meagre 3.8% due to the fact that most of the rural population have little access to functioning financial institutions, as well as the fact that urban banks are unwilling to lend to rural families who are unable to present a list of tangible assets. It would be irrational to conclude that financial institutions should be blamed for this seeing how it would be irresponsible on their part to give out loans without sufficient confidence in the borrowersÊ ability to repay their debts, yet one can justifiably assume that in societies with a more even distribution of asset ownership, more profitable investment projects get funded. The success of microcredit, such as the foundation of the Grameen Bank in Bangladesh that targeted rural women who needed loans for small capital investments, perhaps offers one possible solution to this problem, although it would be unwise to rely on the effectiveness of one strategy rather than dealing with the root of the problem. Similarly, income inequality may lead to the establishment of monopolies. Without effective government intervention to correct market failure, firms run by the rich tend to dominate markets in developing countries, restricting both the productive and allocative efficiency of the economy as a whole. As with the unavailability of loans for the poor, the creation of monopolies further reduces business opportunities for the majority of the population and leads to a more uneven distribution of wealth, as one would expect. Many may point to the dynamic efficiency that monopolies tend to bring, although the chances of this occurring in a developing country is highly suspect – most firms lack the motivation to innovate when there is little external pressure to do so, and may instead choose so save their profit for future use, usually in an international location. Finally, inequality may lead to the loss of social capital, which includes the trusts, norms and networks that improve the efficiency of society. Accumulation of social capital can have many economic benefits, such as reduction in contract enforcement as well as costs of transactions – for instance, productivity in sugar plantations in India is
low when asset ownership is more unequal. As Dana Rodrik points out, income inequality also increases the resistance of the losing groups to political compromises, thus creating undesirable social friction. However, the importance of social capital extends beyond the realms of economics and politics. There is evidence to suggest that the size of the income gap between the middle class and the rich is correlated with homicide rates – it is no coincidence that South Africa, with one of the largest Gini Coefficients in the world at 63.1, is one of the world leaders in crime rates as well. Therefore, to a certain extent, income inequality not only presents various economic obstacles for developing countries, it also augments social divide between the rich and the poor, which in turn generates a vicious cycle that perpetuates inequality and its many inconvenient consequences. Both Britain and China experienced considerably large income inequality in the late 18 th century, but under very different circumstances. The availability of property rights along with the flourishing culture of entrepreneurship within the UK economy allowed the island to accumulate vast amounts of capital, both from domestic sources, whose productivity was greatly enhanced thanks to religious influences, as well as international sources that greatly valued BritainÊs economic freedom. Such development gradually led towards the blossoming of the Industrial Revolution, establishing the UK as the worldÊs prominent economic power. ChinaÊs story could not have been more different. Despite possessing one of the largest economies in that era, China experienced far greater income inequality, with the majority of its wealth concentrated within the royal family. It was common for emperors to live lavish lifestyles whilst thousands die of hunger outside his gates, and it was the royaltyÊs intention to keep it that way. Civilians were expected to continue with their occupations for generations – innovation and technology were simply used to entertain the elite and not to be shared. Revolution was unlikely – people had neither the financial support nor
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