Causes and Effects of Income Inequality in Developing Countries
Income inequality in developing countries is not a new subject. Uneven income distribution has proved to be a major issue in developing countries mainly because the rich get richer while the poor get poorer. Reports indicate that one percent of recipients of income earn 15 percent of the global income while the other five percent receive 40% of the global income. The poorest, who make up 20% of the population end up receiving a mere 1 percent of the world’s income.
There are several factors that contribute to income inequality in developing countries. This inequality is however mostly driven by the rise of inequality in salaries as well as wages. Thomas Piketty, an economist specializing in inequality study argues that economic disparity has widened in an inevitable manner and attributes it to free market capitalism in which case the return rate on capital is higher than economic growth. Some of the common aspects that contribute to economic inequality however include the following:
- Outcomes of labor markets
- Technological changes
- Ethnic discrimination
- Policy reforms
- Technology changes
- Increased regressive taxation
- Gender discrimination
Whenever education is universal and free, income equality has the tendency to decrease. This is because the economic system is designed in a manner that ensures people rise only when they apply ability in their endeavors.
In most of the developing countries, governments impose high taxes on low income earners further widening the inequality gap between the poor and rich in society.
This is yet another factor that contributes to income inequality in developing countries. It refers to the capability of individuals to shift from their humble origins to better opportunities.
This is closely associated to issues of culture and it also contributes to incidences of economic inequality in developing countries. When individuals in these countries have the option of either working hard in order to earn money or spending more leisurely time, they settle for the latter. This in turn affects labor markets and influences cases of income inequality.
Income inequality poses a major challenge largely because it leads to increased rate of social and health problems. It also leads to decreased levels of economic utility and consequently lowers economic growth. Other factors that also contribute to income inequality among individuals in developing countries include unionization decline, offshoring, shrinking of the government and lowered taxation for the rich in society. Income inequality in developing countries should be addressed for purposes of ensuring all enjoy equal growth opportunities.
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Progressives have typically attacked economic inequality on fairness grounds, arguing that it's just not right that so much national wealth is funneled to the top even as millions struggle to get by. Americans are definitely open to this argument, especially during times like now when a warped, anemic economy is mainly just raising the yachts, and not the boats of ordinary people.
This is a key finding of Leslie McCall's recent book, The Undeserving Rich, which carefully scrutinizes years of public opinion polls on inequality. The problem, though, is that when economic times are fairly good, the fairness critique of inquality tends to lose traction. We saw that in the late 1990s and also the Bush years. The yachts were soaring into the stratrosphere, but ordinary boats were also inching up just enough that it was hard to raise concern about near-record levels of inequality.
We could easily see this same movie again in coming years. Recent public concerns about inequality could quickly melt away if the economy cranks back up and modestly good times return. The fact that tens of millions of workers will still be trapped in low-wage hell while a sliver of Americans live better than the kings of old will seem like a minor detail. Remember, this is America, where people will seize any chance they get to blame themselves for their economic misfortune as opposed to larger systems or the elites who run things.
All this is why opponents of inequality need a truly sustainable critique of the huge gaps of income and wealth in America today — one that seems relevant in both good times and bad. Fortunately, such a critique has finally emerged in recent years—one which focuses on how inequality undermines growth and hurts everyone.
This argument follows a simple causal chain: unequal growth concentrates wealth in the hands of a tiny slice of consumers who can only spend so much money. In turn, the vast majority of earners are left with little extra cash for goods and services. Resulting weak demand undermines growth. Low growth makes everyone poorer than they otherwise might be, including those who own the means of production. Inequality produces other bad economic outcomes, too, such as the underutilization of the nation's human capital, inadequate public investment in both human and physical capital, and social ills that are costly to address, diverting away resources from investment.
It all makes sense. And it makes sense whether the economy truly stinks like it does now, or is simply underperforming, which was the case through much of the Bush years.
What's more, this critique of inequality doesn't just appeal to those who are hurting or care about fairness. It appeals to anyone who wants more customers for their goods and services. Or anyone who wants America to compete well against China and Germany in coming decades.
This new critique has been popping up often lately. Demos has used it to analyze inequality in the retail sector and make an argument for higher wages. And just last week, the Center for American Progress launched the Washington Center for Equitable Growth, which aims to deepen the economic critique of inequality. As the mission statement of the Center says:
New research suggests that growing inequality in the United States may have broad social and economic effects — by reducing stable demand for goods and services, dampening entrepreneurialism, undermining the inclusiveness and responsiveness of political and economic institutions, limiting access to education, and stunting individual development. Yet our understanding of how these mechanisms interact with the broader economy is limited.
Thanks to this initiative, and other work, we are likely to soon know more about how inequality affects everyone's economic fortunes in America. That knowledge will be a powerful thing in making a far stronger argument for inclusive growth.