EC1111 - International Economic Policy RHUL - Autumn Vinay P. Nundlall Seminar 7 Read the articles posted in Moodle which relate to the topic on Poverty, then answer the following questions: Question 1 a) Is the poverty measure used by Besley and Burgess (2003) satisfactory? Explain your answer. Besley and Burgess use the Headcount index - the students should argue the merit and demerit of this. E.g. the index looks at an arbitrary line of poverty, and may exclude a lot more people who consider themselves poor. Poverty can be relative: if you can live on more than $1.25 a day, but your peers are living on $50 a day, then you will be considered poor. In middle income countries, the threshold of $1.25 is not enough. Further, people may be provided with all the basic means to lead a healthy life (housing, health care, food and shelter), but not have the income to spend on additional goods and services that make their lives enjoyable. b) What is the main empirical result from their research? The main result is that they estimate the elasticity of poverty with respect to real income to be negative, which implies that as income increases, the poverty index drops. The size of the elasticity matters and they find that it varies across regions in the world. The higher the absolute value, the more responsive poverty alleviation is to economic growth. The smaller the absolute value is, the less responsive it is. For the whole world, it is fi0.73. However, the estimate for SubfiSaharan Africa, the poorest region in the world (which by the way, is the only region that is getting poorer every year!), is fi0.49. This means that the region is resilient to policies geared towards alleviating poverty. Policy measures aimed at economic growth are not filtering down to improving the poor's fortunes because of institutional problems (probably because land is not distributed equitably, income is not redistributed fairly, etc ... ) c) Demonstrate that the coefficient of the log of income per capita in the equation estimated by Besley and Burgess is an elasticity term. log Pit =0; +nlog Ha + Eu Let us drop the subscripts, and take derivatives:
d dP InP du du 1 dP 1 =n= P du ? d (Inu dP n = p dp P du Question 2 Discuss the role that foreign aid could play in reducing global poverty. What does evidence show: has foreign aid been successful in alleviating poverty? Many studies show that foreign aid is not effective at reducing poverty. This is because foreign aid is fungible: it gets diverted to other uses rather than the one it was given for. Bilateral aid (from one government to another), is rarely effective because the recipient government can do whatever it wants with the funds once it has obtained it. Aid by NonfiGovernment Organisations (such as OXFAM) is more effective because NGO's are able to follow and monitor how the funds are spent. For example, they