The Economic Theory on Poverty and Inequality - Research Paper Example

? Poverty economics of the of the Table of Contents Brief overview/synopsis of the issue 3 Economic theory or modelrelating to global poverty 4 Discussion on the economic theory on poverty and inequality 7 Critical analysis of the outcome presented in the article 8 References 10 Brief overview/synopsis of the issue The article that has been chosen for this paper is titled “Reason and the end of poverty” and is written by Chief Economist and Senior Vice President of the World Bank, Kaushik Basu. The central issue of this article highlights the fact that poverty is an evil that the global economy should fight against. Although the international economy is progressing (at a slow pace after the financial crisis of 2008), all layers of the society are not being entitled to the fruits of economic growth. The model of trickle-down effect of growth is found to be prevalent in practice in the real world. Under this model, the benefits of growth are mostly savored by the upper and middle classes of the society. The lower middle class and the grass root level receive very little benefits of this economic growth. This is due to the fact that there is serious problem of income inequality in most of the economies in the globe, particularly in the developing countries (Altmann et al., 2013). All the sectors in the developing economies are not equally developed and there is huge inequality in income in the countries. In the concerned article, the Chief economist of World Bank has mentioned that the Bank has placed two new objectives that it would strive to achieve. These two goals are “ending extreme and chronic poverty in the world by 2030, and promoting shared prosperity, defined in terms of progress of the poorest 40% of the population in each society” (Basu, 2013). The central question that has been addressed in this article is that, whether the good effects of positive growth in the economy would automatically trickle down to the lowest strata of the society and effectively reach all individuals equally, or policy makers need to devise methods in which the benefits might be redistributed. Economic theory or model relating to global poverty The world has been developing at a rapid pace since the mid 1990s. The factors that affect this growth rate are rapid technological development, improvement in productivity and the lowering in the number of people living below poverty across the world. During the 19th century and also in the first few decades of the 20th century, over 1.2 billion people in the world used to live below the poverty level (the poverty line is set at $1 per day). Currently, this percentage of population has fallen marginally. According to the theory of poverty line, the people living below poverty line have the purchasing power of less than $1 dollar per day. Additionally, it must be noted in this context that more than half of the population of the world lives below $2 dollars per day. The variables that measure poverty are under nutrition, poor health condition, poor level or absolutely no literacy, environmentally degraded and unhygienic living condition, low or no access to essential things in life (such as clean water) and lack of protection of fundamental freedoms or rights. Poor people all over the globe are characterized by the living condition in slum areas and under nourishment. Scholars and economists have univocally agreed that poverty is integrally linked with inequality in income distribution (Naranpanawa, Selvanathan & Bandara, 2013). One commonly used method of measuring the personal income statistics is the Lorenz curve. The Lorenz curve helps to analyze the percentage of income against the percentage of income recipients. The further the line is from the diagonal, the greater is the degree of inequality. The following diagram illustrates the workings of the Lorenz curve. Figure 1: Lorenz curve (Source: Anonymous, n.d.) The further the curve bends from the diagonal, the greater is the inequality in income level. The area between the two lines shows the measure inequality. This measure is reflected by the Gini coefficient. The Gini coefficient is a convenient measure of income inequality and is given by the “ratio of the area between the diagonal and the Lorenz curve divided by the total area of the half square in which the curve lies” (Anonymous, n.d., p. 199). The measure of total poverty gap presents a detailed picture of the condition of poverty in a country. Theoretically, two countries are considered, 50 percent of whose population lies below the poverty line. But income inequality in one country is greater than the income inequality in the other country. This is shown by the following diagram. Figure 2: Income inequality in two countries (Source: Anonymous, n.d.) This implies that the effect of economic growth in both the countries would not be the same in both the countries. The country in which income inequality is less would be benefitted more from a certain level of growth in the economy (apparently reflected by rise in gross domestic product (GDP)) than the country in which distribution of income is highly unequal. This shows that along with development, the richer segments of population would be better off while the poorer segment of population would be worse. The rich becomes richer at the cost of the poor. However, one factor remains unnoticed in this discussion. The discussion focuses in the income gap between the rich and the poor. But, inequality in income distribution is inclusive of the unequal level of income amongst the people who are recognized as poor. This is the theory of relative poverty. Income inequality among the poor is a critical factor in the understanding of poverty and its impact on the activities of the economy. In a similar way, the level of inequality of income among the people that live above the poverty line is also a concern for economists (Smith, 2010). There are several reasons that create this concern; extreme inequality in income distribution creates economic inefficiency, tends to lower the overall rate of savings in the economy and leads to inefficient allocation of assets. Secondly, under conditions of extreme inequality, social stability is disturbed when the overall income of a nation is concentrated in the hands of a few. It gives rise to political agitation. Finally, from ethical point of view, ethical inequality is considered as unfair. It is viewed to be as a social bad. Although there might be a group of population in the society that have a high income average in comparison to the global average of the income of the rich section of the population, the presence of a wide base of poor class diminishes the good effects of economic growth. Discussion on the economic theory on poverty and inequality Economic theory states that the development of the economy is a social process. While growth refers to the statistical rise in income depicted by inflated GDP, overall development of the economy depends on factors such as reduction in poverty level and lesser income inequality. These two factors would naturally lead to improvement in other factors, such as, primary education, nourishment, access to clean water and hygienic living conditions (Grusky, Kanbur, & Sen, A. K. (2006). Following economic theory on poverty and inequality it can be stated that the economic growth is the result of increased economically productive activities taking place in the economy. Such activities would be beneficial for the economy in the sense that the national income of the country would increase. With increase in national income, per capita income of the economy would also rise. However, in this regard, several scholars argue that with increase in total national income, the income of all individuals within the economy might not equally rise (Apergis, Dincer & Payne, 2011). While the income of the highest income group would increase the most, income earned by the people living close to the poverty level might reflect meager or no increase in income. Additionally, the developing economies face a serious social problem of unemployment. When there is a rise in income due to actual increase in productive activity within the economy, it leads to increase in employment opportunity. If the national income rises due to other factors, such as, increase in exports due to depreciation of exchange rate, lower interest rate or devaluation of domestic currency, this increase in national income is not the effect of increased economic activity within the economy or increased employment opportunity. Hence, although overall income in the country rises, all sections of population are not equally benefitted. This indicates a lack of economic development. Lack of economic development does not help an economy to reduce unemployment or alleviate poverty. According to the theory proposed by revered economist Amartya Sen, relative intensity of poverty is a serious issue in developing economies. This implies that not only people living below the poverty line require attention, but also, the section of population living above the poverty line deserves equal attention (Sen, 2008). There is spectacular gap in income distribution amongst this population group living above poverty line. While one section of population earns high income, another section of population earns very low income, in spite of the fact that both population groups live above poverty line. This phenomenon occurs due to income distribution imbalances. Critical analysis of the outcome presented in the article The issue presented in the article emphasizes on the fact that the government has to identify and consider loopholes in the economic system, which deserve intervention by the government. Under the effects of the financial crisis, most countries are facing an economic slowdown. In order to correct this economic condition, the level of aggregate demand has to be increased. This can be done by increasing per capita income of the population. However, Basu points out that most economies depend on general economic growth to improve the per capita income of all population groups within society. With the waves of globalization changing the pattern of growth in most economies, the private sector is gaining more importance than ever before. Government in many countries rely on the private sectors (increase in investments by the private sector would lead to increased employment opportunity) for growth in their own countries. Due to presence of moderate to extreme income imbalances in many developing countries, several leaks exist within their economic system, which does not allow the process of trickledown effect to take place effectively. However, according to the Chief economist of World Bank, governments should be upfront about the condition of the economy and take actions actively to improve the income generating sources for its citizens. In this article, the author has posed a question; “will the benefits of economic growth trickle down on their own, reaching all, or will we need targeted redistributive policies?” (Basu, 2013). It is highly debated whether government policies should be implemented in the market economies for achieving better income distribution. References Altmann, M., Eisenreich, S., Lehner, D., Moser, S., Neidl, T., Ruscher, V. & Vogeler, T. (2013). Global inequality and poverty in perspectives of geography. Multicultural Education & Technology Journal, 7 (2/3), 127 – 150. Anonymous. (n.d.). Poverty, inequality and development. Retrieved from http://pagesperso.dial.prd.fr/dial_pagesperso/dial_chauvet/PagePerso/courses/DevelopmentEconomics/Lecture4_required_readings.pdf . Apergis, N., Dincer, O. & Payne, J. E. (2011). On the dynamics of poverty and income inequality in US states. Journal of Economic Studies, 38 (2), 132 – 143. Basu, K. (2013). Reason and the end of poverty. Retrieved from http://www.bdlive.co.za/opinion/bdalpha/2013/10/30/reason-and-the-end-of-poverty . Grusky, D. B., Kanbur, S. M. R. & Sen, A. K. (2006). Poverty and Inequality. Stanford: Stanford University Press. Naranpanawa, S., Selvanathan, S. & Bandara, J. (2013). Empirical income distributions: The case of Sri Lanka. International Journal of Social Economics, 40 (1), pp. 26 – 50. Sen, A. (2008). Violence, identity and poverty. Journal of Peace Research, 45 (January), 1 5-15. Smith, N. (2010). Economic inequality and poverty: Where do we go from here? International Journal of Sociology and Social Policy, 30 (3/4), 127 – 139. Read More