Economic Development: Poverty and Distribution
• Large degree of inequality in terms of wages. This wage difference plays a large role in inequality within
South Africa. Central most important thing, is based on very large differentials in wages.
• Differences in incomes between houses can be seen through wage inequality.
• Wages in turn are also determined largely by the qualification a person has achieved within their
lifetime.
Why so much attention to poverty and distribution?
• Nb in a model society.
• “The last 200 years have witnesses a dramatic change in thinking about poverty. Mainstream economic
thinking in the 18th century, held that poverty was necessary and even desirable for a country’s
economic success. Today, poverty is more often viewed as a constraint on that success. In short, poverty
switched from being seen as a social good to a social bad. This change in thinking . . . has greatly
influenced public action, with heightened emphasis on the role of anti-poverty policy in sustainable
promotion from poverty, as well as protection. Development strategies today typically strive for a
virtuous cycle of growth with equity and a range of policy interventions have emerged that aim to help
assure that outcome. An expanding body of knowledge has taught us how effective those interventions
are in specific settings, although many knowledge gaps remain”
• Important in SA!
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, A. Perspectives on economic development
• Economic development: a process of structural change that leads to a sustained rise in the living
standards of the general population -> growth + structural change + (re)distribution
• Can’t have a change in living standards without sustained growth.
• Doubling period for anything is approximately 72/growth rate (not 100 years because of compounding
interest).
• If the population of a country is growing at 2%, then 36 years for it to double.
• Thinking of it in the context of EU industrialisation, since the industrialisation there has been 2% p.a
growth rate across the countries. It means about 30 years roughly, for the income per capita to double.
• Immense changes in technology and the institutions within an institution of a society
• In order to sustain growth of that volume, need changes in infrastructure, and in institutions.
• Structural change - both a cause and a consequence of economic development.
Interpretation of data
• Important part of economist’s job is to analyse data
• First identify most important trends in tables and graphs
• Explain correlation patterns - things that tend to move together / that move in opposite directions
• Seek possible causal channels that explain correlation patters
• But correlation is not causation.
Which country A / B is developed?
Income per capita Life expectancy
A $3400 74
B $13340 53
C $10660 75
• Countries either choose to develop their economic success (income per capita) / invest in health and
education (life expectancy).
• A: Sri Lanka, B: Equatorial Guinea, C: Malaysia
What would SA’s 2014 GDP have been if growth since 1990 had been as in selected other countries?
• Would higher SA growth have improved social stability and reduced distributional conflict?
• What is required to grow at a rate the same as China?
• We have quite a varied experience of the countries over the period.
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,• If we didn’t have such internal conflict, how much would there be too delegate to fees of tertiary
education.
• Higher growth can give you greater stability, but greater stability in itself may be a prerequisite in and
of itself.
How do we measure living standards?
• Income is an important component
• Average income of citizen of richest country is 200 times that of the average citizen of poorest country.
• But many other dimensions are also important
• Could look at happiness - but research shows that happiness does not correlate to having a higher
income.
• Often what is important to people is not their level of living, but their level of living comparative to
other people. (Negative way to look at society, but is often true).
• Third graph - initially it seems that as income goes up there is a strong rise in general satisfaction and
when you get to the higher levels of income it seems to flatten off, this may be due to people’s basic
needs have been met, but above that it is not their income that determines their overall happiness.
Discussion
• Economists’ point of departure is pareto-optimum - the effect on welfare is unclear if one person is
advantaged at the cost of another, as interpersonal comparisons of utility are impossible (comparing the
gain of the poor person, vs the loss of a wealthier person).
• Thus no conclusions can be drawn about welfare gains in a zero-sum game situation.
• Try avoid because it is difficult to make a judgment on this, but welfare gains as a result of economic
growth is much easier.
Measuring development
• Indicators of income and production
• Social indicators - e.g:
• Mortality measures (life expectancy, looking at the probability that people in a certain age group
would die given current mortality rates - if the present pattern in every age group remains constant,
crude death rate (no. of persons dying as a measure of the population)
• Fertility (total fertility rate, number of children that would be born to the average woman if the
current fertility pattern is projected on all women)
• Nutrition (Weight for height, height for age - indications on stunting / under nutrition)
• Urbanisation (how many people are above a certain threshold - above grade 8, can read).
• Education
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, • Distributional measures (Gini coefficient, Lorenz curve)
• Poverty measures (head count, poverty intensity) - this requires there to be a poverty lying, based on
the cost on a certain standard of living. All of them are in some extent they are subjective, and are
determined by the society.
World Bank classification of countries
• Low income
• Lower middle income
• Higher middle income
• High income, incl. OECD
• SA is a middle income country:
• HMY country judged by income and production structure
• LMY country judged by social indicators
• Financial services sector - best in the world, but on many measures it falls within lower Middle income
(infant mortality, death from Aids).
Data from World Lower Middle Upper Middle
Low Income High Income World
Bank Income Income
GNI per capita,
$1593 $6073 $14184 $40842 $15032
PPP
GNI growth
4,3% 2,1% 5,1% 2,1% 2,7%
(annual %)
Life expectancy
59 67 74 79 71
at birth
Fertility rate
(births per 4,8 2,8 1,9 1,7 2,5
woman)
Infant mortality
rate (per 1000 53 44 16 5 34
live births)
• PPP - purchasing power parity, an amount of a currency that gives you exactly the same purchasing
power in terms of another currency.
• Big Mac Index - crude way of getting this idea across.
• Non-tradable goods (services in a restaurant) / cost of getting someone to clean your house, these are
parts of the cost which are not reflected in the exchange rate, because the exchange rate are driven by
tradable. Therefore what you can buy off your money is much more than what you would think,
sometimes the gap is exaggerated by the exchange rate.
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