Chapter 4 – Development and Human Welfare, page 1 of 14• this chapter considers human welfare in a broader sense:1) income distribution2) incidence of poverty3) alternative measures of development: HDI, physical quality of life index• development versus growth:• growth refers to an increase in the total output produced or an increase in the averageoutput per person; however, just because growth occurs does not mean all peoplebenefit• if inequality increases as growth proceeds then the incidence of poverty couldincrease; thus, how inequality changes with growth is important to consider• if average income is growing quickly and inequality is growing slowly, even thepoorest can be better off; however, if growth occurs but inequality also grows quickly,then the poorest might not benefit• inequality (equality) versus inequity (equity):• equality and inequality are positive terms – they can be considered apart from valuejudgements• equity and inequity are normative terms – they require a value judgement; there iscontroversy over the criteria for determining equity/inequity• if development has the goal of increasing living standards or reducing poverty thenequality has to be considered, since it is a determinant of how much living standardsimprove for how many people• often, equality is taken into account because of an interest in equity• equality and efficiency:• in the late 1970s Arthur Okun wrote Equality and Efficiency : The Big Tradeoff whichargued that there was a trade-off between equality and efficiency• inequality might be necessary to motivate people; in this case, if governmentredistribution programs are too generous, then they will undercut people’s incentives towork and invest• however, there is not always a trade-off between equality and efficiency – there arecases where greater equality leads to greater efficiency (as seen by greater growth):1) land reforms – if land is distributed more evenly then output grows; forexample, if rich landowners hire workers to farm their land (a hacienda, forexample), then dividing the land and giving it to the workers will oftenincrease output, because the new owners work the land more intensively;thus, land reform both reduces inequality and improves efficiency2) education – if education is allocated by who can pay, then upper incomegroups will receive more education even if they are not the ones who havethe aptitude to benefit most from education; redistributing educationaldollars to those with the most potential would benefit society by reducingthis misallocation3) political instability – high levels of inequality can lead to political instability(guerilla movements, civil wars, general strife) or detrimental governmentpolicy (powerful disaffected minorities can force interventions that areharmful to the economy)4) health care – we will return to this later in the course• some economists believe that welfare states are bad for efficiency; if so, inequalityitself can create inefficiency because the government is forced to redistribute; forChapter 4 – Development and Human Welfare, page 2 of 14example, Taiwan has relatively equal income and is not highly redistributive, in contrastto Brazil which has high inequality and pressure to intervene (which may thwarteconomic development)• inequality, economic development, and the Kuznets curve:• until about 20 years ago it was believed that rising inequality necessarily accompanieseconomic development• the Kuznets curve (associated with Simon Kuznets) illustrates the idea that inequality(here measured by the Gini coefficient) increases with the level of economicdevelopment (here measured by the GDP per capita):degree ofinequality Kuznet’s curve(Ginicoefficient)level of development (GDP per capita)• 30-40 years ago it was observed that the poorest countries (Bangledesh, Congo, PapuaNew Guinea, etc.) had a more equal distribution of income (probably because almosteveryone was poor), middle-income countries (Mexico, Brazil, etc.) had substantialmiddle- and upper-classes along with large numbers of poor (greater inequality), andthe most industrialized countries (Sweden, Germany, etc.) had less inequality (becauseof widespread skills and productivity, as well as more redistribution)• this observation suggests that inequality might be inevitable through the process ofdevelopment – unless a country prefers to stay in poverty then it will have to sufferrising inequality; this helped justify the attitude in the 1950s and 1960s in developmenteconomics that rising inequality is not a concern• studies at this time were cross-sectional (they compared different countries at the samepoint in time); if this cross-sectional data is predictive, then the trend of rising inequalityshould be observed in time-series data (observing the same country over time)• time-series data did not support the hypothesis that inequality inevitably increasesthrough the process of development; for example, Korea and Taiwan went throughdevelopment without much inequality growth (inequality might even have declined dueto land redistribution or public education); this might be illustrated as:Chapter 4 – Development and Human Welfare, page 3 of 14degree ofinequality(Ginicoefficient)inequality rises slightly with developmentinequality decreases with developmentlevel of development (GDP per capita)• moreover, there is little evidence that inequality in Mexico and Brazil is changing –thus, there is little support for the Kuznet’s curve as a predictor of an individualcountry’s dynamic path• recent research on inequality and economic growth:• over the last ten years research has shown that a more equal distribution of income hasactually been associated with more rapid economic growth• cross-country regression analysis uses the growth rate of GDP per capita as thedependent variable and initial GDP/capita, investment rate, Gini coefficient, etc. as theexplanatory variable:growth rate of GDP per capita = f(initial GDP/capita, invest. rate, Gini coefficient, …)• studies find that countries with a lower Gini coefficient (less inequality) grew faster –this is contrary to the notion that inequality is necessary for growth; controlling for otherfactors shows that inequality is bad for growth; this could be related to politicalproblems because conflict could harm growth, and also to the more efficient allocationof the gains from education, health care,