1. Policy issues in development (Josiah)1.1. Explain the concepts of market failure, government failure, and community failure, and giveexamples. Why are they important concepts for public policy?Market failure occurs when markets fail to provide goods or services efficiently. Example:drinking water in slums and rural areas in developing countries.Government failure occurs when governements fail to efficiently solve problems or providepublic services. Example: bad schoolsCommunity failure occurs when communities fail to organize collective action for commonbenefit, typically from common-pool resources. Example: everyone over-fishes from a lagoon,destroying the fisheryThey are important concepts for public policy because they can all have negative societalimpacts, especially in regards to poverty, and good public policy can help correct various typesof failures as well as mitigating their consequences.1.2. Give seven categories of indicators that can be used to characterize “development”.• Income• Poverty• Inequality and inequity• Vulnerability• Basic needs• Sustainability• Quality of life1.3. How did the UNDP define a “Human Development Index”? What are the advantages andlimitations of this indicator?The HDI is calculated as the weighted average of indexes of life expectancy, adult literacy,school enrollment, and PPP-adjusted income. Each index is normalized based on a sort ofranking where the countries with the highest and lowest measures get a 1 and a 0. For example,life expectancy ranges from 80 in Japan to 39 in Sierra Leonne, so a country with a lifeexpectancy of 59.5 would get a life expectancy index of 0.50. The weights are: life expectancy1/3, adult literacy 2/9, school enrollment 1/9, PPP-adjusted income 1/3.An advantage of the HDI is it summarizes a lot of information in a single number, allowing oneto easily compare countries. Its limitations include: it is a relative measure so absoluteimprovements in a country's metrics will not appear in the HDI if other countries also improveproportionally, it ignores many aspects of social development, and it lends itself tooversimplified interpretations.1.4. Define the concept of z-scores for health achievements. How are they used as developmentindicators?Z-scores are calculated from height-to-age ratios (for stunting) and wieght-for-age ratios (forwasting). The z-score is calculated as the number of standard deviations away from the meanvalue. Stunting and wasting are formally defined as a z-score of -2 or less. Z-scores are used togauge child physical development; low z-scores are often caused by under-nourishment anddisease.2. Poverty assessment (Josiah)2.1. How to define an extreme and a normal poverty line?The extreme poverty line is usually based on the cost of having enough food to maintainrecommended minimum caloric intake. The normal poverty line is the income needed to buysufficient food, given budget constraints of non-food expenditures.2.2. Give definitions and interpretations of the poverty index Palphaand its specialization to P0,P1, and P2. What do they each mean? What would it mean if P0falls while P1rises betweentwo periods?Palphameasures the extent of poverty in a population. It is formally defined as sum[ ((z-yi)/z)alpha] / n, summing over y (income or expenditures) for every person falling below thepoverty line. z is the poverty line, and n is the total number of people in the population. P0is theincidence of poverty i.e. the percentage of people in poverty. P1is the poverty gap index and isthe ratio of a targeted welfare budget sum(z-yi) to an untargeted budget (nz). P2is the severity ofpoverty index and measures inequality amoung the poor (people in extreme poverty are givenmore weight than people in moderate poverty). If P0 fell while P1 rose, it would mean that fewerpeople were in poverty, but the people in poverty were were in deeper poverty.2.3. How to draw a poverty profile? How do we know that comparison of two poverty profilesmeasured in two periods is robust to the choice of a poverty line?You draw a poverty profile by ranking individuals or households by y (their income orconsumption level), then graphing rank vs expenditures. You can tell if changes in poverty overtime is robustness to the choice of poverty line by calculating the change in P0 or P1 with arange of poverty lines. If the change in poverty indexes is relatively constant to the choice ofpoverty line, then the trend is robust.An alternate method of testing robustness in periods A & B is to see if the poverty profiles for Ais always higher than B (or vice-versa). If the poverty profile of A & B cross at a Z that could bea realistic poverty line, then the changes in poverty profiles are not robust to the choice of apoverty line.2.4. How to calculate the aggregate Palphafrom the Palphafor subgroups in the population?The aggregate Palphais equal to the population-weighted average of the Palpha's of the subgroups.2.5. How would you define chronic and transitory poverty? Do the policy instruments to reduceeach type of poverty differ?Peoples' incomes fluctuate over time. People in chronic poverty have a mean income under thepoverty line, although their income may rise above the poverty line from time to time. People intransitory poverty have a mean income above the poverty line, but their income drops under thepoverty line from time to time.The policy instruments to reduce transient poverty are transitory "safety net" programs thatprotect people from shocks that can cause irreversible shifts into poverty such as risk copingmechanisms like credit or insurance. The policy instruments for chronic poverty are persistent"cargo net" programs such as access to productive assets, conditional cash transfers, foodprograms, work-fare, etc.2.6. Does growth have to be “pro-poor” to help reduce poverty? Give an example where povertyhas fallen even though growth was not “pro-poor”.Growth does not have to be "pro-poor" to reduce poverty. China's growth in recent yearsincreased inequality dramatically, which indicates that it was not pro-poor, but it also took 500million people out of poverty.2.7. In your Mexico poverty assessment in Assignment #1, how did you analyze the changes inpoverty and inequality between 1998 and 2004? What were your main findings?We analyzed the change in poverty by calculating the change in poverty indicators P0, P1, andP2 between the two years, and examined the trends for robustness by repeating the
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