growth for the economy as a whole. This perhaps became evident during the Cold War, when the economy of capitalist countries such as the United States soared in comparison with those under the control of the communist USSR. The socialist organization of the economy also demonstrated other negative effects of relative income equality, including poor discipline and low initiative amongst workers as well as poor quality and limited selection of goods and services. A more economic argument in favour of income inequality claims that inequality is likely to stimulate growth because it increases aggregate savings. Imagine, for example, a country with a population of five where the savings rate is 10% for everyone earning more or equal to a hundred dollars annually and 0% for those who earn less. Assuming that the total income for this country is four hundred dollars, the country would be without savings if everyone earned eighty dollars per year. In comparison, if one person earned four hundred dollars per year whilst the others earned nothing, the total accumulated savings of the country would be forty dollars, a significant improvement over the amount generated by an equal distribution. The example is flawed in many obvious ways – rarely does a country ever experience an unemployment rate of 80% - but it does present the intriguing possibility that large income inequality results in an increase in aggregate savings, which leads to further investment and capital accumulation. This allows developing countries to negate the problematic effects of rapid population growth, thus preventing capital shallowing and consequent loss in GDP per capita, which tends to be a major concern in developing countries, especially those with abysmally low saving rates. One explanation for why the rich tend to save more is that well-off families tend to be more educated and thus understand the long-term benefits of saving. They are also more likely to make wiser decisions when
investing their savings in the future, thus using the savings to its full potential. On the other hand, the poor are more vulnerable to temptation. In the Hyderabad survey conducted by Abhijit V. Banerjee and Esther Duflos in 2006 that attempted to detail the economic lives of two thousand households of the capital of the state of Andhra Pradesh in India, 28% of those interviewed admitted they would like to cut at least one item from their expenses, with the most common items being alcohol, sugar, tea, snacks, festivals, and entertainment. One has to keep in mind that the majority of these families barely get by purchasing the absolute essentials, yet they tend to spend whatever remains from their income instead of saving it for the future. This is perhaps exacerbated by the fact most of the poor have little access to financial institutions and thus would have to save their money at home, which is prone to be stolen or lost, therefore making saving the least desirable option. Therefore, given the lack of incentives and methods to save, it is understandable why the poor may be more inclined to spend. However, income inequality poses many limitations that may negate its potential positive effects. These limitations present themselves in politics, economics and society in general, and can often prevent the poor from escaping poverty or reaping the benefits of economic growth, if there is indeed any. Income inequality unsurprisingly weakens the government. The privileged essentially dominate political decisions through contributions to political campaigns, access to the media and even bribery or contortion, leading to what Charles Beitz coins an Âabridgement of libertyÊ. Political instability is a common feature amongst most developing countries, particularly in Sub- Saharan Africa – one only has to flip through the newspaper to find articles detailing recent coup dÊétats in countries such as South Sudan. The direct repercussion of this is that governments become unwilling to implement any policies or support any social projects that would conflict with the
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