Explore the Measurement, Extent, Causes And Consequences of Inequality - Essay Example

Explore the measurement, extent, causes and consequences of inequality An unequal world- the facts Inequality has been the notable characteristic of a society from the very beginning of human history. According to a UNICEF working Paper prepared by Ortiz and Cummins (2011), world’s 70% of the total income goes to the top 20% of the population. The report also predicts that the bottom billion population would take over 800 years to gain 10% of the global income as per the current rate of change (ibid). The authors identify that children and the youth greatly suffer from inequalities; and nearly 50% of children and the youth are below the $2 per day international poverty line (ibid). Inequality is more severe in middle-income regions like Asia and Latin America whereas low income-countries provide mixed results. However, the 2013 Human Development Report identifies a profound shift in the global dynamics driven by fast developing economies such as China, India, and Brazil. The report also reflects that the income inequalities in developing economies are improving notably (ibid). While analyzing the global inequality data, it seems that the current development model particularly serves the interests of the world’s wealthiest population. According to the Wealth Report 2012, the year’s “World Economic Forum in Davos, income inequality was among the issues at the top of the list of countries’ current concerns” (Frank 2012). Although countries are taking expensive and troublesome efforts to curb the issue of income inequality, this problem is still a growth impediment to economies. The World Income Inequality Database maintained by the United Nations University provides some useful information regarding the distribution of income across the globe. The Lorenz Curve and the Gini Coefficient are very beneficial to obtain a clear view of the income distribution in a particular region (ibid). This database also gives inequality information of different states and regions around the world. According to a Human Development Research Paper prepared by Atkinson and Morelli (2011), income inequality has the potential to lead a country to financial crises. Evidently, the inequalities between rich and poor countries are significant. The UN Human Development Report 2004 identified that the GDP per capita in high, medium, and low human development countries was ‘24,806, 4,269, and 1,184 PPP$’ respectively (Mohamed 2011). This data clearly point to the fact that wealth is concentrated in the hands of a few. Although some reports indicate that the issue of inequality is improving over years, the reality is another. A special report on inequality asserts that the share of national income achieved by the richest one percent of Americans has doubled from 10% to 20% since 1980 (Special Report on Inequality 2012). More surprisingly, the share of national income going to the top 0.01% Americans (nearly 16,000 families having an average income of $24 million) dramatically increased from 1% to 5% during this period. This share of national income is very large relative to the richest 0.01% achieved 100 years ago (ibid). In short, inequality is a major issue facing the world today and hence it needs immediate attention. Why Inequality? As seen already, income inequality contributes to financial crises. As Atkinson and Morelli (2011) states, income inequality and financial crisis are two inter-related issues and each can intensify the other. And, some financial crises may become ‘defining moments’, resulting in a “permanently changed level of inequality” (ibid). This finding is also supported by Stiglitz (2012, pp. 53-56), for he notes that the global financial crisis led some notable structural changes in the United States. The author continues that destruction of millions of manufacturing sector jobs, a major effect of the crisis, severely impacted the US economy because this sector had been assisting the country to create a broad middle class since the end of the World War II (ibid). Stiglitz also says that the housing bubble and the real estate bubble played a crucial role in weakening the incomes of so many in the American middle class. In the view of the writer, globalisation together with rapid technological advancements reduced the demand for uneducated workers and this situation in turn led to a decline in the incomes of the working class (ibid, pp.53-56). Referring to this empirical evidences, the view that globalisation makes the rich richer and the poor poorer seems reasonable. The global financial crisis has notably contributed to inequality. It is also argued that democratisation of living standards has led to a large scale concentration of incomes in the hands of a few over the last three decades. Stiglitz argues that some thoughtless policies of the US government on public sector wages and other key strategic areas also contributed to inequality. The effect of inequality Evidences suggest that inequality has a profound impact on the general level of health. In their book The sprit level: Why more equal societies almost always do better, Wilkinson and Pickett (2009) show the impacts of inequality on health. The income per head Vs life expectancy graph for rich and poor countries depicts the dreadful effects of inequality on health. The chart clearly indicates that life expectancy declines with income. Therefore, life expectancy in poor countries is significantly worse than that in rich countries (ibid). The same trend is also visible within societies, and hence the least deprived people show high life expectancy whereas most deprived people have relatively low life expectancy. It is also identified that health and social problems are linked to income inequality in way that those issues are more prevalent in countries having high income inequality (ibid). The authors also point out that health and social problems are worse in more unequal US states. There is also a connection between child well-being and income inequality. The diagram reflects that child well-being is better in rich countries with low income inequality Wilkinson & Pickett 2009). For instance, child well-being is better in countries like Sweden and Finland. Likewise, levels of trust are higher in rich countries with more equal incomes. In this regard, countries such as Norway, Sweden, and Denmark are top rated according to the given diagram (ibid). While analysing other factors like prevalence of mental illness, teenage pregnancy and birth rates, drug abuse, infant mortality rates, incidence of adult obesity, educational scores, child dropouts from high school, homicide rates and imprisonment, social mobility, and recycling; it seems that more equal countries perform better (ibid, slides 3-31). Undoubtedly, the issues discussed above end up in unnecessary public spending, and hence to a great extent impede the growth of an economy. Effects of inequalities on economic growth Evidently, inequalities woefully impact a country’s economic growth. One unequivocal statement is that “widely unequal societies do not function efficiently, and their economies are neither stable nor sustainable in the long term” (Stiglitz 2012, p.82). The author adds that inequality is most likely to result in price hikes unless it is curbed in the right time (ibid). In the event of such a price increase, middle and bottom classes will probably need to pay the highest price. When a particular class of people hold too much power in the society, the situation would lead to the creation of policies that can benefit only those particular segments. When the wealthiest group obtains excessive control over corporations, public revenues are concentrated in the hands of a few instead of benefiting the society as a whole. Hence, inequality negatively influences the overall development of an economy. Atkinson and Morelli (2011) claim that inequality may lead to financial crises. They point out that a growing income inequality in a number of counties has been observed in the period prior to the 2007-08 financial crisis (ibid). During this period, an increased share of total income was accumulated in the pockets of a few. The authors specifically identify that rising income inequality has become a major issue in the United States over the last three decades and it led to the recent severe economic crisis in the country. Another argument of writers is that unequal access to quality education was a major cause contributed to the growing income inequality in the US and the issue in turn created political pressure for more housing credit (ibid). Evidently, the housing ‘bubble burst’ in the United States greatly contributed to the global financial crisis 2008-09. Irvin (2011) also supports the view of Atkinson and Morelli. He specifically indicates that more unequal countries are highly vulnerable to financial crises. The writer adds that financially developed countries like US and Britain were severely affected by the global recession mainly because of income inequality (ibid). He believes that income inequality leads to financial crises, which in turn widen the gap between the haves and have-nots. As discussed already, income inequality results in many intense issues including low levels of trust, high prevalence rate of mental illness, infant mortality, homicides, and teenage births, increased imprisonment rates, decreased life expectancy, and high incidence of obesity. Evidently, this situation would force national governments to allot huge funds for addressing these issues. Therefore, governments cannot raise enough funds for promoting development activities; instead, they get less time to focus on economic growth. Researchers indicate that income inequality and the resulted social stratification may lead to high levels of psychological stress which in turn may intensify the issues like alcohol and substance abuse, depression, and poor community life. Referring to the findings of Wilkinson and Pickett (2009), Booth (2010) concludes that there is a strong and consistent association between inequality and violence. Psychological studies indicate that men strive to achieve high status as possible because it is directly linked to their sexual competitiveness; and therefore, men are likely to use violence when their status becomes exposed to different threats (ibid). Violence may include gang crimes, gun crimes, sexual assaults, homicides, and other issues. Evidently, companies or investors would not be interested to invest in countries where violence rate is very high. This is the major reason why multinational corporations still turn their face against African countries. Hence, lack of foreign direct investment and business activities may impede the economic growth of a nation. In addition, government would incur huge policing and other intervention costs as part of curbing the violence rate. Studies also indicate that there is a negative relationship between income inequality and social cohesion. Economists argue that social cohesion is a major component driving the economic growth of a country. However, some economists hold the view that income inequality would enhance the growth of an economy. They claim that the increased gap between the ‘have and have-nots’ is likely to act as an incentive for competition and innovation, which in turn would boost the economic growth rate of a nation. More precisely, this situation would intensify the competition spirit of low income groups and ultimately the economy would achieve a high growth rate. Referring to the opinions of some economists, The New York Times reporter Lowrey (2012) indicates that income inequality may reduce economic growth and slower job creation in the years ahead. Undoubtedly, job creation issues would worsen the economic status of UK and US that are still under the process of economic recovery. According to Ostry , the Deputy Director of the IMF’s Research Department, “economic growth becomes more fragile in countries with high levels of inequality like the United States” (ibid). International bodies like the Organisation for Economic Co-operation and Development suggest that countries cannot promote economic expansion over the next decades unless they address the issue of inequality immediately. In the words of many economists, the concentration of incomes in the hands of a few not only indicates a more unequal society, but “less stable economic expansions and sluggish growth” (as cited in Lowrey 2012). Conclusion From the above discussion, it is clear inequality is becoming a growing issue all around the globe. The lion’s part of the world’s total incomes goes to a small percent of the richest people. Inequality leads to issues like lower life expectancy, high violence rate, low levels of trust, and other health and social problems. Hence, this issue adversely affects a nation’s economic growth. In order to address this issue, national governments must ensure a minimum wage for all citizens regardless of their age, sex, religion, or politics. It is also recommendable for governments to impose huge income tax rates on rich people and to exempt the poor from taxes and other duties. References Atkinson, A. B. and Morelli, S. (2011) ‘Economic crises and Inequality’. Human Development Research Paper. United Nations Development Programme. Booth, R. (2010) ‘The Spirit Level: how ideas wreckers turned book into political punch bag’. The Guardian [online] available at [accessed 08 March 2013]. Frank,K. (2012) Wealth Report 2012 ‘The Global Perspective On Prime Property And Wealth’[online available at [accessed 08 March 2013]. 2013 human development report [online] available at [accessed 08 March 2013]. Irvin, G. (2011) ‘Inequality and Recession in Britain and the USA’. Development and Change [online] available at [accessed from 08 March 2013]. Lowrey, A. (2012) ‘Income Inequality May Take Toll on Growth’. The new York Times. [online] available at [accessed 08 March 2013]. Mohamed, I. A. W. (2011) ‘Reviewing Poverty Measurements and Analysis’. Philosophy and Methodology of Economics, 2, 28 [online available at [accessed 08 March 2013]. Ortiz, I & Cummins, M. (2011) ‘Global inequality: Beyond the bottom billion. A Rapid Review of Income Distribution in 141 Countries’. Working Paper. Unicef. Special Report: The World Economy. Inequality 2012. Stiglitz, J. (2012) The Price of Inequality. Penguin UK. World Income Inequality Database: User Guide and Data Sources (n.d) [online] Available at [accessed 08 March 2013]. Read More