Economics

Study Notes

Micro and Macro Influences on Income Inequality in Developing Countries

Level:
A Level, IB
Board:
Edexcel

Here is a selection of resources for students preparing an essay on: " Using your own knowledge, evaluate the microeconomic and macroeconomic influences on income inequality in two developing / emerging market countries of your choice."

According to a recent blog from the IMF, "Much has been written about the relationship between inequality and economic development, but theory remains inconclusive."

They also claimed that 

"Global income inequality has declined in recent years, with the Gini index—dropping from 68 in 1988 to 62 in 2013, reflecting relatively strong growth in many emerging and developing economies, particularly in China and India. However, inequality has increased within many countries, including in many advanced economies." Read more here

Countries with the highest income inequality (Source: HDI data, 2016)

The table below tracks the countries with the highest level of income inequality as published in the 2016 Human Development Report with nations ranked first on the Palma Ratio.

Countries with the highest income inequality

Microeconomic influences on the level and depth of income inequality

Many of the micro influences come from the rewards to labour and capital in factor markets. For instance, the growing divide in real wages between low-skilled and skilled workers; the increasing returns to capital including profits / dividends flowing to owners of factories, commercial farms, mines and other businesses.

Micro influences might include:

  1. Scale and extent of trade union protection / the role of collective bargaining in raising wages and improving working conditions in formal labour markets e.g. when facing monopsonistic employers
  2. Whether or not in a developing / emerging country, there is a statutory minimum wage for adult/youth workers
  3. The availability, affordability and quality of training designed to increase skills, lift human capital and productivity
  4. Availability and affordability of basic health care for families - affecting lifetime incomes
  5. The effects of social norms for example affecting female participation in the labour force and educational opportunities
  6. Impact of discrimination in labour markets increasing the risk of relative poverty for those groups negative affected
  7. Consequences for inequality of changing rates of net migration in labour markets
  8. Cost and availability of secondary, tertiary and higher education in developing countries
  9. A lack of competition/contestability in markets e.g. monopoly providers of basic utilities might worsen inequality because their higher prices disproportionately affect relatively poorer families
  10. Microeconomics of financial markets - for example the very high rates of interest on loans to poorer families and access to basic banking services.

Macroeconomic influences on the level and depth of income inequality

Macro influences might include:

  1. Whether or not a developing country has the fiscal resources and political appetite to operate a welfare state including basic pensions and other transfer payments to support those in need (including cash transfers to the poorest)
  2. The extent to which a country's tax system is progressive in reducing the gap between rich and poor (i.e. the gap between original and disposable income)
  3. The impact of economic growth on levels of employment and unemployment and under-employment
  4. Effectiveness of government in protecting land rights e.g. against risk of land grabs by transnational corporations
  5. Effects of increasing trade/globalisation on income inequality - does globalisation act to increase relative poverty within a nation even if it also leads to reductions in extreme poverty?
  6. Consequences of persistently higher average rates of inflation for poorer households in lower and middle income nations
  7. Effects of big structural changes in the economy e.g. rural-urban labour migration, fast-growing of cities on the level of inequality
  8. The macroeconomic effects of volatile commodity prices for income inequality in both countries that are heavily reliant on commodity exports and those where imported commodities have a crucial role on growth, inflation and real living standards.

Links for wider reading on this issue

Importance of land rights

Amartya Sen on inequality

The Agenda: Winnie Byanyima on inequality | The Economist

Boston House,
214 High Street,
Boston Spa,
West Yorkshire,
LS23 6AD

Tel: +44 0844 800 0085

© 2021 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.