the Federal Reserve Bank of San Francisco, the quality
structures in different countries or country groups. What if we have a of the U.S. workforce actually appears to have improved since 1979. This
dummy for East Asia in such regression? Would it have the same could be for unrelated reasons — the workforce is getting older and more
consequence as the Latin American effect in the Kuznets regressions? experienced and overall educational opportunities are growing. So we
This remains to be investigated. can't disprove theory #1. But we can't yet prove it, either.

Is inequality a necessary condition for growth? • There are many counter arguments to this line of thinking. While
many development economists agree that savings and investments
• Economists used to think that income inequality was a necessary
are important ingredients for growth, the rich in developing countries
condition for growth, at least in emerging economies the famous
are not known to have frugal lifestyles, focusing mainly on saving and
Kuznets curve suggests that inequality should rise sharply at first, and
investing. In fact, many rich families in developing countries are
then the benefits of productivity become more widely shared over
known to splurge on luxuries. In particular, their excessive
time. But this doesn't appear to describe the United States since the
expenditures on international travel and overseas shopping sprees,
1970s. Income inequality has soared, but the benefits of productivity
jewelry and acquiring properties in other countries do not really help
growth haven't flowed as widely.
domestic demand.

• So in recent years, some economists and even groups like the

• Theory #2: High inequality leads to lower levels of consumer
International Monetary Fund — have started wondering if high levels
spending. Consumer spending makes up about 70 percent of the U.S.
of inequality might even be detrimental to growth. The theories are
economy. And lower-income people have a greater propensity to
often elegant. But the validity of the Kuznets inequality curve
spend their income than wealthier people do. So, if more and more of
hypothesis remains unresolved. The conflicting results from empirical
the nation's income is concentrated at the very top, that could depress
studies have fueled debates about the effect of growth on inequality
overall demand and weaken economic growth. And, Bernstein notes,
levels and vice versa and what this implies for national development.
it's hard to find a relationship even after running simple regressions
On the one hand, many economist say that
or accounting for time lags. On the other hand, there may be more to
inequality is unavoidable in the process of growth and that, in fact, it is this story. Since 2000, inequality has grown, middle-class incomes
necessary so that growth can be sustained. The main argument of this have stagnated, and poverty has stayed stubbornly high. Yet
group is based on the belief that high personal and corporate incomes consumption kept growing — in part because there was a surge of
generate savings and investments, which is an important element of borrowing and a housing bubble.
 • It has also been pointed out in the literature that when people are able
• Theory #3: Inequality can lead to credit bubbles and financial crises. to share in the so-called fruits of development by experiencing higher
It's also possible to combine theories #1 and #2 above and tell a story standards of living as the economy progresses, they are more
about how inequality can lead to destructive financial crises such as encouraged to actively participate in the development process. This
the one we had in 2008. has an important psychological effect that is greatly beneficial to
national development.
• Incomes at the top grow. Incomes at the bottom stagnate. That creates
a lot of demand for cheap credit — people at the lower end borrow • Finally, it is important to recognize that of the two ways of raising
more to keep afloat, while those at the top end have plenty to lend. At incomes, by reducing inequality or by raising the growth rate in per-
the same time, income inequality begins to warp politics. One capita living standards, the latter is by far the more important
example: The University of Chicago's Marianne Bertrand and Adair approach. It would require an enormous adjustments in the
Morse have found that members of Congress in districts with higher distribution of income to achieve the same addition to living standards
levels of income inequality were more likely to vote for a 1992 bill that for the poor as an additional percentage point of sustained growth.
greatly expanded credit for housing. That was true even after Furthermore, as we have seen by looking at the data for Asia, this kind
controlling for ideology. pf remarkable shift in income distribution has not occurred and is not
likely to happen in the future.
• Bernstein notes that there's a lot of circumstantial evidence that
How does inequality relate to openness?
supports this story — including a recent paper by Barry Cynamon and
Steven Fazzari establishing many of the details. "But the empirical • Juan- Luis Londono presents a fascinating figure that shows the
problem, and it's a big one," Bernstein tells me, "is that you can also relationship between the Gini coefficient and the intensity of trade
see many of these trends evolving in periods where there isn't as much (exports plus imports divided by GNP) for the various regions of the
inequality. So I'm not sure we have this one completely nailed down." world in the mid-1990s. Figure 10.7 shows that East Asia has much
higher rate of openness and a low Gini coefficient, as low as any other
• It was also been pointed out that low incomes and low living standards region besides Europe and almost as low as united states, Australia,
can only lead to lower growth because it limits the ability of Canada and south Asia. Africa and Latin America have much higher
individuals to reach their full potential. We know that people with levels of income inequality, while their exposure to trade is also
higher educational levels work better, more efficiently and thus have smaller.
higher productivity. It is the same with healthier individuals.
• An important point to note here is that East Asia has been able to
• Another important argument why inequality should be addressed via minimize significant increases in inequality as it promoted a trade-
higher incomes is that an economy made up of households and based growth strategy. This has been made possible by an emphasis
individuals with higher incomes and living standards demand more on trade, without a natural resource base. Latin America and Africa on
consumer goods. Attempts to equalize incomes in such an economy the other hand, have substantial natural resources but have not been
are thus helpful in stimulating domestic demand, and therefore assist able to convert these assets into rapid growth or trade. Educational
economic growth in this way. levels have not been an obvious advantage or disadvantage in this
 regard. The average level of schooling in Latin America and East Asia richer households. For a start, they will have a lower survival rate
is about the same. during infancy. As they grow older, it is also more likely that crucial
opportunities in health care and education will be denied to them by
THE Unequal Burden of Poverty
default. Such children will have to share limited family resources (e.g.,
• Poverty, as experienced by countries, households, and the people food, clothes) with more siblings and they will be asked to work and
within them, is rarely experienced evenly. Some countries are poorer contribute to the family coffers at a very early age. In societies where
than others, some households are poorer than others, and some there tradition values males above female children, girls are even
individuals can experience poverty more acutely than members of the more disadvantaged in the poorer households.
same household. In this section, we break down poverty within a
country by identifying the vulnerable groups and providing analysis • ELDERLY. The elderly in developing countries tend to depend solely
on why or what made them so. Doing so provides a clearer insight into on their families to look after them in their twilight years. While this
the issue and will also lay the ground for the policy discussions that is traditional and most children would not turn away from such
follows. responsibility, the burden of looking after aging parents in households
with very limited resources is not an easy one because poorer
Who Are the Poor?
households tend to have larger numbers of children. On the one hand,
• The following groups of people have been repeatedly identified and elderly parents can look after the children while parents go to work,
proven to be the most vulnerable members of the national community but the health and welfare of the elders tend to suffer. Where
because of their poverty. governments provide little, if no support for the medical needs of their
elderly population, medicines, health checkups and trips to the doctor
• RURAL DWELLERS- People who live and work in the rural areas can be a burden to the poor.
of the world are more likely to be poor. In Asia and Africa, rural
poverty accounts for over 60 percent of the total population and often • ETHNIC MINORITIES. Ethnic minorities and indigenous
over 80 percent of total poverty. In Latin America, it is less than 50 populations are generally poor for similar reasons such as
percent because of higher urbanization levels. discrimination and because they are rural-based-American
Indians, Indians in South America, aboriginal people in Australia,
• WOMEN. Women constitute over 70 percent of the world's poor— Kurds in Iraq and Turkey, Tamils in Sri Lanka, Tibetans in China, hill
particularly households headed by women. A combination of current tribes in Thailand, and the Philippines. In the United States and
and past discrimination is responsible-low education and health Australia, the human welfare indicators-life expectancy, infant
indicators are the primary reasons for women's poverty. Recent mortality, nutrition and education--for indigenous populations are
studies indicate a greater likelihood for households headed by women much lower than for the rest of the population.
to be poor compared with those headed by men. Why Are Some People Poor?

• CHILDREN. On average, children are poorer because the poorer 1. There are three fundamental reasons why people are poor.
households tend to be the bigger families. Children born into poor 1. They have a very low stock of human capital, such as education,
families will have lesser opportunities compared with those born in training, or skill development. In India, over 70 percent of heads of
 poor households are illiterate compared with about 30 percent in the poverty in the urban areas is commonly known to be lower than in the
general population and much less for those above the poverty line. rural areas and that the illiterate, women and children bear the brunt
of poverty in urban areas. The situation is changing rapidly as
2. They have a very small amount of physical capital, such as land or industrializing cities attract inward migration from the countryside.
machinery. Those lacking education, minority groups, children, and That said, the advent of rural migrants have caused poverty incidence
the elderly are generally poorer. This is because there is limited access rates to increase in the urban areas, particularly in cities where there
to land and irrigation facilities. Those without access to land have are no government assistance programs available to ease the
much higher incidence of poverty. Much of the evidence shows that transition pains for such new city dwellers.
tenants do as well as owners, other things equal, and things equal, and
ASPECTS OF RURAL POVERTY. Poverty is usually associated with the
contrary to some popular beliefs, are also no slower than owner
lack of ownership of productive assets. In rural areas, the majority of the
operators in implementing new technology.
poor are found among the landless tenants or those who own very small
parcels of land. The poor participate in all forms of rural non-farm
3. Even if they have physical and some human capital, their employment
employment, largely cottage and traditional industries, but in general,
opportunities may be blocked because of discrimination - for example
households with a significant proportion of income on agricultural labor
those living in backward or bypassed areas, such as the northeast of
tend to be poorer. In Indonesia, this group accounts for the highest
Thailand which gets little water, the dry areas of Baluchistan in
incidence poverty at 38 percent, followed by self-employed households
Pakistan, and the outer islands of Indonesia.
which have agriculture as their main source of income. In the Philippines,
roughly two-thirds of the rural poor are engaged in farming (including
• Within the household, the burden of being poor rests unequally
fishing). The poor there experience greater unemployment and
among the members. Inequalities among household members-that is,
inadequate access to modern agricultural machinery, mainly because they
who gets the more favorable treatment for resources such as
lack access to credit facilities
education and health, etc. -tend to be highly correlated to the
member's (potential) capacity to earn income. Those who are denied • As noted above, education is another productive asset that the poor
opportunities tend to be females, both adult and children, and the generally lack. In Indonesia, poor households in which the parents
elderly. This happens as a decision not of individuals but as a family or have low education levels have a greater tendency to keep their
a household a decision that is manifested in the actions of each family children from attending school. These children are instead asked to
member—including those who are denied the opportunities help out on the farm, do housework, or look after younger siblings.
themselves. How this decision is reached is beyond the scope of this • Hence, net school enrolments are lower among the rural poor
chapter. However, it is worthwhile to note that an increase in the level compared with the nonpoor in all age groups, with the difference
of women's education has been shown to bring with it greater widening with the increase in the age of the children. Therefore, there
bargaining power in the household, and more resources to the are high illiteracy rates for poor rural households. For those who are
children (a household, and more resources to the children (especially not illiterate, there is little evidence of schooling beyond the primary
female children) and better care for the elderly. level.
• Rural versus Urban Poverty Within a single country, the poor exists in • Because of their limited access to productive assets, the rural poor
both rural and urban areas. Particular aspects of poverty in these two have limited capacity to improve their productivity. If some own a
regions can, however, differ significantly. For example, the incidence of small parcel of land, there are limited economies of scale to be gained
 from improving land productivity. Additionally, because they generally Poverty Affects All Markets
have only few years of education, poor farmers also tend to be ill-
• CREDIT MARKETS. The poor cannot borrow from formal credit
equipped to absorb new knowledge on how to increase farm yield
markets because of the lack of collateral. Therefore, in case of an
through new technology. The spillover effects of technology transfer
emergency or to smooth incomes, they have to go to informal markets
will also be limited. The poor generally have a very short planning
which charge higher rates of interest.
horizon. They tend to favor solutions to problems that take effect
immediately rather than concern themselves with long-term
• GOODS MARKETS. Since the poor have very low incomes and cannot
strategies. Physically, the incidence of sickness may be higher and
afford the cost of storage, they cannot buy in bulk. Thus, the cost of
illnesses may last longer and be more debilitating since the poor have
goods per unit is higher, often much higher than when purchased in
limited access to medicines and medical facilities, and are more likely
bulk and stored.
to be exposed to unclean water and poor sanitation.

ASPECTS OF URBAN POVERTY. Unemployment in rural areas drives • LABOR MARKETS. In urban areas, the poor tend opportunities in
people to migrate to urban areas--and migrants form the majority of the ghettos, in the fringe of cities. Employment opportunities on ghettos
urban poor. Since most new migrants will not have much financial and are limited and it is necessary for them to find employment far from
physical capital to begin with, they will have to rely on the educational or their place of residence. Therefore, transportation expenses as a
vocational training they have had prior to the migration. Lack of such proportion of income incurred by the poor may be higher than for
training and/or skills reduces their chances for employment and this has other income groups. Poor nutrition contributes to low income by
been identified as a major factor for poverty in urban areas. A vicious cycle reducing energy levels., increasing the incidence of sickness and
of poverty perpetuates. Poverty results in high dependency rates, low disease, and making the poor a bad employment risk.
education of children, and low wages, as well as significant periods of
underemployment. Aspects of Labor Absorption and Unemployment

• Unemployment rates are not a good index of employment for urban • Poverty and unemployment are closely related economic phenomena.
areas. These measured rates are low, but underemployment is very More specifically, there is usually high unemployment rate in areas
high in many cities. Unemployment is low simply because someone where there is widespread poverty. This is because for most
in the family must earn money or the family will starve—there is no households, labor is normally the only productive asset that people
social security system in these countries. Where do the urban poor can depend on their daily existence, particularly in developing
work? The urban poor are predominantly self-employed or engaged countries. If there are not enough opportunities to work, it usually
in small-scale enterprises. They rely heavily on work in small-scale results in the impoverishment of the household and all its members.
enterprises. In Asia, they operate small shops and service
establishments, sell food and cigarettes, hawk lottery tickets and • More often than not, analysts need to look beyond the picture that
newspapers, repair cars and bicycles, transport passengers in official unemployment rates paint regarding employment conditions
pedicabs and motorized tricycles, collect and reprocess trash and in the economy. A more accurate representation of the employment
scavenge in garbage dumps. In all the major Asian cities, there are situation can be drawn from the underemployment rate-that is, the
many families who eke out a living by gathering and selling items ratio of employed workers looking for more work to the total number
collected from huge garbage dumps.
 of workers-- which is usually much higher than the official Therefore, it is critical that these human resources be developed and
unemployment rates. nurtures to ensure they are capable of making these important
decisions. Human capital is defined as human capacities that raise
• Labor market dualism is prevalent in poor countries. This means that productivity. Labor productivity increases in particular are essential
wages are much higher in the formal sector than in the informal sector. for sustained growth in the economy.
Unions and other restrictive practices help to retard the growth of the
The Economics of EDUCATION
formal sector and perpetuate dualism. Even without strong unions,
there has been a trend toward wage setting in the formal sector, WHAT IS EDUCATION?
resulting in rising unemployment in Africa and Latin America.
• Education can be defined broadly as any or all forms of human
learning.
• Industrialization cannot be relied on to solve the unemployment
problem in many developing countries. Industrial growth cannot Types of education:
supply enough jobs to absorb the underemployed and unemployed.
The elimination of factor price distortions can help to improve labor ▪ Formal Education - involving a schooling systems with structured
absorption, but this is limited by the small size of the formal sector in program, using textbooks and having lessons within the confines of a
some countries. classroom.

▪ Informal Education- where knowledge is acquired in very structured

• Labor market discrimination against minorities and women and
way, as children learn from their parents and relatives, or through
children occurs in two ways-low pay for equal work and occupational
apprenticeship schemes that teach a trade.
discrimination. There are some occupations that are dominated by
certain racial, ethnic, or social groups. Nurses and doctors are good For example: Children learn planting techniques and other skills in the
examples of past sex discrimination. How many male nurses and fields as they watch their elders, and eventually become part of the
female doctors are there? agricultural community as a result of this kind of informal training
HUMAN RESOURCE DEVELOPMENT: A FOCUS ON EDUCATION AND A rapid expansion of the public educational system occurred worldwide
HEALTH from the 1960s onwards, as governments in both developed and
developing countries became convinced that the provision of educational
• In recent years, development economists have begun focusing on
opportunities to the largest possible section of the population was a
human resources as a vital economic component in stimulating rapid
critical component for national development.
economic growth. While physical capital and natural endowments of
land and resources are also important, human resources play a critical Factors Affecting Spending on Education
role in bringing about the structural and technological transformation
that are required to industrialize and raise per-capita incomes rapidly. 1. Low Salaries of Teachers. There has been a decline in teacher
salaries relative to average incomes in many countries. A person
• People not machines make the crucial development that result in
working as a Teacher in Philippines typically earns around 31,100
improved allocation of resources and the implementation of
PHP per month. Salaries range from 14,300 PHP (lowest) to 49,500
technology. They save and invest in new technology and infrastructure
PHP (highest). The low remuneration has clearly helped to keep the
and also decide how resources are to be used and mobilized.
 cost of education at the primary and secondary levels affordable, but EVIDENCE FROM MICROECONOMIC STUDIES Evidence from
if the trend continues, the teaching profession may in the long run find microeconomic studies suggests that there are high rates of return to
it difficult to attract enough highly motivated and capable individuals. investment in education for the individual. Nevertheless, education is
Certainly, keeping the balance between the quality of teachers and the considered to be a merit good, there is a rationale for government
cost of providing education is a huge challenge for policymakers. subsidies. Society benefits from positive externalities that arise from the
provision of education, particularly at primary and early secondary levels.
2. Population of Students In the developing countries, the rapid
Private returns
growth of the population has resulted in a substantial increase in
the number of school-age children. This has placed a heavier ▪ Personal Empowerment- Knowledge and skills
burden on the carrying capacity of class, and shared text materials in ▪ Lifetime earnings
some cases. Given the limited and the large demand for public ▪ Best chances for getting best paying jobs
educational services in the developing countries, many conclude that ▪ Job opportunities
the quality of public schooling has deteriorated in many of these
Private Cost
countries in the past few decades.
▪ Earnings Foregone (Opportunity Cost)
3. A dichotomy between Public Education and Private Education. ▪ Direct Cost (tuition fees, school’s supplies, travel expenses, etc.)
There is a risk, however, that a private school system may perpetuate
the maintenance of social elites as the rich would send their children Two Conclusions about why Social Cost Outweighs the Social Returns
to better private schools and the poor would have to be satisfied with ▪ First, cost primary education is much lower (per capita) and the
an inferior public school system. As a result, in many developing social returns are perceived to be very high.
countries where private education has been allowed to flourish, this ▪ Second, both social and private returns decline with the higher
twin system of providing educational services to the population has levels of education, particularly beyond the tertiary level.
led to inequalities in “quality, a dichotomy that continues into the
provision of tertiary level education, it also affects employment EVIDENCE FROM MACROECONOMIC STUDIES
outcomes as employers in such developing countries tend to favor According to Pritchett (2001), there is little evidence that educational
graduates of private schools over their public-school counterparts. systems have been a general failure in the Asian economies. Even though
some corruption exists in governments in the region, the bureaucracy has
As an example notice that private schools specializing in computer not, by and large, become a residual employer as it has in other developing
technology and languages have mushroomed all over developing Asia in regions of the world. Furthermore, the results of cross-section production
the past few decades in response to a growing demand. The private functions try to identify regional effects. First, these results were compiled
sectors are leading the response of educational system in providing for a wide cross-section of countries and therefore there would be
facilities these languages and technical skills. differences in individual country experiences. Secondly, itis possible that
the rent- seeking behavior of graduates who go into government jobs,
Rates of Return to Education where there is opportunity for graft and corruption, may actually have
strong opposite effects. Thirdly, there may have been a stagnant demand
educated labor domestically, even though education may be rewarded
highly in other countries. Finally, it could be that schooling does not create Korea). They conclude that it is important to consider the cultural
the skills needed to achieve more rapid growth. This suggest failure in the context and that in countries with traditional-defined gender roles,
educational system. such as in Sri Lanka and Korea, increases in labor participation is less
likely in economies where gender roles are less rigidly defined such as
Education, Labor Earnings, and Productivity
the Philippines and Thailand.
How does education enhance productivity?
Educational Spending
Three main channels through which education can affect productivity.
• Spending on education absorbs a much larger proportion of
1. Education might enhance the productivity of measured inputs government budgets than most other expenditures. It is thus
and an hour of labor. important that we study the allocation of resources to this sector. The
2. Education reduces the cost of adjusting to changes in the mix of budget share of educational expenses to GDP has steadily increased
inputs and outputs to production. for most countries in Asia over time.
3. Education increases the ability of workers to adapt to new
technology and their willingness to change the traditional ways of • In the 1960s, the share of education in GDP ranged from less than 1
doing things. percent in Nepal and Bangladesh to as much as 3.09 percent and 3.74
percent in Singapore and Sri Lanka, respectively. By the mid-1990s,
Education and Women: The Virtuous Cycle of Education
the education sector’s share in GDP averaged about 3.2 percent, with
• Women's education has many direct and indirect benefits in the Thailand and Malaysia standing out as having the largest shares of
development process. Improving women’s education has the more than 4.6 percent of GDP, and very comparable with those seen in
beneficial external effect of decreasing fertility and infant mortality Australia, Japan, and the United Kingdom. In the 2002-2005 period,
rates, and of increasing the “quality” of surviving children, who tend this share of education continued to rise for many countries, led by
to be better educated and healthier. In this virtuous cycle, educated South Korea (its share increased to 4.6 percent from 4.07 percent
women feel greater empowerment within the home, take better care seven years earlier), and Malaysia (its share increased to 6.2 percent
of themselves and their offspring physically, and feel a greater from 4.62 percent over the same period.) The share of education in
responsibility to have fewer children. Malaysia’s budget is now above those of the major industrialized
countries, except for New Zealand, which had 6.5 percent share during
Women’s Participation in Labor Force 2002-2005. These appears to be a weak correlation between an
• There is some evidence that women’s participation in the labor increase in per-capita income and a nation’s share of the budget for
force is suppressed in societies where the social norms are education.
traditional, and where women are discouraged from entering the Education Expenditure and Level of Income
workforce and urged to stay at home. According to a study by
Cameron, Dowling, and Worswick (2001, Asian countries such as • If we consider the costs of public education calculated as a percentage
Korea, Sri Lanka, Thailand, the Philippines, and Indonesia. They found of per-capita GDP, it is striking that countries with low per-capita
that tertiary education had significant impact in raising women’s incomes spend the least on primary education. This includes the
participation in the labor force in four of the five countries (except countries in South Asia and the Philippines.
• If we consider the costs of public education calculated as a percentage World War II, there was much less disparity in per-capita income, but
of per-capita GDP, as reported in Table. It is striking that countries the gap has increased over time.
with low per-capita incomes spend the least on primary education.
This includes the countries in South Asia and the Philippines. • Overaged students and repeaters tend to distort the enrolment
numbers at the primary level These survival rates in education are
• Further to this, the proportion of gross national product (GNP) closely related to levels of per-capita income, suggesting that the
devoted to tertiary education is as much as forty times devoted to efficiency of education is highly correlated with income per capita.
primary education, particularly for several countries in South Asia.
Gender Disparities in Educational Attainment
In contrast, countries such as Indonesia, Korea, and Malaysia devoted
more resources to primary and secondary-level education, and • Gender disparities exists at all levels of education for most countries,
relatively less on tertiary education. As an economic strategy, the but they tend to fall as incomes rise, as do literacy differentials. By the
former is seen as more effective in laying the foundation for higher level of schooling observed in the girls-to-boys enrolment ratio,
growth rates in the future – that is, compared with the resource bias although in several Southeast Asian countries, such as Malaysia and
of South Asian countries towards tertiary education. It is thus, the Philippines, the enrolment rate for tertiary education has been
probably no accident that the South Asian countries grew more slowly higher for females than males
than the NIEs and the economies of Southeast Asia.
GENERAL ISSUES IN EDUCATION POLICY
• One reason why the Philippines, Korea, And Indonesia spend • There is no doubt that education plays a very important role in the
relatively less on tertiary education is that this sector is supported by economic development of nations. Today, I will discuss a few other
the private sector to a significant extent In this case of Thailand, the important issues that are directly relevant for policymakers.
figures show a relative neglect of secondary and tertiary education.
Greater Privatization of the School System
• Looking at enrollment rates over the past fifty years, a number of • An argument can be made for greater privatization of the school
developments are evident. Firstly, primary education has become system by allowing private schools to coexist with public schools. This
quite universal in most countries. However, the quality of this gives students greater choice and also helps to promote competition
education can vary substantially and the figures in some instances between public and private schools. A study of the Philippines by
seem high, since by walking around in any of the major cities in South Jimenez (1987) shows that administrators in private schools who are
Asia, it is obvious that 100 percent figure is an overstatement. financed by local funds have greater incentive to minimize costs while
maintaining quality. The provision of a private-school alternative also
• The NIEs started in 1950 with a very strong primary education base, helps to reduce the budget burden on the public purse as a result of
but so did a few other countries, such as Sri Lanka and the Philippines, these competitive factors.
which now have much lower per- capita incomes. We have noted this
in earlier chapters and speculated on the reasons that they were not • Perhaps there is a range of funding for tertiary education by the
able to capitalize on a strong primary education base, as did the NIEs. private sector of around 50 percent. At higher rates of private
Bangladesh and Pakistan, on the other hand, stand out as countries financing of higher education, the social selectivity of a totally
that have made little progress in education generally. Note that after
 privately funded higher education system will work to exclude the differences? A related point is the family background of the student. It
poorer segments of society. Studies in the Philippines and China also is important to recognize that all three of these variables are probably
show that the unit cost of education tends to fall with the size of highly correlated in most samples-that is, higher quality, higher
enrolment in the school. This is true for both secondary and tertiary quantity, and "good" family background tend to go together. Thus, the
education. returns to education have to be interpreted carefully. Simply offering
to extend the same quality of education to a wider cohort will probably
• The proliferation of private schools, however, may exacerbate existing give a lower rate of return than estimates based on data where all
income and wealth inequities within an economy. Poorer families tend three variables are changing over time. This is because some of the
to send their children to public schools, while more affluent families increase in wages/earnings will be attributed to the increase in
send their children to private schools. While there are economically quantity of education, whereas the quality of education and the
justifiable reasons for allowing private education systems to flourish, background of the student will also be important determinants of
this dichotomy drives a wedge between graduates of "public" and earnings on their own account. Moreover, studies conducted with
"private"flourish, this dichotomy drives a wedge between graduates of panel data suggest that a pupil's home environment and social status
"public" and "private" education systems, and does affect labor market are much less important in developing countries than it is in
outcomes as employers tend to favor graduates of private schools developed countries. These studies also show that the variation in
more than their publicschool counterparts. academic achievement attributable to factors internal to the school
system, such as the physical infrastructure and facilities, the quality of
Teacher's Pay, Class Size, and Educational Efficiency
the teachers, and the availability of books, and other teaching
• There is also evidence that efficiency improves as the student-to- materials and facilities, play a much more important role in the
teacher ratio increases up to a point. A study by Leroy (1995) shows developing world than it does in developed countries. Despite these
that the pupil-teacher ratio does not have much effect on educational caveats, there is still a strong economic and social incentive to invest
outcomes when the range is 25 to 50 pupils per teacher. At the same in education. These findings also reinforce the conclusion that greater
time, the pupilteacher ratio tends to decline with higher income. emphasis should be put on providing good facilities and teachers.
Therefore, it may be a good strategy for poorer countries to increase
Tertiary Subsidies and the Brain Drain Problem
class size while improving teacher quality. As incomes and education
budgets increase, they can gradually reduce class size. • Tertiary education tends to be much more costly relative to primary
education in developing countries than it is in developed countries.
The wage differentials between the tertiary graduate and those who
Quality versus Quantity of Education obtained less years of schooling tend to be higher in developing vis-a-
vis developed countries. It was also pointed out earlier that the
• The rapid increase in demand for educational services has been based external benefits of education diminishes with more years of
on the notion that having more years of schooling is more likely to schooling-that at higher levels of education, greater benefits accrue to
boost one's earnings in the labor market. Furthermore, there is some the individual more than to the society. This reality must be
evidence that past a certain threshold of income, there is bound to be recognized by policymakers in developing countries where large
greater substitution between the quantity and quality of education subsidies are often given to higher education, which tend to have a
obtained. How much of the variation in earnings is a result of quality regressive effect on the taxation system. An associated problem is the
 phenomenon called "brain drain”. When higher education is Implications for Policy
subsidized and there is international labor mobility, there is likely to
Based on the above analysis, we can draw five tentative policy conclusions:
be a larger "brain drain" problem. This wastes public resources and
indirectly provides a subsidy to the richer country, which does not 1. Curbing population growth means lower dependency rates and
have to spend on training for the immigrant. The solution is to reduce increases the ability of the society to educate its population with the
the subsidy to higher education dramatically. same resource base.
Inequality Effects and Missing Credit Market
2. It pays to educate teachers more intensively and to pay them well,
• The educational levels and quality of education in Asia vary widely even at the expense of having slightly larger classes.
among countries. The policies that an individual country follows at a
particular time will depend upon the status of the existing system. In 3. It is advantageous to spend on education for girls and primary
many instances, the existing system tends to perpetuate the education education in general. Investment in these areas shows high payoffs,
of the ruling class and discriminate against the education of "gifted" both in social and private returns.
poor children, particularly in rural areas where facilities for primary
education may be weak. A balance needs to be struck between the 4. It pays to encourage private providers of tertiary-level education and
different objectives of a subsidized education. If there is great possibly at the secondary level as well if they do not already exist.
inequality in the redistribution of income, more generous subsidies
may be given to gifted students, even at the tertiary level. In a 5. Experiments with higher pupil-teacher ratios and decentralization of
comparative study of Kenya and Tanzania, Armitage and Sabot (1986) authority over school management, the curriculum, and the budget,
found that higher school fees in Kenya resulted in a higher secondary may also be advantageous.
enrolment. This could have helped Kenya to achieve more rapid
HEALTH AND ECONOMIC DEVELOPMENT
development than Tanzania, which followed a policy of keeping
secondary education free but reduced enrolment by test screening. To • Health is the overall well-being of an individual. This definition covers
understand how these policy issues apply in particular countries, we the physical, mental, and social state of the person and is essentially
have to understand the existing educational system in these countries the definition used by the WHO and other international agencies.
and assess the quality of the education provided. Health also refers to the over-all or general well-being of a population.
that being said, health means that illness and infirmity or physical and
• One way to address the inequalities raised above is through the mental weakness is absent in a population.
development of a well- • Morbidity and mortality are the chances of a person becoming sick or
dying (presumably due to illness). Morbidity is a difficult statistic to
functioning credit market. Low levels of wealth hinder or even bar
measure as trips to the doctor are the only available information that
productive educational choices because of the failure of credit markets.
can be used to estimate this probability for the population. Morbidity
For the poor, educational loans are difficult to obtain because of a lack of
is the state of having a specific illness or condition. While morbidity
collateral. In India and Thailand, there seems to be a working credit
can refer to an acute condition, such as a respiratory infection, it often
market for education- -but it may still be inaccessible to the poorest
refers to a condition that’s chronic or long-lasting. Example of
income groups.
morbidity is diabetes, high blood pressure (hypertension), heart
 disease, obesity, etc. In the developing countries, this problem is worse of such efforts can substantially enhance productivity and increase the
since access to medical services can be remote. The measurement of amount of arable and habitable land.
morbidity may also be complicated by the gravity or seriousness of the
HEALTH PATTERNS AND TRENDS IN DEVELOPING COUNTRIES
illness being reported. The mortality rate can be and are more closely
monitored. Because, Mortality refers to the number of deaths that • Health conditions have been improving gradually over the years. The
have occurred due to a specific illness or condition. In most countries, life expectancy rates-that is, the number of years a person is expected
the national statistical agencies maintain databases of births and to live-have increased between 1960 and 2005. In general, life
deaths in the economy, and their regular publications contain these expectancy is higher in developed countries than in developing
statistics for the year. Other statistics are also commonly used, such as countries, but this gap has narrowed in the last forty years. This is due
infant mortality, life expectancy at birth (number of years a person is to the availability of safe water, sanitary facilities, immunization, and
expected to live), crude birth rates and, of course, crude death rates. access to health services in most countries, Asia and other parts of the
Note that: statistics on the cause of death provide important clues or world. Income has long been accepted as the major force driving
information about the general well-being of the population that can be improvements in health for many countries. A dramatic decline in
used in forming a new set of health measures. But, these sets of death rates occurs when countries become industrialized and living
information are not always reliable or available. standards as well as incomes, increase. Subsequently, as a result of
lower mortality rates, the life expectancy rates have risen
Importance of health
substantially. People in richer countries have lived longer in both the
➢ A healthy population is an important ingredient for economic 1930s and 1960s, life expectancy rates in poorer countries have
growth and development. Because good health increases the caught up rapidly in the later period. Both rich and poor countries
worker's strength and stamina and enables them to work longer hours have benefited from the advances in medical technology. We can see
and concentrate more effectively. There is little argument that a here that in the 1960s, the curve for lower income range becomes
healthy and fit workforce is better able to increase national higher compared to 1930s. This phenomenon also illustrates when
productivity. the life expectancy curves begin to flatten out. Over- all, this shows
that increasingly, income has become less important as a determinant
➢ Good health is also known to improve the performance of of mortality.
children in school. When children are well fed, they tend to have a
longer concentration span, absorb what istaught more effectively, and • We have known for a long time that poor health and poverty go
are generally is able to participate better in class activities. Besides together. Recent research carried out by the World Bank provides
increasing the quantity and improving the quality of human resources, empirical evidence showing that the poor health of a population is a
health expenditures can also extend the availability or productivity of detrimental factor for economic growth. The WHO Commission on
non-human resources. For instance, is the schistosomiasis in Africa, Macroeconomics and Health has released its assessment of health and
this endemic disease makes it unsafe for people to enter lakes and economic development. This assessment also finds a close
streams in sections of Africa. So far, no chemical means of control have relationship between health and the level of income per capita. This
been discovered for this disease. China, however, has made progress relationship between growth and health happens through the
against schistosomiasis through mass campaigns aimed at ridding production function, as poor health reduces labor productivity and the
lakes and streams of the snails that transmit the parasite. The success ability to absorb new technical change.
 ASPECTS OF HEALTH IN DEVELOPING COUNTRIES their budget for food is lessen due to an unpredicted expense,
therefore their food consumption will decrease compared to their
➢ Good health increases the human potential in all areas and is rightly
normal food consumption.
regarded as a basic human need.
• b. Prices - The poor are very sensitive to changes in the prices of
Three Main Aspects in The Context of Their Implications for Policy a food basket and they tend to make strong substitutions when
prices change. For example, if the price of rice increases, we would
1. Environmental Health- One effective approach toward better health
expect the nutrition content of the diet of the poor to decrease, other
outcomes in developing countries is through the improvement of
things being equal. Because of the decrease in nutrition from
environmental sanitation. The spread of infectious and parasitic
decreased rice consumption, there is a sufficiently large increase in
diseases can be effectively controlled by ensuring that people have
the demand for other relatively nutritious food, it is to redeem the
access to clean water and the provision of an adequate waste disposal
decrease in nutrition caused by the decrease in rice consumption. A
system. Experience has shown that such measures have effectively
related point is the response of the poor versus the rich to price
controlled the spread of waterborne diseases. Improving housing
changes. Within poorer households, female children are generally
conditions with better ventilation and space-can also minimize the
made to accept a greater nutritional burden of adjustment when there
spread of tuberculosis. Health risks for these diseases are exacerbated
are unfavorable price movements. The nutrition of others in the family
by the presence of urban slums, especially in developing countries.
moves much less.
These are pockets within a city that are highly populated by the poor
• c. Tastes - Cultural beliefs and tastes in the consumption of
and housing conditions are very crowded.
particular types of food can impede nutritional improvement.
Many traditional societies have beliefs about the health effects of
2. Malnutrition And Food Consumption - Malnutrition occurs when a
various food that are not supported by modern nutritional science.
person’s food intake does not meet minimal nutritional requirements
And these beliefs can be harmful to the health of certain segments of
for the physical body to function well. It is a major cause of ill health
the population. Soybean products, for example, have been found to be
and premature death. We all know that having the right amount and
a cheaper source of protein than animal products, yet their potential
kind of food for the young is very important as they are still growing.
as a primary provider of protein in the household diet is yet to be fully
Inadequacies in their food intakes affect their physical and mental
utilized in the poor countries of Africa or South Asia, where meat is
development and therefore, this will also affect the quality of the adult
still preferred.
population in the future.
3. Medical Services Health services in developing countries are
unevenly distributed with large urbanrural differentials in the
Three Elements of Food Consumption quality of services provided.

• a. Income - Income is an important indicator of food consumption MEDICAL FACILITIES AND SERVICES
levels, particularly at lower levels of household income. Engel's
• Medical facilities and services in the developing countries are very
law says that poorer households devote a greater proportion of their
inadequate in providing for the health needs of the growing
budget to food and that they have a relatively high-income elasticity of
populations. In developing countries, public expenditure on health
demand for food. This means that poorer households use their
has always been lagged behind those for education, defense, etc.
additional income to purchase food for the household. If for instance,
Furthermore, compared to developed countries, these health
 expenditures are still very low, even as a percentage of GDP. This has • In the end they recommend greater investment in the health programs
resulted in a stock of medical resources- the facilities and personnel- because improved health definitely promotes more rapid growth. And
that are far from adequate for the needs of the population. It is not a it simply means that health is an important determinant of economic
secret that there are usually long queues in the few established health development and a healthy population means higher productivity,
centers, insufficient medicine supplies, and a lack of trained health thus higher income per head. And the importance of human capital to
personnel to support these services. The number of physicians willing economic growth cannot be over emphasized because it serves as a
to practice in the public sector is also limited because many doctors catalyst to economic development. Healthy population means higher
are lured by the prospect of higher income in private practice. productivity, thus higher income per head.

SUBSIDIES AND NUTRITION

• There is a strong drive to acquire the latest medical technology to
make the domestic capacity comparable to Western economies. Thus, What is Subsidy?
much is spent on medical machines that support, for example, open-
heart surgery. But the problem is this usually happens in the cities, • Subsidies- are the sum of money granted by the government or a
where the interests of the urban elites are satisfied. This is an example public body to be able to assist an industry or business so that the
of the large urban-rural differentials in the quality of services and price of a commodity or service may remain low or competitive.
facilities, because urban areas are privileged with the latest medical Examples: agriculture, oil and gas, transport, green energy, foods and
technologies, but in the rural area even a rudimentary or basic medical products and welfare payments It appears to be mismatch in the food
care to sick infants and children is woefully inadequate. products that are subsidized focusing on those food products that
consumed by the poor.
• The developing countries spend far more resources on curative health
care when it is well known that preventative health care is the more ➢ Meats, poultry and dairy products – given some subsidies in
sensible approach. Inoculation campaigns, mosquito spraying, and developing countries
eradication of pests such as rats, is proven to have produced dramatic ➢ Costly-for poor to consume
improvements in health conditions in some low-income countries, If subsidies are to be given, they should be for grains, such as rice and
most notably in China. The main issue for governments in the wheat, which are most heavily consumed by the poor and it is to be
developing countries is on how to strike a balance between curative prioritize first.
and preventive health care.
RAISING INCOMES THROUGH DIRECT TRANSFERS
PUBLIC- HEALTH POLICIES AND THE ASIAN EXPERIENCE
• Raising incomes through direct transfers does not necessarily
What is Public Health? improve nutrition and health. While this point is still being debated,
• Public health- has made a significant impact on the health of there is some evidence that the income elasticity of nutrition
populations, making people healthy and saving their lives. expenditures may be very small in some countries. And with these
cases, it may be better to provide direct nutrition rather that direct
Greater investment to health-related programs transfers. Direct nutrition through a subsidy to augment programs
that can raise the income of the poorest and most deficient groups.
MACROECONOMIC EFFECT middle-income countries. According to the World Health Organization
(WHO),
Macroeconomics
• the Human Immunodeficiency Virus/Acquired Immune Deficiency
Macroeconomic Factors that contribute to health: Syndrome or HIV/AIDS for short, has now become the leading cause
of adult mortality at the global level.
➢ General level prices(inflation)
• It was the main cause of some 4.9 million deaths in 2004, and
➢ Employment rate
morbidity effects are expected to rise even more substantially in com
➢ Unemployment rates
ng years. Latest WHO statistics indicate that as of early 2009, more
➢ Budget deficits (BDs)
than 40 million people around the world live with the AIDS virus.
➢ National income and expenditures
• These are the several mechanisms' through which HIV/AIDS can affect
CHARGING FEES FOR HEALTH CARE the workings of economies.
1. First, unlike most other deadly diseases, HIV/AIDS directly
It has been discussed earlier that health care in developing countries is
affects people of working age.
severely under- financed. Prices have generally played a minor role in
2. Secondly, the susceptibility of working-age individuals can lead
generating resources for financing health services or in determining those
to a potential reduction in saving rates and disposable incomes.
who have access to them.
3. Thirdly, high rates of AIDS-related deaths reduce the stock of
• Large externalities- means that is when society benefits significantly human capital.
from the provision of one unit of service to an individual or a
These Are the Vulnerable Groups
household. This type of health service must be provided below cost.
• Low externalities- means the cost for this type of service should be Four major groups exhibit a very high-incidence of HIV/AIDS:
borne by the individual.
➢ sex workers (both male and female) and their clients
• Excess demand, on these high-price services, then the price can be
➢ men who have sex with other men
further increased. And the revenues generated can then be reinvested
➢ and intravenous drug users.
in expanding services.
• No excess demand, the effect of a fee increased on revenues and the Measures to Contain the Spread
level of services provided would depend on the elasticity of demand
1. Promote the use of condoms among sex workers and bisexual
for health services. In the context of a developing country where most
men
households and individuals are not able to afford primary health care
2. Publicize the necessity for using measures to protect against
for themselves and their family members, it is an uncomfortable
AIDS, such as condoms, and high light the importance of not sharing
thought that people will only be provided with medical and health
needles
service if they can pay for some. And those who use public-health
3. Make condoms and needles widely available and at reasonable
services are the poor.
prices, or supplied free in clinic
4. General promotion of HIV/AIDS awareness through public media
• The widespread prevalence of diseases such as malaria, tuberculosis, and non-governmental organizations (NGOs), as well as
and HIV/AIDS pose significant constraints to development in low- and
newspapers and magazine articles.