inequality, economic growth and development

Inequality, Economic Growth and Development

Kuznets and Income Inequality

Real Income Growth in the USA

Top Decile Income Share in USA

A Global Perspective

The vertical axis shows changes in real income between 1988 and 2008, measured in 2005 international dollars, i.e. adjusted for inflation and how the cost of things varies in different countries

The horizontal axis divides the incomes of the world into percentiles

A Global Perspective

The vertical axis shows changes in real income between 1988 and 2008, measured in 2005 international dollars, i.e. adjusted for inflation and how the cost of things varies in different countries

The horizontal axis divides the incomes of the world into percentiles

60m or so people who constitute the world’s top 1 per cent

A Global Perspective

The vertical axis shows changes in real income between 1988 and 2008, measured in 2005 international dollars, i.e. adjusted for inflation and how the cost of things varies in different countries

The horizontal axis divides the incomes of the world into percentiles

60m or so people who constitute the world’s top 1 per cent

New global middle class, particularly in China and India. In 2008 earning median income would put the average Chinese in the top half of the global income distribution

A Global PerspectiveWe now live in a world with a bulge around the median with significantly rising incomes for the entire second third (or more) of the global income distribution. That is the new aspiring global middle class.

We also see growing wealth and probably power of those at the very top and, remarkably, stagnant incomes for both the people just below the “enchanted” richest 1 or 5 per cent, and those poorest in the world.

Source: Milosevic, World Bank, 2013

Professor Angus Deaton

Inequality is a knotty subject. There is little agreement on what ought to be equal. Should it be a measurable outcome such as income or wealth; a hazier outcome such as power or freedom; or a vague aspiration such as “equality of opportunity”?

It is often said that the world is becoming more unequal. But it is less than clear what is meant by that. Income inequality between countries has grown over the past three centuries but it may now be narrowing between the world’s people as a whole. (FT 11-10-13)

Tax system is now less

progressive

Monopoly rent seeking –

power elites

Regressive effects of high

inflation

Widening urban-rural

income divide

Patchy nature of state welfare

systems

Systemic market failures e.g. education /

housing

Cognitive elites and rising premium incomes Root Causes Of

Tax system is now less

progressive

Monopoly rent seeking –

power elites

Regressive effects of high

inflation

Widening urban-rural

income divide

Patchy nature of state welfare

systems

Systemic market failures e.g. education /

housing

Cognitive elites and rising premium incomes Root Causes Of

Tax system is now less

progressive

Monopoly rent seeking –

power elites

Regressive effects of high

inflation

Widening urban-rural

income divide

Patchy nature of state welfare

systems

Systemic market failures e.g. education /

housing

Cognitive elites and rising premium incomes Root Causes Of

Tax system is now less

progressive

Monopoly rent seeking –

power elites

Regressive effects of high

inflation

Widening urban-rural

income divide

Patchy nature of state welfare

systems

Systemic market failures e.g. education /

housing

Cognitive elites and rising premium incomes Root Causes Of

Tax system is now less

progressive

Monopoly rent seeking –

power elites

Regressive effects of high

inflation

Widening urban-rural

income divide

Patchy nature of state welfare

systems

Systemic market failures e.g. education /

housing

Cognitive elites and rising premium incomes Root Causes Of

Tax system is now less

progressive

Monopoly rent seeking –

power elites

Regressive effects of high

inflation

Widening urban-rural

income divide

Patchy nature of state welfare

systems

Systemic market failures e.g. education /

housing

Cognitive elites and rising premium incomes Root Causes Of

Tax system is now less

progressive

Monopoly rent seeking –

power elites

Regressive effects of high

inflation

Widening urban-rural

income divide

Patchy nature of state welfare

systems

Systemic market failures e.g. education /

housing

Cognitive elites and rising premium incomes Root Causes Of

Tax system is now less

progressive

Monopoly rent seeking –

power elites

Regressive effects of high

inflation

Widening urban-rural

income divide

Patchy nature of state welfare

systems

Systemic market failures e.g. education /

housing

Cognitive elites and rising premium incomes Root Causes Of

“Half of one’s income depends on the average income of the country in which that person was born.”

Branko Milanovic, World Bank economist and expert on trends in global inequality

“8% of humanity takes home 50% of global income; the top 1% alone takes home 15%.”

Some countries have made progress

The richest 300 people on earth have more wealth than the poorest 3bn - almost half the world's population

Rising inequality

2:32:17 PM

Inequality in developing countries

Economic Effects of Rising InequalitySocial unrest and civil disobedience• Strikes and demonstrations over poor pay

and conditions at Fox con in China which produces IPhones and IPads

Self-perpetuating poverty cycle• Limited access to health care and education• Volatile incomes, high debts• Low savings

Misallocation of scarce resourcesCapital investment skewed towards preferences of the richLow collateral – limits entrepreneurshipCapital flight by the rich

Hon Hai Precision IndustryThe company started in the 1980s in Shenzhen, near Hong KongNow Fox Conn has half a million workers at inland factories and half a million at factories on China’s eastern coast including Shenzhen.

Economic Effects of Rising InequalitySocial unrest and civil disobedience• Strikes and demonstrations over poor pay

and conditions at Fox con in China which produces IPhones and IPads

Self-perpetuating poverty cycle• Limited access to health care and education• Volatile incomes, high debts• Low savings

Misallocation of scarce resourcesCapital investment skewed towards preferences of the richLow collateral – limits entrepreneurshipCapital flight by the rich

Economic Effects of Rising InequalitySocial unrest and civil disobedience• Strikes and demonstrations over poor pay

and conditions at Fox con in China which produces IPhones and IPads

Self-perpetuating poverty cycle• Limited access to health care and education• Volatile incomes, high debts• Low savings

Misallocation of scarce resourcesCapital investment skewed towards preferences of the richLow collateral – limits entrepreneurshipCapital flight by the rich

Extreme Poverty

Source: http://www.worldbank.org/content/dam/Worldbank/document/Poverty%20documents/inequality-in-focus-october2013-v12.pdf

Poverty Reduction Pathways

Source: http://www.worldbank.org/content/dam/Worldbank/document/Poverty%20documents/inequality-in-focus-october2013-v12.pdf

Inequality Reduction StrategiesHuman Capital Investment• Improving school enrolment rates• Improving the quality of teaching

Inclusive Growth Policies• Raising incomes for people• Conditional cash transfers as welfare

Micro-Finance• Small scale loans, gender empowerment• Micro-insurance to help poorest farmers

Poverty Reduction StrategiesHuman Capital Investment• Improving school enrolment rates• Improving the quality of teaching

Inclusive Growth Policies• Raising incomes for people• Conditional cash transfers as welfare

Micro-Finance• Small scale loans, gender empowerment• Micro-insurance to help poorest farmers

Inequality Reduction StrategiesHuman Capital Investment• Improving school enrolment rates• Improving the quality of teaching

Inclusive Growth Policies• Raising incomes for people• Conditional cash transfers as welfare

Micro-Finance• Small scale loans, gender empowerment• Micro-insurance to help poorest farmers

Inequality Reduction StrategiesHuman Capital Investment• Improving school enrolment rates• Improving the quality of teaching

Inclusive Pro-Poor Growth Policies• Conditional cash transfers as welfare• Productivity improvements in rural industries

Micro-Finance• Small scale loans, gender empowerment• Micro-insurance to help poorest farmers

Economic growth by itself is only weakly correlated with poverty reduction. Ravallion (2004) found that a 1% increase in per capita incomes can reduce income poverty by as much as 4% or by less than 1%, depending on the country as well as the time period. Clearly the pattern of growth matters as well as the pace

Inequality Reduction StrategiesHuman Capital Investment• Improving school enrolment rates• Improving the quality of teaching

Inclusive Pro-Poor Growth Policies• Conditional cash transfers as welfare• Productivity improvements in rural industries

Micro-Finance• Small scale loans, gender empowerment• Micro-insurance to help poorest farmers

Shared ProsperityShared prosperity is defined as “fostering income growth of the bottom 40 per cent of the population in every country” (World Bank, 2013).

Poverty Reduction Strategies

“There is probably no silver bullet, one needs to learn from experience what has worked and what has not worked, and what problem what solutions can and cannot fix.”

Esther Duflo, author of Poor Economics

Cost of Inducing Extra Education

De-worming and poverty reduction

One billion people in the world are infected with worms; yet there is cheap, easy mass treatment

This provides a cheap way of achieving an extra year of education especially in primary schools

Addressing rural poverty is key

Source: http://siteresources.worldbank.org/EXTPREMNET/Resources/EP125.pdf

Stiglitz on InequalityI see us entering a world divided not just between the haves and have-nots, but also between those countries that do nothing about it, and those that do. Some countries will be successful in creating shared prosperity — the only kind of prosperity that I believe is truly sustainable. Others will let inequality run amok. In these divided societies, the rich will hunker in gated communities, almost completely separated from the poor, whose lives will be almost unfathomable to them, and vice versa. I’ve visited societies that seem to have chosen this path. They are not places in which most of us would want to live, whether in their cloistered enclaves or their desperate shantytowns.

http://opinionator.blogs.nytimes.com/2013/10/13/inequality-is-a-choice/

Two Economists on Inequality

Recommended StructureOne Main

Point/Argument per paragraph

Analyse / Build Connectives

Use Supporting Examples &

Evidence

Then evaluate the actual point

made

Evaluate

Assess

Discuss

To what extent

Examine

Questions Requiring Evaluation

Get help for unit 4 from fellow students, teachers and tutor2u on Twitter:

#econ4@tutor2u_econ