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Income Inequality and other Economic Dynamics: An Inter-Continental Perspective | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Paper Id :
17822 Submission Date :
2023-07-11 Acceptance Date :
2023-07-22 Publication Date :
2023-08-08
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Abstract |
A global consensus has recently been indeed emerging in favour of equality. The rationale being the acceptance to the consequential implications for the growth and macroeconomic stability behind the exacerbating income inequalities. So, an attempt has been made to analyse the extent of income inequality and its relationship with human development in the selected twelve countries. It is found that the income inequality bears negative relationship with human development. The top 10 per cent continued to accumulate ample share in income and the poorest 40 per cent is surviving on a very small chunk. The extent of the concentration of income manifested a bleak picture in the Brazil, India and Uganda.
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Keywords | Income Inequality, HDI, Poverty and Government Expenditure. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Introduction | For the economic growth, making a choice between
egalitarianism and inequality has not remained a major concern for long time.
However, a global consensus has recently been indeed emerging in favour of
equality. The rationale behind it is the acceptance to the reasoning like
exacerbating inequalities have consequential implications for the growth and
macroeconomic stability of the nations. IMF also referred to the fears like
possibility of concentration of political and decision-making power in the
hands of a few, sub-optimal use of diversified human resources, misuse of
political power and lack of appropriate investment policy due to economic
instability and higher fiscal crisis risk (Norris, 2015). Additionally,
apprehensions that persistent unbalanced sharing of the growth would lead to
social resentment, fuel populist and protectionist sentiments have also been
proving true. Recent discussions, particularly in the US, about increased
inequality being one possible cause of the 2008 financial crisis also contributed
to relevance for policymaking to abridge inequality (Cinago, 2015). Hence, the
focus has been shifting towards the equality and inclusive development during
the process of policy making regarding economic growth. Even at national and
international level, various institutes have made efforts to combat inequality
like UNDP has set the target to reduce inequalities and ensure equal
opportunities under the Sustainable Development Goals, which have to be
achieved by 2030. Going beyond the income factor in terms of inequality, a new
idea of human development which embodies human capabilities and aggrandization
of choices has broached in the 90s and Human Development Index developed by
Mahbub Ul Haq and Amartya Sen holds a significant place. A bi-directional relationship
between income and the level of human development has also been emerged in the
recent decades. In essence, the existence of income inequalities leads to the
deprivation in education, health and other factors affecting human development
and other way around. |
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Objective of study | So, because of the prevalence of the concern about growing
economic inequality and considering income as the most important determinant of
economic inequality, an attempt has been made to analyse the extent of income
inequality and its relationship with human development. From diverse
continents, twelve countries having different levels of HDI and income have
been selected for the purpose. Hence, the main objective of this paper is to
find out the extent and trend of income inequality between and within the
selected countries including India. The extent of the concentration of income
has also been examined. |
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Review of Literature | Numerous
studies have documented the relationship between inequality and human
development as listed below- Hicks (1997)
asserted that the distributional inequalities in income, education, and
longevity possess a major concern for human development and well-being and
suggested a mechanism to incorporate inequalities of income, education, and
longevity into the framework of the Human Development Index (HDI). The paper
recommended that inequality should be reduced on the basis of efficiency
argument asserting that lesser inequality of incomes leads to a more efficient
societal use of income for obtaining other valuable social goods. Grimm et. al.
(2010) measured the inequality in human development to a sample of 32
developing and industrialized countries and found strong overall negative
correlation between the level of human development and inequality in human
development. The strength of that relationship varies across the three
sub-indices, it is very strong for the GDP component, moderate for the
education component and very weak for the life-expectancy component. The paper
recommended to focus not only on the country average level of human development
but also on its inequality, which in some countries is substantial. Kovacevic
(2010) emphasised the significance of accounting for inequality in
opportunities for and outcomes of human development and reviewed the different
approaches to accounting for inequality while quantifying Human
Development. It is found that the income
Gini index is negatively correlated with the HDI and all of its components at
the global level, essentially confirming that the higher inequality in income
is associated with lower values of human development measured by the HDI. Neumayer (2011)
analyzed the theoretical and empirical links between inequality in human
development and sustainability as inequality in human development is
essentially inequality in capability and freedom which will determined by
income, education and health. The paper found that the vicious circles between
more inequality leading to more unsustainability and vice versa are likely to
exist and suggested that the policies aimed at reducing inequality and
achieving sustainability have a good chance of resulting in virtuous circles. Inaki &
Smits (2020) developed the Subnational Human Development Index (SHDI) to
examine the within-country variation in human development by covering 161 countries.
The paper found that within-country inequality in human development and
subindices is much less in high-HDI countries and strong in low and
middle-developed countries. Education disparities explain most SHDI inequality
within low-developed countries, and standard of living differences are most
important within the more highly developed ones.
The studies have discussed the dynamics of inequality in terms of human development and the negative impact of inequality which shifted the global agenda towards equality and human development. |
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Main Text |
Historicity and
Reasons No doubt,
visioning complete equality truly is an illusion. Even some economists
justified the existence of inequality based on marginal productivity theory
resultantly those who would make more contribution in the economy will get more
returns. Indeed, some level of inequality is inevitable as some individuals
have more capabilities; in return, they get more rewards. Withal, there is a
belief that it is necessary to give more incentives to some people as compared
to others to make them work and invest more. Nonetheless, the role of
redistribution policies in reducing inequality can’t be denied. While on the
contrary, the theoretical foundation of equality has supported the notion of
distributive justice. Rawls supported the concept of inequality if it ensures
distributive justice i.e., existing level of inequality should not make the
situation of the worse worst off. While, Amartya Sen broaden the view of
justice and rationale of income distribution. He has explicated that it is the
lack of certain key capabilities, which eventually creates inequality and
poverty. Thus, to achieve the idea of just society, the provision of equal
opportunities should be the main agenda. Numerous are
the reasons for economic inequality amongst the nations but basically it is a
result of unequal progress. While having a look at the other reasons,
historically, it comes out to be the rise of private property during the
beginning of industrialised phase which made bifurcation of the society between
rich and poor class. In fact, Rousseau stated that a departure from the
primitive state would ultimately lead to the pre-dominance of the private
property, from where all sorts of the inequalities will generate (Charles-Coll,
2011). The issue of income re-distribution became a key question then. In the
end of the Nineteenth century, the rate of exploitation increased and the gap
between the two classes widened. Inherently, it is the result of neglect of welfare
led economic growth policies. If we look two centuries back, the world
inequality worsened continuously from 1820 to 1950 as the Gini coefficient rose
by 1 percentage point every decade, then almost levelled off between 1950 and
1992 (Bourguignon & Morrisson, 2002). The 1950s era traced a welfare regime
aimed at alleviating inequality occurring out of a capitalistic and
industrialist society but after 90s the conception of welfare encountered
various transitions (Anderson, 2007). After 90s, the international policy
favoured the emergence of globalisation and privatisation which has been
accompanied by growing inequality. During the last
two-three decades, some regions have seen perceptible development whilst others
are gradually moving towards that path. The main factors that acted as a
dis-equalising force throughout the 19th and 20th century was relatively slow
growth of the Asian region and rapid enrichment of the European population.
Howbeit, now the world has becoming more equal as many developing countries are
converging towards the level of income of developed countries. With the
initiation of Twenty First Century, the share of global wealth in the
high-income countries from 2000-2014 fell 80 percent to 71 percent, while the
share of middle-income countries such as China and India rose from 14 to 22
percent. While reviewing the scenario within the countries, the trends and
level of income inequalities within the countries turned out to be more
grievous till now. It is found that the egalitarian regime started with the
Great October Revolution 1917 in Russia which attracted the world. Also, in
almost all the rich countries, a sharp decline in the income inequality between
1914-1945 perceived as a consequence of the destruction led by the two world
wars (Piketty, 2014). Thereafter,
controlled capitalism in developed countries like US and Western Europe and
rise of communist powers like Russia and China stabilised the income
distribution during 1950-1980. In the last few decades, the level of income
inequality has been spiked in almost all the countries. Since 1980s, it has
escalated in USA, China, India and Russia whereas Europe has seen a modest
increase (World Inequality Report, 2018). Accentuating inequality in income is
a sign of the closure of post war egalitarian era which raised the power of
elite groups and policies were shaped in favour of them. World Social Report
(2020) revealed that income inequality has increased in most developed
countries and in some middle-income countries, including China and India.
Countries where inequality has grown are home to more than two thirds (71 per
cent) of the world population. The top 10 per cent of the population of
southern countries (except China) acquired one-half or more of the national output
(Patel, 1991). The share of national income of the top 0.1 per cent in America
(that merely constitutes 1600 families) rose from 1 per cent in 1980 to 5 per
cent in 2012; the share is even bigger than the Glided Age (Stiglitz, 2013).
Whereas, the people in the middle and at bottom have not fared so well.
Southeast Asian countries have shown income distribution adverse than South
Asia but better than Africa and Latin America. More spending on poverty
alleviation programmes and food subsidies brought more egalitarian income
distribution in South Asia (Hashim, 1998). Technological progress during this
period has augmented inequalities. Fiscal expert Israel Sawtrill stated that
the globalisation and technology created bigger wage premium for the top and stagnating
wages for the bottom employees (Mokkapati, 2018). The dramatic rise in
inequalities in Anglo-Saxon world has also owned to the superior wages earned
by the CEOs of various firms. Living conditions differ widely between and
within the different regions of the world. Very few are living their life in a
healthy and wealthy manner whilst the majority lead a vulnerable life. The
fruits of widespread development in the various countries of the world could
not reach equally to the people, thus instead of filling the gap between rich
and poor, the inequalities have grown. The ramification of rising disparities
and a lack of opportunities are creating a vicious cycle of inequality,
frustration and discontent among the people. Income
Inequality vs Human Development
The growing inequality could jeopardize the achievement of internationally agreed Sustainable Development Goals. UNDP set a target of eliminating poverty and reducing inequalities in the SDGs to improve the living conditions of impoverished people. The new development paradigm strides towards bridging the income gap and human development. The variations in income inequality and human development are measured through Gini coefficient while, Human Development Index (HDI) and Inequality Adjusted Human Development Index (IHDI) measures the main dimensions of human development i.e., health, education and income as well as the extent of inequalities. More clearly, the IHDI combines a country’s average achievements in health, education and income with how those achievements are distributed among country’s population by “discounting” each dimension’s average value according to its level of inequality. As these indicators are highly correlated, table no. 1 unveils the position of selected countries from various categories of human development and their profile with respect to per capita income and poverty ratio taken for the analysis of income inequality.
Source- 1. UNDP
Database (2020), http://hdr.undp.org/en/content/download-data 2. CIA World
Factbook, https://www.cia.gov/the-world-factbook/ From the first
category, three countries i.e., Sweden, US and UK with high income and very
high human development are selected. These are first world countries or
developed countries having high economic growth, better opportunities and
developed social security system. In the
category of upper middle-income countries, the selected ones are China, Brazil
and Sri Lanka with favourable economic conditions but are still emerging.
India, Bangladesh and Pakistan fall in the category of medium Human development
and lower middle income. The countries in fourth category are suffering from
widespread poverty and overpopulation which eventually resulted in low levels
of human development and slow economic growth. So, the measures mentioned
hereafter intend to investigate the well-being and prosperity among the people
in these countries.
The table no. 2 depicts the Human Development Index and Inequality-adjusted Human Development Index of the selected countries. It also shows the gap between Human Development Index (HDI) and Inequality Adjusted Human Development Index (IHDI) of these selected countries & overall loss in HDI due to inequality. The percentage difference between the value of IHDI and HDI depicts the overall loss to human development due to inequality. All the countries have significantly ameliorated their performance in terms of HDI over a span of ten years. The countries with very high level of human development have HDI of the value of more than 0.8. It is quite apparent that human development is remarkable in the developed economies because of high level of income, living standards and skilled manpower. Sweden is the outstanding country with the highest value of HDI among the selected countries. India with HDI value 0.64 falls in the medium human development category and the value increased from 0.57 to 0.66 during 2010-2021. The performance with respect to HDI indicated a bleak picture in case of African countries i.e., Uganda, Nigeria and Ethiopia. High incidence of poverty, corruption, lack of basic infrastructure, unemployment and political instability can be held responsible (Kutor,2014). However, the interesting fact is that Ethiopia, a worst performer has seen the largest jump in the HDI value among the selected countries during these ten years. Table no.2: HDI and IHDI of selected countries
Nonetheless, if
we look at the Inequality-adjusted Human Development Index in the table no.2,
every country has experienced a loss in the value of HDI after the
consideration of inequality. So, it is evident from the aforementioned values
that there is decline in the values of indicators of HDI due to the prevalence
of unequal distribution. Sweden and UK with very high level of human
development have moderate losses. The overall loss of human development in
terms of inequality is the highest in Nigeria followed by Ethiopia, Uganda,
India and Brazil. The gap between HDI and IHDI values is high in Brazil,
Nigeria, Pakistan and India. As compared to neighbouring countries, India has glimpsed
more difference between the HDI and IHDI. Again, African countries have lesser
value of IHDI because of the higher incidence of poverty and massive wage gaps. To further
explore the extent of income inequality, the relationship of income inequality with
HDI growth rate is investigated by taking Gini coefficient of these selected
countries. Gini measures how equitably a resource is distributed in a population and
it ranges between zero and one (Farris, 2010). Gini coefficient of zero shows
perfect equality whereas one shows perfect inequality. HDI growth rate shows
variations in HDI during last ten years. The bar in the figure one shows upward
trend of HDI growth rate from US to Ethiopia. The HDI value of US and UK is
already high which results in the less growth of HDI. Figure 1 also reveals
that Brazil lies at the top of the graph showing the highest level of income
inequality during 2010-2019. High rate of unemployment, increasing income gap
between skilled workers and unskilled workers, small number of large landowners
in the rural areas and urban segregation makes the distribution precarious
(Skidmore, 2004; Beghin, 2008). The larger share of growth acquired by
capitalists in India made Gini coefficient stood at 37.8 in this time-period.
Sweden has the lowest Gini coefficient; while, US has the highest Gini among
the developed nations because of the rollback of taxes at the top and reduction
in social programs after Reagan revolution (Stiglitz, 2013). Equality vs
Exclusion
The growing
level of inequality is changing the dynamics of the society in terms of
exclusion. The divergence in the level of income inequality is clearly visible
in the table no. 3 showing the income share of top 10 per cent and poorest 40
per cent. Those at the top continued to accumulate an extensive share of income
and have complete control over the country’s irrespective economy and politics.
The rise in the share of top 10 per cent incomes has taken place at different
pace across countries since 1980s. Despite of the fact that Brazil has been
enjoying the status of high human development and having upper middle income
with only 4.2 per cent people living below poverty line, but it has an enormous
and persistent level of income inequality during the last few decades. The top
10 per cent owned more than the half of the income. Large concentration of
profits and capital incomes has expanded the gap between rich and poor in the
country. Also, Brazil has suffered a strong recession during 2014-16. India
followed by Brazil has also seen an upsurge with top 10 per cent owning 31.5
per cent share of income in 1980 to 56.13 per cent in 2019. The hike in India
is unendurable. De-regulation and liberalisation policies lead India towards
the egregious level of inequalities. The number of billionaires has been
increased from 9 in 2000 to 119 in 2019 in India (Oxfam Inequality
Report,2019). On the other hand, the
bottom 40 per cent have been suffering in the wake of emerging affluent
society. Table no.2: Share of top 10 per
cent and Bottom 40 per cent in the income distribution.
Source- WID
(2020), https://wid.world/ The top 10 per
cent are getting five times more than bottom 40 per cent in Brazil and three
times more in UK, India and Uganda. The share of top 10 per cent in Sri Lanka,
Bangladesh and Pakistan has remained stable.
The inequality levels have also been illustrated in terms of income
quintile ratio in the figure 2 and these fluctuated around 5 per cent to 18 per
cent in the selected countries during 2000-2017. It shows immense levels of disparities
between top 20 per cent and bottom 20 per cent of the populace in Brazil, US
and Nigeria. The same figure also exhibits the percentage of people living
below poverty line based on PPP $1.90 per day. Global poverty rate has been
reduced during the last three decades and 1 billion people escaped poverty but
still one-tenth of the global population lives below poverty line (Mahembe
& Odhiambo, 2018). The regions with highest poverty rate are Nigeria
because of low income and low level of human development. The other regions
where prevalence of poverty is high are Ethiopia, Pakistan, Bangladesh and
India. So, it can be concluded that human development is high in the countries
where degree of inequality and poverty is low and vice-versa with Brazil an
exception.
Governance and public policies play bigger role in the evolvement of human development, poverty and inequality. Most of the public policies protect the interest of elites and public funds are more vested towards the interests of rich than the necessities like health and education. Taxation and spending policies are not more progressive. Only few countries are following the policies that reinforce the process of the eradication of poverty and more inclusive growth vigorously. Public policies can profoundly affect the level of economic structure of the economies in terms of income and human development. The countries enjoying the status of high income and very high human development have better education system and implemented various social security schemes to strengthen the system. Sweden where HDI is already very high, government introduced a long-term reform programme in 2016 to reduce segregation till 2025 which basically emphasise on housing, schooling, societal services and employment opportunities (Govt. of Sweden, 2016). Other than that, more equal access to education, increasing quality of compulsory education, progressive taxation and social security schemes made Sweden more egalitarian society. Even US was more egalitarian before 1970s because of increased access to higher education supported by GI Bill. But after Reagan Revolution, the market incomes started splitting up and government cut down the taxes at the top which led to increase in the share of income at the top. But still, it has lower level of inequalities than the other countries having low level of income and human development. While talking about Brazil, the government follows regressive taxation policy that spares large capital and put more burden on consumption and labour (Beghin,2008). The poor countries having low per capita income like Nigeria, Uganda and Ethiopia lack adequate revenue resources to build human capital and infrastructure to lift people out of poverty. India also lacks well-funded public health and education system. Indian government barely spends approximately 4 per cent of GDP on education and 1.5 per cent on health services. Whereas the government of China initiated various reforms to combat inequality like personal income tax reform, annual hikes in minimum wages and the Dibao system that provides relief assistance for extreme poverty (Chandra et. al 2018). Hence, the lack of pro-welfare public policies creates a predicament for the economically deprived groups in these countries. |
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Conclusion |
The economies have seen wrenching changes that provoked the
various kinds of inequalities in terms of income, human development and the
extent of poverty. These inequalities profoundly affect the economies by making
them politically and economically unstable. Withal, how the rising levels of
inequalities are affecting the level of human development is a matter of
concern. For this analysis, twelve countries representing various levels of
income and human development have been chosen. With the data at our disposal,
we found that Brazil has extreme level of inequalities because of regressive
nature of tax and insufficient living conditions in urban areas. Although the
country is having high level of human development. The selected developed
countries i.e., Sweden, US and UK are having high levels of human development
but IHDI reveals the existence of inequalities in the achievement of HDI in
these countries too. When the inequality factor in HDI is considered while
calculating HDI, these countries have bear losses in the value of HDI. The
overall losses are highest in Nigeria, Ethiopia followed by India and Brazil.
The loss between HDI and IHDI value is around 26 per cent in India which is
quite high. Furthermore, the indicators of human development and inequality
show harrowing plight of selected African countries. Uganda, Nigeria and
Ethiopia have low levels of human development and high levels of inequality.
Thus, the relationship between human development and inequality is quite
evident that prevalence of inequality leads to the reduction in the value of
HDI. Whatever may be the category, everywhere the income has been distributed
unevenly in the selected countries as the top 10 per cent continued to
accumulate ample share in income and the poorest 40 per cent is surviving on a
very small chunk. The major reasons behind growing unequal distribution are the
adoption of liberalisation policies without emphasising much on its adverse
impact on employment opportunities and assigning lesser importance to social security
schemes specially in middle-income and lower-income group countries. There
should be ample job opportunities and social security schemes to elevate the
lives of the impoverished in the various continents of the world. Therefore,
keeping in view the consequences of and reducing accentuating income
inequality, sound public policies like progressive taxation system, more and
equitable investment in education and developing skilled workforce should be
drafted and implemented. |
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References | 1. Alvaredo, Facundo, et al. "World Inequality Report.
World Inequality Lab." (2018). Retrieved from- https://www.politics-society.aau.dk/digitalAssets/684/684889_nr80_welfare-states-and-welfare-state-theory.pdf |