Income inequality in developing countries
Tayler Yu
Even the most vehement supporters of Marxism would not attempt to persuade you that absolute equality within society is achievable. The idea of living in the same conditions as everyone else has deteriorated into an unrealistic fantasy that is beginning to lose its appeal - not only with economists, but with the wider public as well. As with almost every other economic topic, academics are distinctively divided over the problem of income inequality. Many, including Nancy Birdsall, view inequality as a significant hindrance that is preventing economic growth in countries that are in desperate need for development, whilst perpetuating a vicious cycle in which the gap between the rich and the poor widens with no end in sight. Others believe income inequality is a Ânecessary evilÊ that promotes and establishes a culture of hard work, innovation and risk-taking – valuable qualities that ultimately will translate into sustained economic growth in the long run. Whilst both sides present convincing arguments, neither side can ignore the fact that a large disparity in the distribution of wealth within a country is undesirable, especially in one that is trapped in persistent negative growth and poverty. The extent to which the detrimental impacts of inequality are felt in society is dependent on the economic and political structure of a nation, and whether the established institutions are able and, in some cases, willing to protect the less fortunate. It is no surprise, then, that an uneven distribution of wealth in a country such as Burundi is more concerning than that of the United States or China. Thus, should income inequality be a major concern in developing countries? By analyzing the advantages and disadvantages that income inequality typically presents
with the support of statistical evidence, this essay will hopefully explain how growing economic inequality tends to limit development in many developing countries on multiple facets, including economic participation and education, given how the lack of proper institutions can transform this Âblessing in disguiseÊ into a categorical curse. Traditional economics depict a conflicting relationship between income inequality and economic growth. In Bouriguignon and MorrissonÊs study of the evolution of inequality since 1820, they discovered that: ÂThe mean income of world inhabitants increased by a factor of 7.6. The mean income of the bottom 20 percent increased only by a factor of slightly more than 3⁄ and that of the top decile by almost 10Ê. This was accompanied by the fact that the Âextreme poverty headcount fell from 84 percent of the world population in 1820 to 24 percent in 1992Ê, thus depicting the trade-off that economic growth often has with inequality, a relationship that perhaps goes beyond simple correlation. The experience of China further supports this belief – whilst China averaged a per capita growth rate of 9.7% from 1990 to 2005, its Gini Coefficient simultaneously increased substantially from 0.31 to 0.45. There are many justified reasons to believe that income inequality may lead to significant economic growth. One of the more widely accepted arguments is that income inequality fundamentally provides incentives for the population to work and innovate. In her article, ÂInequality Matters, Nancy Birdsall claimed that, Âinequality reflects a system that rewards hard work, innovation and productive risk-takingÊ. The logical result of this ÂsystemÊ is enhanced productivity and ultimately higher average income per capita and accelerated rates of
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