interests of the elite, offering an explanation as to why public systems in developing countries are often inadequately funded and poorly managed. Take education, for instance. From the eliteÊs perspective, it makes no economic sense to be tied down with a large tax burden to fund a service they can buy privately (and often at a higher quality). Thus, with their political power, the rich can easily divert spending from education to something that directly affects their welfare. This, combined with continuous pressure to maintain or expand enrolment, leads to the establishment of poorly managed and funded schools, which in turn deters families from sending their children to school when they could be working and earning a considerable income. Comparing the education system of Latin America with that of East Asia in the 90Ês fully depicts the devastating effects of low public spending on the quality of education. With both areas experiencing high income inequality, the children of the richest 20% in Latin America went to school for six more years than the children of the poorest 20%; the comparable gap in East Asia was just four and a half years. The crucial difference between the two regions was the fact that East AsiaÊs governments spent much more on public education, thus creating a functioning educational environment in which children can flourish. However, by no means does this suggest East AsiaÊs focus on education is as adequate or as effective as the majority of more developed countries – to this day, for instance, teacher absenteeism in Indonesia still hovers around a concerning 20%. EducationÊs long-term economic benefits are universally recognized, and if inequality is hindering the progress of education in countries that currently depend on education as a path out of poverty, then inequality undoubtedly should be a major concern and perhaps even a focus point when discussing possible solutions to the lack of development in certain areas. A strong middle class is crucial for the development of countries, which is one of the reasons why the Gini Coefficient is
valued higher than quintile ratios given how the former takes the middle class into account. In unequal societies, the median voter tends to be in favour of policies that promote redistribution of wealth since in these societies the median income is usually below average. The strength of the middle class is thus a double-edged sword to a certain extent – on one hand, it allows the improvement in welfare, as shown by the improvement in education in East Asia that was essentially advocated by the middle class; on the other, the middle class is typically in favour of income redistribution through distortionary taxation that could ultimately slow growth. In fact, bad political outcomes often result from a lack of judgment on the part of the working class, as demonstrated by GarciaÊs Peru in the 80Ês as well as PeronÊs Argentina. Thus, although the economic benefits of having a strong middle class in developing countries can be debated, its effect in terms of restricting the behaviour of the elites is evident and can be crucial to the success of a developing country in both the short-run and the long- run. Weak governments are often incapable to compensate for struggling markets, and this is worsened by the fact that inequality also inhibits growth through market mechanisms. As mentioned above, governments dominated by elites in developing countries cannot fund public systems as efficiently and effectively as one would hope, yet this is not the only way inequality can prove to be a detriment for developing markets. Frictions in capital markets are prevalent in developing countries. Excessive credit constraints limit the borrowing capacity of individuals who possess little assets and thus cannot provide sufficient collateral for their loans. Not only does this reduce the aggregate investment of a country, but it also aggravates the problem of income inequality, as the poor are financially incapable to participate or invest in profitable projects. From 2008 to 2010, IndonesiaÊs financial sector grew by an impressive 6.5% annually, yet its agricultural sector, which mainly supports the rural population, only grew by a
58
Made with FlippingBook - Online Brochure Maker