Economic Growth - Rising Inequality and Rapid… | tutor2u Economics
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Economic Growth - Rising Inequality and Rapid Growth

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB

Why can rapid growth often lead to a widening of inequalities in both developed and developing countries?

  • High increases in pay of people in top-paying jobs
  • Increasing wealth including rising property prices
  • Growing gaps between urban and rural areas
  • High fertility in poorer households
  • Increasing pay of those with higher levels of schooling especially with the growth of jobs and pay in high-knowledge industries such as computer gaming, engineering systems, financial trading
  • Reductions in the percentage of people who are members of a trade union
  • Linked effects of inequality in health and education

Much depends on the extent to which a government has a welfare and tax system in place to provide an income safety-net and also a desire to redistribute rising incomes and wealth so that the benefits of growth can be more equitably shared out.

Economic and Social Costs from Rising Inequality

In 1980, the per capita income of the 15 richest nations was 44 times that of the 15 poorest, by 2000, that multiple had increased to 62. However in 2009, reflecting better economic performance in several developing and transition countries; the ratio had fallen to 56

The Kuznets Curve and Inequality

  • The Kuznets Curve was established by the economist Simon Kuznets and it dates from the 1950s.
  • It suggests that in pre-industrial societies, almost everybody is equally poor so inequality is low. Inequality then rises as people move from low-productivity agriculture to the more productive industrial sector, where average income is higher and wages are less uniform.
  • As a society develops and becomes richer, the urban-rural gap is reduced and old-age pensions, unemployment benefits, and other components of a social safety net have the effect of lowering inequality.
  • The shape of a possible Kuznets Curve is shown in the next diagram.

Trends over the last 30 years show income inequality increasing within countries and between them.

For emerging countries, inequality has risen in most countries – suggesting that many nations have been on the rising part of the curve. Of the BRIC countries and other leading developing countries, only Brazil has seen an eventual fall in measured income inequality. Partly this is the result of deliberate inclusive growth policies including the conditional cash transfer policy explained in our chapter on Brazil.

We can see from the table below the depth of the scale of income inequality in some low and low-middle income countries. In South Africa 84% of cumulative income is held by the richest 40% of the population whereas the poorest fifth take just 3 % of income.

Income Shares for the Population Bangladesh India Sri Lanka Congo, Dem. Rep. Kenya South Africa Nigeria
Income share held by lowest 20% 9 9 7 5 5 3 4
Income share held by second 20% 12 12 10 9 9 5 8
Income share held by third 20% 16 16 14 14 13 8 13
Income share held by fourth 20% 21 21 21 21 20 16 20
Income share held by highest 20% 41 42 48 51 53 68 54

Source: World Bank

Economic and Social Costs from Rising Inequality

Consumption and mis-allocation of resources

  • Low income families spend a higher % of their incomes - inequalities depress consumer demand
  • Investment skewed towards preferences of the rich

Risk-taking

  • Incentives are undoubtedly needed for enterprise
  • But excessive compensation can encourage too much risk-taking especially in financial markets

Market failures

  • High inequality deprives many people of access to education limiting human capital growth
  • Many of the poorest pay more for their debt
  • Unemployment and social cohesion / upheaval
  • Structural unemployment and vulnerable employment increases the burden on the state
  • Low employment damages social capital

Revision Video: Balanced, Sustainable and Inclusive Growth

Revision video on sustainable, inclusive and balanced economic growth

Revision Video: Inequality in the UK Economy

Inequality in the Uk economy revision video

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