The Nature and Extent of Regional Inequalities in Income - Essay Example

Order 152263 Topic: Regional inequalities in income and opportunity are developing in such a way that the gap emerging between rich and poor regions could threaten Russias integrity. Examine the nature and extent of these inequalities and consider the implications for Russias future. Introduction: This paper seeks to examine the nature and extent of regional inequalities in income and opportunity in Russia that are developing in such a way that the gap emerging between rich and poor regions could threaten its integrity. The paper will also consider the implications of these inequalities for Russias future. What are regional inequalities in income and opportunity and how are they expressed? Regional inequalities in income and opportunity refer to inequalities that make the gap between the rich and poor that could threaten Russia’s integrity. For the inequality to make to threaten Russia’s integrity, it must be defined as that will merit political or social action on the part of the Russian government. To undertand that extent of this inequality, there must be a way of measuring the same. A way to do it is the Gini coefficient, which a measure of inequality of a distribution. Italian statistician Corrado Gini developed this Gini coefficient and published the same in his 1912 paper "Variability and Mutability". The term is a ratio with values between 0 and 1: where the numerator is the area between the Lorenz curve of the distribution and the uniform (perfect) distribution line and the denominator is the area under the uniform distribution line. The Gini index then is the Gini coefficient that is converted as a percentage, by multiplying it by 100. The Gini coefficient is used to measure income inequality, where 0 corresponds to perfect income equality and 1 corresponds to perfect income inequality (Wikipedia, 2007) (Paraphrasing made). The coefficient could be used to measure both inequality of income and opportunity. Inequality in income could be easily understood to refer to per capita income but inequality of opportunity must be defined clearly. Mitra, P. and Yemtsov, R. (2006) distinguished equality of opportunity and equality of outcomes as follows: “The World Development Report (2006) makes a persuasive case for policies that promote equality of opportunity, defined as opportunities to pursue a life of an individual’s choosing and be spared from extreme deprivation in outcomes. However, it cites the examples of decollectivization of agriculture in China in the late 1970s and wage decompression in Central and Eastern Europe following the onset of transition in those countries as cases where a history of repressed inequality precludes using the resulting inequality of outcomes to infer inequality of opportunities. Indeed, since income differences provide incentives to invest in education, to work and to take risks, any policy that is cognizant of tradeoffs between efficiency and equity will result in inequality of outcomes.” Are regional inequalities in income and opportunity developing in such a way that the gap emerging between rich and poor regions could threaten Russias integrity? We will first answer the first half of the question on whether regional inequalities in income and opportunity developing in Russia. As to whether the development is in such a way that the gap emerging between rich and poor regions could threaten Russia’s integrity, will be answered after establishing the first. As to the first half of the question, there is evidence to say that regional inequalities in income and opportunity are developing as seen in the measure Gini coefficient for Russia. World Bank (2005) stated that in 1999, it was estimated that four out of ten people were living in poverty and that poverty levels peaked in 1999, as the transition recession and the 1998 financial crisis caused incomes to collapse and inequality to increase. It reported that inequality increased between 1997 and 1998, but then declined somewhat over the subsequent period. Using Gini coefficient in consumption as the measure most used for international comparisons of inequality; World Bank (2005) found the coefficient to have increased from 37.0 percent in 1997 to 39.2 percent in 1998, before declining to 36.8 percent in 2002. It mentioned also that that inequality in expenditure, incomes, or assets is higher than that consumption inequality (Paraphrasing made). Proceeding now to the second half of the question on whether it could threaten Russia’ integrity, the answer would depend on the determination of the extent of the inequalities. World Bank (2005) clearly acknowledged that Russia is already at the high end of inequality among the CIS countries, even if its inequality is still moderate by broader international standards. It cited that in 2002, the Gini index of inequality in Russia was 36.8 percent for consumption and 40 percent for expenditure. The reality of extent of these inequalities is further discussed and explained in the next section. What is nature and extent of inequalities and what are the implications of same for Russia’s future? Regional inequalities in income and opportunity do exist in Russia. Mitra and Yemtsov (2006) confirmed the same by stating that regional differences in socioeconomic conditions and living standards are very large. They cited that Gross Regional Product (GRP) per capita in the richest region is 67 times that of the poorest region in nominal terms and 33 times in real terms, when regional price differences are accounted for. The authors added that real consumption per capita in 2002 in the richest region was three times that in the poorest region. They also found the poorest regions to include some regions in the North Caucasus, South Siberia, and Central Russia and that the richest regions included resource-rich regions in Siberia, the Far East, and the European North, and also Moscow City (Paraphrasing made). Mitra and Yemtsov (2006) continued, “Within-region inequality accounts for most of the inequality in Russia. About 10 percent of aggregate inequality in consumption in the Russian Federation can be attributed to inter-regional inequality, while the remaining 90 percent is due to within-region inequality.” As to the implication of this reality, there is basis to agree with the implication that federal policies should encourage regions to monitor and develop policies to keep the within-region inequality in check. Nevertheless, since as argued the same authors that given the relatively large differences in socioeconomic conditions, it is important to continue to continuously monitor and address regional differences, as needed (Paraphrasing made) In the same study, Mitra and Yemtsov (2006) also found large regional differences in the incidence of poverty, with differences varying in 2002 between 3.1 percent and 55.6 percent. The authors noted that while some of these differences are attributed to different characteristics of the regions in terms of urbanization, education, and employment, large regional differences continue even when these characteristics are accounted for. They found that persons with the same characteristics are three times more likely to be poor in the Dagestan oblast or in Tuva Republic compared with persons in the rich Tumen oblast or in Moscow City (Paraphrasing made). Mitra and Yemtsov (2006) further found that most of the poor live in regions, whose GRP (Gross Regional Product) is close to the national average, despite the large regional differences in poverty. They also observed that the poorest regions have a small population, and thus they have only a small fraction of the total number of poor people. Hence, there is also basis to agree with their implication that growth policies for the “average” regions in Russia would reach the majority among Russia’s poor. Nevertheless, they warned that these policies, however, would not necessarily address the special needs of those deep pockets with the highest incidence of poverty, which must be targeted with policies and interventions that take into account the profile of the poor in the poverty-stricken regions (Mitra and Yemtsov, 2006). It could be said that the higher the extent of the inequalities the higher is the disparity of the rich and the poor. As to the possible consequences of inequalities to the economic growth (Samuelson and Nordhaus, 1992), there are two views about it. The first view as told by Todaro (1994) is a large body of theory, which posits that highly unequal distributions are necessary conditions for generating rapid growth (Galenson, and Leibenstein, 1955). This is under the basic argument was that high personal and corporate incomes were necessary conditions to savings, which made possible investment and economic growth through mechanisms such as the Harrod-Domar Model. On the other hand, Todaro (1994) presented also the second where the arguments greater equality may be in fact a condition for self- sustaining economic growth as follows: First, it is explained that common sense, supported by wealth of recent empirical data, proves the fact that savings from the rich as a result of the inequality in the income, such savings and investments do not necessarily add to the nations useful resources and these could even turn out as extensive drains on these resources since the rich do not necessarily save and invest a significantly larger a proportions of their income than the poor (Ranis, 1962) (Paraphrasing made). Second, it is posited that the low incomes and low levels of living for the poor which are manifested in poor health, nutrition, and education, can lower economic productivity and income of the economy as a whole (Griffin, K.,1974) (Paraphrasing made). The third argument is that raising the income levels of the poor can cause rouse an overall increase in the demand for locally produced necessity products like food and clothing, where as the rich tend to depend more of their additional income on imported luxury goods (Todaro,1994) (Paraphrasing made). The final argument was that a more fair distribution of income (or less inequality in income) achieved through reduction of mass poverty, by performing the role as powerful material and psychological incentive to widespread public participation in the development process, can arouse healthy economic expansion. Arguing on the opposite side would mean that wide income disparities and substantial absolute poverty can assume the role of a powerful material and psychological disincentives to economic progress. The worse that could happen is that they may even create the conditions for an ultimate rejection of progress by the masses frustrated and politically explosive people, especially those with considerable educational (Todaro, 1994) (Paraphrasing made). In this paper, we will take the second view that inequality is not inconsistent with growth that we argue for the reduction or elimination of inequality. This is of course based on the premise that governments are supposed to provide the framework on how to make the lives of its citizens better. Failure to address one of the roots of discontentment and poverty could bring the people to reject the present system, they would demand for a better form of government, and hence people would always be restless for change until they get what they really need and want. Knowing therefore the root causes of the inequality should guide economic policy makers in addressing the issue. In relation to this, World Bank (2005) found that low wages and low productivity are a major cause of poverty and that a high share of workers with wages below the official poverty line are concentrated in agriculture, education, culture, health, and other public services. Workers in these sectors are vulnerable to poverty. World Bank (2005) further found that inequality aggravates poverty. Thus, it explained that the transition has been accompanied by increasing inequality in asset ownership and in returns to education, generating increasing levels of consumption and income inequality, contributing to poverty, and weakening the poverty-reducing impact of growth. It also found that Russia is at the high end of inequality within the CIS countries, though its inequality is moderate by broader international standards. International comparison is usually carried out for the Gini index of inequality in consumption or income (Paraphrasing made). Using the still the second view to pursue our argument, the Russian government must eliminate the inequality in income and opportunity as it attains economic growth. As inequality drives poverty and since the government addresses poverty, the extent of inequalities in income deserved more attention for the poor. World Bank (2005) sounds agreeing when it posited that a proper balance between universal and region-specific policies is required. It added that the similarities in the poverty profile across regions mean that common policies targeted to certain common characteristics (i.e., child allowances) would reach the poor across the whole spectrum of regions while certain groups of poor require region-specific policies. Noting particular about the concentration of poor in rural areas in the poorest regions, it suggested that plans to promote rural growth, development of backward areas, and increase incomes of the rural population in the poorest regions would be the most appropriate way to help to target the poorest (Paraphrasing made). The extent of inequality will also be determinant in the process in improving the performance of social policies. World Bank (2005) stated that strategies aimed at broad-based and sustainable growth, as well as policies that are sensitive to both where the poor live and who they are, are important elements of a poverty reduction strategy and that the improvement in the government delivery of social services in the sectors that directly affect the poor is the third important element of a poverty reduction strategy (Paraphrasing made). The four reasons for the importance of addressing the social policies as a key element in a poverty reduction strategy as cited by Word bank (2005) include the following: First, it is important to increase the poverty reduction impact of scarce public funds and to improve the targeting of social assistance. Second, it is important to develop policies that protect the poor from the adverse consequences of important reform initiatives, such as increasing the cost recovery in the housing and communal services sector or gaining accession to the WTO. Third, while overall consumption inequality has not increased recently, underlying forces in the form of the increased disparity in enrolment in non-compulsory education and the inequality in access to quality education are increasingly differentiated by income group, with negative consequences over the long term for the economic mobility of the poor. Fourth, the positive developments of GDP growth and the deep reduction in consumption poverty have been accompanied by some negative and critical developments in some non-income dimensions, such as the increasing inequities in health status and the increasing incidence of HIV/AIDS among the young and potentially productive workforce. It must be made clear however and in whatever direction Russia plans to choose, it must consider inequality reduction in its economic plans. World Back (2005) confirmed that Russia’s transition has been accompanied by increasing inequality in asset ownership and returns to education, generating increasing levels of consumption and income inequality. It added that Russia is at the at the high end of inequality among the CIS countries, even if its inequality is still moderate by broader international standards so that for Russia to achieve a sustained growth rate of 5 percent in consumption, World Bank suggested that GDP would have to increase at a higher rate than 5 percent (Paraphrasing made). Conclusion: There have been regional inequalities in income and opportunity in 1999 and earlier that may have developed in such a way that the gap emerging between rich and poor regions could have actually threatened Russias integrity. But the inequalities were now reduced considerably after 1999 as poverty reduction strategies were adopted and implemented by Russia. Mitra, P. and Yemtsov, R. (2006) agreed with they concluded that by the early 2000s, the transition countries of Eastern Europe and the former Soviet Union exhibited the full spectrum of inequality outcomes, from fairly unequal to fairly equal. There are still an existing inequalities of income and opportunity but is present extent may no longer posed a big threat to Russia’s integrity to deny the country’s capacity for economic growth in Russia’s future but it existence may still limit the country’s plan for higher growth and poverty reduction. References: Galenson and Leibenstein (1955), “Investment Criteria, productivity, and economic development”, Quarterly Journal of Economics, pp 34-370 Griffin, K. (1974) “Rural Development: The Policy Options.” Employment in Developing nations ,Columbia Press, New York, USA, pp. 190-191 Mitra, P. and Yemtsov, R. (2006) Increasing Inequality in Transition Economies: Is There More to Come?,World Bank {www document} URL http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2006/09/14/000160016_20060914143004/Rendered/PDF/wps4007.pdf, Accessed February 9,2007 Ranis, G. (1962), “Investment Criteria, productivity, and economic development: An Empirical Comment” Quarterly Journal of Economics (May 1962). Samuelson and Nordhaus (1992) Economics, McGraw-Hill, Inc. London, UK Todaro, M. (1994), Economic Development, Fifth Edition, Longman Publishing, New York, USA Wikipedia, 2007, Gini Coefficient {www document} URL, http://en.wikipedia.org/wiki/Gini_coefficient, Accessed February 8,2007 World Bank (2005) Russian Federation: Reducing Poverty through Growth and Social Policy Reform {www document} URL http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2005/03/17/000012009_20050317113145/Rendered/PDF/289230RU.pdf , Accessed February 9, 2007 Read More