Plan for today:

• Are we rich because they are poor?
• Does income distribution really matter?
• Some more stylised facts
• Poverty and progress: some international comparisons
• The Income distribution of the world over time.
• Productivity, surplus, and incentives.
• Download the lecture slide here by right clicking and choosing save target as:

Download MDU_macro_lecture2_pandpoverty-1.pdf

Update 07.02.07: I've checked all the links, and they should all work now. Email me if they don't.

1 Are we rich because they are poor?

First, look at the gapminder progress and poverty presentation. The presentation is very nicely put together, and points out several stylised facts Bowles et al go through, starting on page 377:

2. Some More Stylised Facts

1. Around the world, living standards vary dramatically.

2. Culture and natural resources aside, one prominent difference between nations that succeed and those that do not is the composition and efficacy of their institutions governing competition in particular and the economy in generalNations that started the process of industrialisation (the UK, France, etc) had a distinct advantage over late comers. This is extremely well put in Lucas, 2000, Some Macroeconomics for the 21st Century, (you need to be on campus to read this link) which we'll go through in class later.

3. Improvements in living standards are dependent on distribution of the surplus product which is produced by the combination of labour, capital goods, knowledge and improving technology. In the poor countries of the world, rapid technological progress can be achieved by adopting newer technologies.

4. Capitalism is an economic system that provides strong incentives to accumulate capital (duh) which is used to produce increases in the output of goods and services. The adoption of capitalism does not guarantee success, however.

5. Where the government plays an active role is supporting the economy's growth, the country will, generally speaking, be better off.

6. International investment, which is the diversion of the surplus product from one country to another, can help make countries richer through these transfers.

3. Does income distribution really matter?

Well, lots of people seem to think so. There are two sides of the argument. One side says that income distribution doesn't really matter in the broad sense of the word 'matter'. Of course individuals experiencing the income differential are going to feel it matters, but at a societal level the existence of haves and have-nots is really not a cause for concern, one side maintains, because some people work harder, use their innate talents more effectively, are luckier, and so forth. For representative accounts of the latest developments in each position, click here and here. Piketty-Saez is the latest academic contribution from the data side of this argument.

The other side maintains that inequality is a social ill that needs to be curbed through progressive government policies like social insurance and other transfers to Have-nots from Haves. The argument is very well explained here. There are ample we resources on the debate on inequality in the links I've mentioned already if you want to get more into this area.

There are some really shocking numbers out there, for instance we have

The figure is one such measure of inequality - the ratio of the wealth of the richest 1% to that of a household with typical wealth in the middle. As the figure indicates, wealth inequality has not only persisted, but also grown much larger over time. The richest 1% of wealth holders had 125 times the wealth of the typical household in 1962; by 2004 they had 190 times as much or $14.8 million in wealth for the upper 1% compared to just $82,000 for the household in the middle fifth of wealth. (via)

4. Poverty and progress: some international comparisons



Ok, we'll talk in class just how difficult a concept 'poverty' is to define. Check this list out for a subtle entrance to the debate on poverty and progress.

Given that poverty is such a badly defined concept (from a measurement point of view) we need to look at many different measures of this phenomenon to get an idea of what it means:

1. Global health inequalities: an international comparison, British Medical Journal

2. Water Poverty globally, (see pg. 15)

3. The World Bank development indicators, 2006, focus on income;

4. Total Fertility Rates by region, Table 2a here;

5. The Demographic Divide: Insert table 2j here;

6. Pages 379, 380, 381, 382 in Bowles et al.

We could, of course, go on ad infinitum. This is just a taster of the type of differences that exist in these areas.

5. The Income distribution of the world over time.

See http://www.gapminder.org/, focus on Income Distribution changes over time up to 2005.

6. Productivity, surplus, and incentives.

Ok, we've seen enough data to choke a small pony. Now let's look at some economic explanations for the differences in incomes, wealth, etc.

First, let's get a question in our heads we should try to be answering all the time:

Why have some countries done so well in terms of economic progress, while others have not?

We need a theoretical framework to help answer this questions. But first, a quick overview of theories of growth and distribution: Inequality and Economic Performance,  Francisco H.G. Ferreira.

And now let's define our terms:

• Productivity

• Surplus

• Incentives

7. Capitalism and Unequal Development

The Lucas (2000) Model of Uneven development. The Race-Horse Metaphor.

8. Further Reading



On the Evolution of the World Income Distribution

Charles I. Jones

The Journal of Economic Perspectives, Vol. 11, No. 3. (Summer, 1997), pp. 19-36.

Inequality among World Citizens: 1820-1992

François Bourguignon; Christian Morrisson

The American Economic Review, Vol. 92, No. 4. (Sep., 2002), . 727-744.