ECO DEV 3.3

• POVERTY, INEQUALITY AND WELFARE

  economic efficiency, political and social stability, AND moral and ‘fairness’ objections to inequality
• income inequality can lead to ________

  economic efficiency AND inefficiencies
• a poor person with a great business idea but no

  collateral

  credit markets
• the idea will never be implemented

  credit markets
• a loss to society

  credit markets
• if costly (and there always is an opportunity cost even if no

  fees) poor parents may not educate their smart children who may otherwise

  become doctors, inventors, etc. – loss to society.

  education
• if many poor overall saving rate in the economy can be

  very low (less domestic resources to invest in the economy)

  the saving rate
• large farms run by hired labor may be unproductive due to

  incentive problems; smaller, family-run farms usually more productive. However, large

  farms can be even more productive by using machines.

  farming
• higher levels of inequality may undermine ________

  political and social stability
• ______

  makes the rich richer, raises their power and can yield to outcomes that further

  exacerbate THIS.

  inequality
• can facilitate rent seeking (incl. excessive lobbying, political donations,

  bribery, cronyism).

  high inequality
• Resources devoted to such activities are unproductive! Again –

  _________.

  economic inefficiency
• hard to make reforms and changes: the ‘_________’ are typically the rich who have the

  power.

  losers
• lots of poor can also lead to _______ (________)

  that are also bad for the economy in the longer run (e.g. certain land reforms,

  nationalizations, unaffordable social policies).

  populist policies OR redistributionary
• Rawls’ ‘_______’ criterion: what level of inequality would you vote for before being

  born. Most people vote for some intermediate amount.

  veil of ignorance
• If perfect equality there are no incentives to work, study, etc. No reward for effort.

  moral and ‘fairness’ objections to inequality
• if very poor, splitting resources unequally may be more

  efficient.

  lifeboat problem arguments
• if on average society is poor (say average income y) and there are fixed

  costs to set up a business of F > y then if all people are equally rich no one can set up business

  (e.g. adopt modern technology) and the economy stays in subsistence. (think why)

  However, if there were some people with income > F (and, of course, many with income < F in

  order to maintain the same average y) then those rich people can adopt the modern technology

  and eventually the economy may grow and escape the subsistence state.

  moral and ‘fairness’ objections to inequality
• Who are the poor?

  Rural, Women, ethnic minorities, AND people in the poor countries
• disproportionately located in ______ areas – about 80% of people below

  PL are in THIS areas (mostly in subsistence agriculture – 2/3)

  rural
• but often _______ bias in terms of development policy

  urban
• seems focus on ________ areas and agriculture in particular is necessary

  rural
• _____ experience harshest deprivation, more likely to be undernourished,

  less likely to receive medical services, clean water, sanitation, etc.; less access to

  education, formal sector employment, social security

  women and children
• poorest segments in LDCs are in ______

  women-headed households
• ________ paid less for same tasks but also effectively precluded (banned) from

  high-earning occupations

  women
• legislation and social customs often preclude _____ from

  owning property, businesses, signing contracts;

  WOMEN
• ______ over 80% of indigenous population is poor vs. 18% of non-indigenous

  Mexico
• How to increase school enrollment?

  by increasing supply of schooling AND by increasing demand for education
• (but trade-off between quality and quantity

  of schools and teachers)

  by increasing supply of schooling
• (conditional transfer programs in Mexico,

  Brazil, etc. that encourage school enrollment)

  by increasing demand for education
• not all rural poor are farmers T OR F

  TRUE
• (splitting land into small pieces)

  LAND parcelization
• better connection to markets

  transaction costs
• Incentives vs. land parcelization

  land reforms
• (roads, electricity, water)

  rural infrastructure
• determinant of growth and good for reducing inequality

  human capital