Is there a poverty trap for developing countries? Polarization: Reality or myth

A general view that as between countries ‘the rich are getting richer while the poor are getting poorer’ supported in the development literature by explanations relating to cumulative causation, economies of scale etc., and statistically based on the relation between GNP per capita in 1978 and its growth rates during 1960–1978, is shown to contain considerable elements of ‘myth’ or statistical ‘delusion’. The ‘naïve’ polarization hypothesis based on income levels at the end of the period over which growth rates are measured is left with a much weakened empirical basis when the proper substitution of levels of income at the beginning of the period is made. This is particularly so for low- and middle-income countries taken separately, while for the 18 industrialized countries a strong tendency towards convergence in per capita incomes emerges. Finally, for the growth in manufacturing value added during 1960–1977 a significant tendency towards convergence was observed in the case of a group of 24 least developed countries.     

Inequality,technology and payments systems

The paper considers the way in which the interaction between technology, population growth and the payments system is responsible for growing inequality in many poor countries. The payments system describes the set of rules governing property rights, access to work and income from work. Payments systems may be classified into traditional, capitalist, mixed and socialist, although most economies exhibit hybrid characteristics. It is argued that capitalist and mixed economy payments systems are largely responsible for those situations where poverty has increased despite growth in per capita income. Finally the paper considers methods of reforming the payments system.     

Performance criteria and multilateral aid allocation

This study raises questions about past models for aid allocation, in particular the ‘two-gap’ model. It proposes an alternative method for allocating aid among developing countries, on the basis of need (as represented by per capita income) and country performance (measured by variables for relative effort in savings, exports, control of inflation, tax policy, and efficiency of resource use). Statistical tests are applied to actual lending patterns of the World Bank to determine the extent to which in practice the Bank relates lending to these proposed measures of need and performance.     

Measurement of deprivation and poverty based on the proportion spent on food: An exploratory exercise

This paper attempts to broaden the scope of poverty measurement. First, a brief review of measurements based on monetary and nutritional norms is presented. Then, it is suggested that data on the proportion spent on food (PSF) by per capita expenditure can be exploited to measure the incidence of deprivation and the incidence of poverty. It is postulated that until the food needs are satisfied, people spend relatively more of their incremental income on food and this behaviour reveals itself as increasing or invariant PSF as income (or expenditure) increases up to a critical level. The proportion of people up to that critical level are deprived of the required food and the proportion constitutes the incidence of deprivation. The average expenditure at the deprivation point (the PSF level from where its decline is clear-cut and smooth) can be used to develop an arbitrary poverty line. Data for rural India are used to illustrate the measurement of deprivation and poverty.     

A Kuznets curve analysis of ozone-depleting substances and the impact of the Montreal Protocol

This paper examines the relationship between countries' propensityto emit chlorofluorocarbons (CFCs) and income per capita. Themain part of the analysis uses dynamic estimation methods ona panel of CFC production. In contrast to static analyses, wefind statistically significant quadratic relationship betweenincome and CFC production, with a critical income level in theKuznets curve of $16,050. This reinforces the trend observedin other papers that global pollutants have higher criticalincome levels than local or urban pollutants. In addition, itsuggests that, in the absence of any international agreement,CFC production in the poorest countries would ensure that thereis a substantial rise in global production over the next 50years.     

Productivity,mechanization and skills: A test of the Hirschman hypothesis for Latin American industry

This paper attempts to test the paradoxical Hirschman hypothesis relating to the suitability of certain capital-intensive industries for less industrialized countries based on the ‘process-centred’ or ‘machine-paced’ nature of those industries which makes their productivity less dependent on the quality of local labour. Following extensive discussion of the methodology (e.g. problems of selection and specification of the variables explaining productivity differentials, and problems in specifying the appropriate variables to be explained), the author presents and analyses results for seven Latin American countries. These countries were chosen because of their more highly developed industrial structure, i.e. higher industrial value added per capita and a more diversified product mix, in order to provide a more severe test of the hypothesis. Although the results are not definitive, they seem to indicate that the industries which did better in relative productivity terms were those based on abundant local resources or of a traditional character on the whole; rather a reaffirmation of comparative advantage with little paradox.     

The new international economic order: The beneficiaries

The two substantive elements of the programme of action for a ‘new international economic order’ (NIEO) that have been most stressed by developing countries are those dealing with primary commodity prices and relief from debt service burdens. The provision of adequate amounts of official development assistance (ODA) has received less stress. An examination of 75 oil-importing developing countries for which adequate data were available grouped by per capita product, shows that if the priorities of the NIEO are carried out the principal beneficiaries would be the wealthier developing countries. For the very poorest countries, those for which the existing order has provided little in the way of material benefits, the most critical external element in helping them meet their development aspirations would be more ODA.     

WAGNER'S LAW: AN ECONOMETRIC TEST FOR SOUTH AFRICA, 1960‐2006

The main objective for this paper is to test Wagner's law by analysing the causal relationships between real government expenditure and real income for South Africa for the period 1960‐2006. The paper tests the long‐run relationship between the two variables using the autoregressive distributive lag approach to cointegration suggested by Pesaran et al. We use the Granger non‐causality test procedure developed by Toda and Yamamoto, which uses a vector autoregression model to test for the causal link between the two. Evidence of cointegration is sufficient to establish a long‐run relationship between government expenditure and income. However, support for Wagner's law would require unidirectional causality from income to government expenditure. Therefore, cointegration should be seen as a necessary condition for Wagner's law, but not sufficient. This research does find a long‐run relationship between real per capita government expenditure and real per capita income. Results for the short‐run causality find bidirectional causality. On the basis of empirical results in this paper, one may tentatively conclude that Wagner's law finds no support in South Africa.     

Skill, trade, and international inequality

Heckscher-Ohlin trade theory suggests that greater opennesstends to enlarge inter-country differences in stocks of skill(or human capital), which new growth theory suggests would causeinter-country divergence of per capita incomes. Econometricanalysis of data on about 90 countries during 1960-90 confirmsthat greater openness tends to cause divergence of secondaryand tertiary enrolment rates between more-educated and less-educatedcountries, and also between land-scarce and land-abundant countries.These findings may have implications for the optimal choiceof trade policies by poor countries.     

THE GENERATIVE POWER OF AIR FREIGHT IN THE TRADE OPENNESS – ECONOMIC GROWTH NEXUS IN AFRICAN COUNTRIES

Foreign trade matters considerably more than ever in today's integrated economies, and the wealth of benefits afforded by air transport is one of the cornerstones of international trade. Therefore, to shed light on the precise role of air cargo, seen as an important motor of growth, this paper provides an empirical model to examine the relationships among trade openness, air freight volume and GDP per capita using panel cointegration techniques for a sample of Economic Commission for Africa (ECA) countries during the 1970‐2002 period. The analysis substantiates that there are cointegrated relationships among the three variables and that they are bound together in a long‐run equilibrium. Furthermore, evidence from fully modified Ordinary Least Squares panel estimations also indicates that positive trade and air freight shocks contribute to real GDP per capita. In addition, improvements in air cargo services are accompanied by an increase in trade openness in ECA countries and vice versa. These results underscore the important role of air freight and demonstrate that it should not have been overlooked in earlier studies. Finally, the empirical findings have important policy implications for our sample countries.     

Consumption-investment trade-off,wage-profit trade-off,and terms of trade

In most modern models of international trade the assumptions made are that goods are produced, consumed and traded internationally according to the dictates of national utility functions. The gains of international trade are also seen to be higher levels of utility.This paper uses an input-output model to determine which country specializes in capital-good manufacture and which in the consumption goods. The criterion determining this in a planned economy uses the property of maximum growth rate of goods produced for a given per capita consumption (or its reverse causation of maximum per capita consumption for a given growth rate). For free market economies the criterion is taken to be in terms of profit-rate maximization for a given real wage or its reverse.Using these criteria the investment-consumption frontiers or wage-profit frontiers are described in this paper by corresponding equations. The changes in terms of trade are then interpreted as various forms of technical progress. The equations are also depicted forthe case of thriftiness of entrepreneurs being less than unity.     

Economic Convergence in the African Continent: Closing the Gap

The paper attempts to analyse the conditional β‐convergence and its sources for 32 African countries over the period 1960‐2008. The augmented Solow model with both gross domestic product (GDP) per worker and per capita income is estimated using the dynamic system generalized methods of moments (GMM) technique with the panel data. This is the first study on the sources of conditional β‐convergence for African countries. According to the results of the augmented Solow model, income convergence rates are lower than those of GDP per worker. Moreover, total factor productivity convergence, human capital convergence and capital labour convergence are contributing towards the convergence of GDP per worker in Africa. This means that growth in the poorest African countries is being augmented by “catch‐up factor,” which is good news for them. However, convergence in terms of GDP per worker is not being fully translated into income per capita convergence. The demographic structure in the African continent with its record of persistent population growth has played an important role in lowering the income convergence of its countries.     

The physical quality of life index: A useful social indicator?

The Overseas Development Council (ODC) provides a measurement called the Physical Quality of Life (PQLI). The PQLI combines infant mortality, life expectancy, and literacy into a single index for each of 150 countries.We assess the usefulness of the PQLI as a social indicator. In order to make this determination, we test the intensity of the association among the PQLI input variables. We also provide the appropriate Spearman's rank correlation between PQLI and Gross National Product per capita (GNP/C). Overall, our statistical tests confirm that the PQLI is not a major new indicator of inter-country human welfare.     

The Costs of Missing the Millennium Development Goal on Gender Equity

At the Millennium Summit, the world community pledged to promote gender equality and chose as a specific target the achievement of gender equity in primary and secondary education by the year 2005 in every country of the world. Based on the findings from a growing empirical literature that suggests that gender equity in education promotes economic growth, reduced fertility, child mortality, and undernutrition, we estimate what the costs in terms of growth, and forgone fertility, mortality and undernutrition reduction, will be for the 45 countries that are, on current projections, unlikely to meet the target. Our estimates suggest that, by 2005, the countries that are off track are likely to suffer 0.1–0.3 percentage points lower per capita growth rates as a result, will have 0.1–0.4 more children per woman, and, by 2015, an average of 15 per 1,000 higher rates of under five mortality, and 2.5 percentage points higher prevalence of underweight children under five. Sensitivity analyses suggest that the results are quite robust to using different specifications and approaches to estimating these losses.     

Terror per Capita

Studies on the correlates of terrorism usually analyze total numbers of attacks or victims per country. However, what we may ultimately care about in terms of policy recommendations is the likelihood of any individual being subject to the respective phenomenon. Thus, we propose and explore a simple alternative measure of terrorism: terror per capita. Studying terror per capita across 162 countries from 1970–2015, the associated correlates differ substantially in terms of sign, levels of statistical significance, and magnitude from those when analyzing total terror. We illustrate two cases in point, serving as proof of concept. First, democracy, often associated with more total terror, emerges as a marginally negative predictor of terror per capita. Second, a larger share of Muslims in society is associated with a positive and statistically significant link to total terror, but emerges as a negative predictor of terror per capita. We find similar changes in sign and statistical relevance for GDP per capita and language fractionalization as correlates of terrorism. Depending on the policy question, studying terror per capita can greatly enhance our understanding of terrorism drivers, especially when analyzing data across countries with vastly differing population sizes.     

Introduction to income inequalities and redistribution in china

This special section presents the main findings about long-run trends in inequality in China and its driving factors as they emerge from a country case study carried out under a UNU-WIDER supported project.¹ Special focus in the umbrella project were on three issues: (i) the role of earnings inequality and its determinants; (ii) the role of top incomes when administrative records or other sources can be combined with household surveys; and (iii) the redistributive impact of public policies. Main findings of the project including those for China results were presented in a special panel during the UNU-WIDER Think Development – Think WIDER development conference held in Helsinki in September 2018.²

1. Motivation

Inequality has once again emerged as a major issue in economic development across the developed and developing world, and addressing this challenge is key in the UN Sustainable Development Agenda. The UNU-WIDER conference on Mapping the Future of Development Economics held in Helsinki in September 2016³ led to the formulation of a project to study inequality in five major developing countries accounting for more than 40 per cent of the world’s population. UNU-WIDER implemented these studies under its Inequality in the Giants project,⁴ designed as part of a broader international effort to shed light on a set of new questions on between-country and within-country inequalities, by generating integrated datasets and applying a consistent methodology to investigate the determinants of inequality dynamics in some of the world’s largest economies. China was included among the five case countries, and the effort included both a series of papers on China, produced under the coordination of Professor Shi Li and various workshops and meetings. Coming to grips with inequality in China is an obvious priority for anyone interested in trends in global inequality; and the present special section contains five key papers produced in the context of the UNU-WIDER project and subsequently accepted for publication by the China Economic Review.

2. Content of the special section

The five papers on inequality in China presented in this special section cover different topics and jointly illustrate a key set of important themes in the recent evolution of China’s income distribution.The opening study by Luo, Li, and Sicular (LLS) provides an overview and analysis of the long-term evolution of inequality in China, while the next three papers — on urban wage inequality, public transfers, and top incomes — each illustrates and delves more deeply into important aspects of the broader trends in inequality.What are the main findings of these papers? The core finding is that inequality in China rose markedly from the 1980s through the early 2000s; only since 2008 has the upward trend stopped or reversed. LLS report and examine the underpinnings of this core finding, using the five waves of the China Household Income Project surveys conducted during 1988-2013. This paper also finds a considerable, ongoing reduction in rural poverty, and a poverty decomposition analysis indicates that this poverty reduction was mostly due to income growth rather than redistribution in rural areas.The second paper by Gustafsson and Wan (GW) is on urban wage inequality from 1988 to 2013 and it sheds further light on the changes in the distribution of wage earnings. The authors highlight that average wages have grown rapidly and that wage inequality increased until 2007. Moreover, age has become weaker and education stronger related with wage. Importantly, the gender wage gap once small widened rapidly between 1995 and 2007, and workers in foreign owned firm and the state sector enjoy a wage premium.While wages are the most important component of income, it is only part of the inequality story. One important additional question is the role of government taxes and transfers. Since the early 2000s, China has embarked on a major effort to put in place a universal social safety net. The study by Cai and Yue (CY), which is the third paper, assess the consequences of these efforts. Their key conclusions include that the same public policy may produce different redistributive implications. Moreover, if the government keeps increasing the social security transfer scale without changing its distribution, then inequality will increase in China. In addition, formal-sector pension takes up the biggest share and is the most un-equalizing sub-item of all social security transfers; and related to the first paper in the special section they argue that the government should spend more on Dibao and rural residents pension to reduce inequality.Arguably, income inequality measured using household survey data understates actual inequality because surveys have difficulty in capturing top incomes. In the Chinese case, concerns about such bias have increased in the past ten years due to the expansion of private wealth and growing numbers of super-rich. The fourth paper by Li, Li, and Wan (LLW) is on top incomes in China and it attempts to correct for this bias using income information for the Chinese super-rich from various sources. They conclude that the Gini coefficient of income inequality increases substantially when samples of top incomes are incorporated.Finally, Gradín and Wu (GW) analyse in the fifth and final study the distribution of income and expenditure in China in a telling comparative perspective with India. Both countries represent two extreme cases in the relationship of inequality using both wellbeing indicators. It emerges that the joint distribution of income and expenditure differs between China and India because there is a higher prevalence of people with a large mismatch between their ranks in income and consumption in India, especially in rural areas, and particularly amongst those reporting low income and high expenditure. The main compositional effects identified are the different demographic and geographical composition of the countries’ populations, mostly the smaller households (especially in rural areas) and the higher level of urbanization in China than in India. The lack of consistency of cross-country comparisons based on income or expenditure calls for the use of hybrid inequality measures combining data on both provided they are available in the same survey.

3. Concluding remarks

The studies brought together in this special section provide telling insights about the trends in inequality in China from which scholars and policy makers can learn a great deal. In a global perspective, further increases in China’s mean income and wealth, both now above the global means, will begin to raise global between-country inequality. This is important in and of itself. Moreover, while we cannot expect that all the world’s poorest countries will follow the same path as China considering that the initial conditions and the international context they face will be very different, the experiences from China do reinforce the observation that much can be done by policy to influence inequality outcomes. In particular, and as argued by Gradin, Leibbrandt, & Tarp, 2020 (forthcoming):“well-functioning labour markets that promote job-creation, decent pay and social inclusion, removing any legal or de facto discrimination based on gender, race, ethnicity or place of origin, providing equal access to human and physical capital, and empowering the most disadvantaged population groups, are a key driver of increased equality”.These insights also emerge clearly from the five China studies in this special section.     

Evaluation of Asian Income Distribution and Poverty Ratios Using Worldwide Income Distribution

This paper aims to estimate worldwide income distribution for multiple years, and then to use this data in evaluating income distribution for particular countries or areas. Based on previous contributions to estimate the worldwide distribution for a particular year, worldwide income distribution was estimated by using per capita GDP, purchasing power parities of the International Comparison Programme, and income distribution data for various countries. Results for four years show that Gini coefficients exceeded 0.5 and were relatively stable from 1962 to 1985. Income distribution for the Asian area is compared to worldwide income distribution. A Relative Advance Index is proposed to measure the position of a country's particular income distribution in relation to worldwide income distribution. The Index shows that Asian income distribution has shifted toward higher income as compared to worldwide income. The paper also suggests that worldwide income distribution can be used to determine the poverty level cutoff point.     

Pareto - improving intergenerational transfers

In the presence of endogenous growth intergenerational transferfrom the young to the old reduce per capita income growth andharm future generations. On the other hand, competitive equilibriaare inefficient if externalities sustain long-run growth. Thispaper shows that if individuals retire in the last period oftheir life, the inefficiency of the market economy can be removedby an investment subsidy without making the current or futuregenerations worse off only if coupled with intergenerationaltransfers from the young to the old.     

Poverty and unemployment in India: An analysis of recent evidence

This paper examines the association between poverty and unemployment using the data collected by the Indian National Sample Survey from October 1972 to September 1973. Data is analyzed for two states of India: Gujarat and Maharshtra. Contrary to the widely accepted view, supported even in the ILO reports, that the poor are too poor to remain unemployed, this paper highlights a clear association between unemployment and poverty (as measured by the per capita expenditure of households). Poverty is, however, more widespread than unemployment.     

Population dynamics and economic growth in China

This paper focuses on two major elements of China's population dynamics—the rising proportion of workers in the population and the shift of rural workers from agriculture into industry and services—in a provincial-level analysis of per capita income and productivity growth during the last three decades. We measure the ‘mechanical’ contributions of these dynamics to per capita income as revealed by growth decompositions, before assessing the determinants of per capita income and productivity growth in a series of regressions that include the growth of the working-age to total population (WAP) ratio and a measure of sectoral employment change. Our results indicate that sectoral change has made a significant positive contribution to both per capita income growth and aggregate productivity growth, stemming from its positive impact on agricultural productivity growth—as predicted by the Lewisian dual economy model. However, the negative impact of sectoral change on productivity growth in the industrial and service sectors, combined with the negative impact of growth of the WAP ratio on both per capita income and aggregate productivity growth, suggests that the benefits of China's population dynamics during the last three decades have been overstated.