Lorenz Curve Analysis - Term Paper Example

Part Lorenz Curve Analysis By the analysis of Lorenz curve, the distribution of wealth (income or any other related factors) in a particular society is determined. Varied opinions are there regarding the significance of unequal distribution of wealth and income which tends to differ in many ways. But the importance lies in the context that whether the present scenario of a particular society is moving towards or away from the existing distributional pattern. The relationship structure of a community can be diversified. Different countries passing through the same phase or an individual nation passing through different phases must possess some explicable characteristics such that it can be analyzed by statistical, logical and mathematical measures. The two extremes in regard to the wealth distributional features of a society may be perfect equality (the income or wealth is homogeneously distributed all across the community) and perfect inequality (it is completely sporadic in nature and all the amount of wealth is concentrated on a single hand, or an individual ownership structure). So there must be some definite methodologies that need to be followed in order to derive clearer picture of a particular societal framework, in the respect of the wealth or income distributional balance or imbalances, which intrinsically determines the community’s potentially beneficial or detrimental productivity structure. (Lorenz, 1905) For this purpose, Lorenz curve analysis can turn out to be a viable instrument. Given below, a graph is constructed from a set of data that was taken from World Bank (2000) Mexico Earnings Inequality after Mexico’s Economic and Educational Reforms, vol. 1, World Bank Report No. 19945-ME. This is based on the cumulative income share (household per capita income). It is the representation of the proportionality of the income/wealth with the percentile income population. There is line mentioned as the Line of Perfect Equality, which shows the optimum income distribution across the entire population. This means it is a linear relationship depicting each individual sharing equal proportional value. Any deviation from this line indicates the extent of inequality the community is suffering from and provides us with some ideas regarding the societal bias. Figure 1 In the figure above we see that the income or wealth inequality is substantially large with the Gini index of 0.473 for the year 1984 and 0.519 for the year 1996. More than 55 percentile of the total population owns only 20 percentile of the total wealth as depicted in this figure of Lorenz curve analysis. Figure 2 In this diagram, the Lorenz curve for the income groups above 90 percentile is being disintegrated. It can be observed that 60 percentile of the wealth is being appropriated by the top 10 percentile of the income population. This trend shows a gradual increment as we move towards the higher end and then lastly there is a steep rise denoting more than 20 percentile of the total wealth is appropriated by only 2 percentile of the income population. From both the figures, there is adequate information, which suggests that the situation has worsened from 1984 to 1996. The Gini index in the year 1996 brings out the fact that the gap of income inequality has widened over all these years and trends of both the Lorenz curves indicate the wealth distribution pattern remained similarly sporadic and biased through this span of 12 years. The income share as shown in figure 1 implies widespread impoverished societal structure of 1984 and prevailing over the successive years which eventually deteriorated furthermore when in 1996, the rift was stronger. The open trade policies adopted by the country during this span only accentuated the problem of inequality of wealth. Free trade policies effectively, as seen here, could not provide the nation with a proper poverty alleviation aspect. Instead situations started degenerating following up the policy decisions adopted by the government of the concerned nation. Part 2 Trade Liberalization And Income Inequality Proper researches and explorations digging deep into the critical understanding of the various embittered debates related to international trade policies and globalization elicit some key facts depicting the ever increasing arroyo between the theories followed by the advocates and the deterrents of international relations and trade at variance. The distributional pattern of immense amount wealth generated through free trade activities resulting in the biased concentration and mostly regarded as unfair allocation arising out of personal interest gains by applying manipulated trade policies and negotiation, shaping the global regime. There three vital aspects having reservations about the structural foundation of the trade policy decisions and the related activities. The first is the potential and true benefits that can be achieved through international trade, which aids to the conditions of the citizens of the two nations getting involved into the agreement. There are definite reasons in support to the free trade movements creating potentially large economic benefits, in the form of rise in the income levels, availability of diverse commodity or product range at competitive pricing structure, access to various assorted goods and services for consumption purpose globally. The negativity lies as with its advent, the environmental damage issue also supplements and incurs economic costs to the society. Thus the “gains from trade” is major concern in this context. Secondly, the issue arises as regarding the distributional pattern of the “gains from trade”. The inner concept lies in the actual channelization of wealth. The question arises as in who gains and who loses. By the international trade policy interventions, the economic ventures in this respect causes in unequal allocation of the gains and inappropriate distribution of the same. Thirdly and last but not the least comes the perception and realization of the effects of the trade policies, specifically emerging out of the trade liberalization process. Particularly focusing on the scale and distributional aspect from the free trade policies, proper assessment and analysis is done order to understand the effects trade interventions. Now by considering the individual queries as stated above, trade and wealth scenario mixes well together and can take a particular economy forward which is engaging itself in international trade in a quantitative sense. As we peer into the empirical data sources, striking facts reveal themselves promoting the aspect of further research. The industrial nations composing North America, Europe, Japan and Australasia dominates the world trade and can extract the maximum possible gains from the free trade movements across the globe. (World Bank, 2000a) Approximately three quarters of the total world commodity trade originates from the high income generating nations and only 7% of the world trade is between the middle and low-income nations. The most striking aspect here is that these affluent countries only constitute 15.6% of the world population (in 2001). It is not that they export more than the low-income countries (in fact their exports constitutes 22% whereas for the Less Developed Countries, it is 27% of their total output), but the dominance surfaces out of the high per capita income levels of the developed nation which is about 23 times the average earnings of the citizens residing in the other parts of the globe. (World Bank, 2002b) However the domination of exports and imports by the rich countries is not a static feature. There are instances of many smaller economies that have gained substantially through “export-led growth” and have grown much faster than their counterparts. The building up of the export levels and its rapidly rising stimulation on the income was a result of their successful participation in the international free trade after 1950s. Now obtaining actual benefits from the free trade is a matter of serious concern. The increased trade movements by the export of a significant amount of the total production output as followed by many of the high growing LDCs does not necessarily suggest that they actually reaped the gains in terms of reduction of domestic poverty levels. On the contrary, it never happened as in the unfortunate cases of the sub-Saharan countries in Africa. (Bromley, Mackintosh, Brown & Wuyts, 2004, p. 33-36) The World Trade Organization (WTO) has been created to supervise and liberalize international trade. The rules set by the WTO basically promote the free trade policies as in favor of the industrialized nations. The Terms of Trade (TOT) regulatory power eventually grabbed by the Developed Nations building up in a synchronized manner normally as an upshot in the free trade process. The prices altogether are reduced to a certain level generating the demand aspired for, and paving forward to successfully achieve the objective of global economic growth. On the other hand, the detractors of this notion bring out some of the major loopholes as critically researched and delineated by the “Prebisch-Singer Thesis”. By this theory, as it had been argued, the free trade policies ultimately lead to the rising gap in the income inequality and creation of veritable chasm between the Developed nations and developing ones, as well as societal fragmentations emerging out of the inequality in wage structure with proportion of wealth appropriation sporadically and impoverishment which is extremely detrimental from the latter’s perspective (Toye, 2003). The economic interrelations between the income inequality, poverty and trade liberalization are quite variegated in terms of opinions and now let us look into the matter from the Latin American context, specifically Mexico which is a country belonging to the middle-income group. The normal arguments, in against the safeguard of the sectoral interests that was undertaken by many LDC governments, always favored the policy of raising all the free trade barriers hindering the flow. But it became quite evident that both free international trade and the degradation of the poverty structure of the concerned nation were taking place simultaneously during the 1980s. There was profound expansion in the manufacturing industrial sector and voluminous imports of labor intensive manufacturers. But the unskilled laborers were losing their jobs and there was significant rise in the unemployment level. The most popularly postulated version of international trade is the theory of Comparative Advantage which states that the countries will indulge themselves into trade depending on their factor endowments. The advantage lies in the fact that with the expansion of trade, the abundantly endowed factor—in this case skilled labor gains and the relatively sparse factor—the unskilled laborforce loses. This was the exact situation that the nation was suffering from. The rise in demand for the skilled workers and declining employment level of the unskilled ones was facilitating the gap which already had started widening. The Mexican workers suffered competition especially from China with the opening up of the world market. The particular countries which are endowed with abundant unskilled labor force raised the supply side of the world market as a result of which the wage level fell for the domestic unskilled workers and there was widening of the wage band denoting rising of the wage income inequality and distribution structure. The empirical surveys conducted on the income & expenditure levels of Mexico brings out the figures like from 1984-89, the Gini coefficient increased from 0.47 to 0.55. It declined a bit after 1989, but shortly after a huge financial crisis in 1994, it again soared to 0.57 from 0.52 in 1994. After 2000, it showed a decreasing trend anyway. But if the whole period right from 1984 to 2000 is considered, it can be seen that there was a general rising trend of the inequality distribution of the wage income levels along with the fluctuations. During the period there had been an increase of 6.5 million people. This can be also viewed as the general case of population rise but the share of the poor, although marginal, decreased 4.3% of the population (Roa, Economic Integration, Wages and Inequality (Audio)). There can be several other factors related such as the demographic transitional stage of Mexico with high birth rate leading to the abrupt rise in the level of population and consequently aiding to the unemployment level and income inequality. Again this was coupled with low growth rate prevailing in the economy during the 1980s which also played a key role in this regard. The Gini coefficient as we see from above renders the idea that there is prevalence of a decently high rate of income inequality. The general relationship of GINI coefficient with the GDP that can be perceived is that the poorer countries tend to have a higher Gini coefficient than the developed ones which is quite obvious from the aspect of income inequality. From the available data shows that Brazil and Mexico were the nations with the highest Gini coefficient values since the World War II. Gradually Mexico managed to drive down the inequality level but it was only after 2000. But Brazil’s graph shows a too much fluctuations ultimately moving towards a steadily rising trend since the 1990s. Although it cannot capture the true socio-economic structure if there is dominance of a sizeable underground economy, still a rough idea can be provided by the Gini coefficient in respect of the economy, the community and the trend of the societal income arrangements. Similar trends can be noticed in most of the Latin American nations like Argentina, Peru, Columbia etc. with Gini index varying from 0.5 to 0.6 and above portraying the overall impoverished socio-economical base and vastly unequal income framework. (UN Development Report 2007/2008) References: 1. Bromley, S., Mackintosh, M., Brown, W. & Wuyts, M., 2004, Making the International: Economic Interdependence and Political Order, Pluto Press. 2. Lorenz, M.O., 1905, Methods of Measuring the Concentration of Wealth, American Statistical Organization, New Series No. 70. 3. Roa, J.V., Economic Integration, Wages and Inequality (Audio) 4. Toye, R., 2003, The Origins and Interpretation of the Prebisch-Singer Thesis History of Political Economy - Volume 35, Number 3, Duke University Press. 5. UN Development Report 2007/2008, available at: http://hdrstats.undp.org/indicators/147.html, accessed on 9th April 2009. 6. World Bank, 2000, Mexico Earnings Inequality after Mexico’s Economic and Educational Reforms, vol. 1, World Bank Report No. 19945-ME, available at: http://www-wds.worldbank.org/external/default/main?pagePK=64193027 Read More