Economic Inequality in the Modern World - Essay Example

Development Economics What does available evidence suggest about the links between economic growth and income inequality in developing countriesInequality is one of the foremost issues in developing countries today. It may be seen that income inequality in particular, is a cause of great concern in these countries. Inequality may be defined as the lack of proportion in distribution of wealth and resources. (Sen, 1992) This may be demonstration in the form of the equation below: Often => Economic inequality = wealth/income disparity (Sen, 1992) Income inequality and economic growth are related in developing countries. This is owing to the fact that disproportionate income distribution leads to retarded economic growth in countries that are not fully developed. This takes place due to a variety of factors. The basic premises followed in the study of the link between economic growth and income inequality in developing countries are as follows: Resources are scarce Scarce resources must be put to optimum use to produce those goods or those combination of goods that attract maximum revenue and least effort (Bardhan, 1996) One of the basic problems in adhering to these premises is the problem of over population in developing countries. Over population has led to a state where any amount of resources is considered scarce. When the domestic demand is not met, there is little scope to export any produce. The lack of exports leads to a deficit in direct foreign investments which is the key towards the achieving the following: Earning greater revenues through foreign exchange Avoiding inflation Creating greater employment opportunities As it may be seen above, the problem of over population brings the problem of lack of employment opportunities. There are too many people to fill a job vacancy. The ratio of human resource availability to actual vacancies is disproportionate. Thus, there is a disparity in incomes which has a direct effect on resources. Resources become scarce when there are too many people demanding it. With too much of demand, any resource becomes over priced. This leads to a situation where people end up spending most of their income on the procurement of basic necessities and finally, frequent cases of inflation. This has a direct bearing on the progression of economic growth. (Bardhan, 1996) In the case of India, one may find that over population as led to such problems. Agriculture is the predominant economic sector in the country, yet it has to import wheat to feed its domestic demand; let alone having enough to export. This has led to an imbalance in the import export scenario which has led to a slow rate of economic growth. (Bardhan, 1996) 2. a) How else can poverty levels be reduced Poverty refers to deprivation in spheres like food, education, shelter, health care systems, basic human rights and many more. Under developed and developing countries face this problem. The ways in which poverty can be reduced are as follows: Faster rate of Economic growth: accelerated economic growth through better use of fiscal mechanisms and the overall production process is the basic key. Increase in propensity to save: the propensity to save must be encouraged through incentives and other mechanisms that will give faster and bigger benefits. Optimum Utilization of resources: putting resources to use for production of those goods that most beneficial revenue wise will help reduce poverty. Creating of more employment opportunities: The employment pool needs to be expanded through more opportunities to earn a living will reduce poverty. Increased rate of direct foreign investment: increased exports and reduced imports will create a better balance of payment for more equitable income distribution. Avoiding the chronic poverty trap: the poverty trap is a chronic problem with those who have no inclination to save. More welfare programs and incentives: better welfare programs and drives must be organized especially through privately owned NGOs. Avoiding Inflation through better fiscal and regulatory mechanisms: these tools must be used to regulate the flow and circulation of money so as to reduce income disparities. Balance between public and private sector production: The resources must be spread more equitably in the public and private sectors so as to create a better platform for accelerated economic growth. Population Control: controlling the population is a major way in which poverty can be reduced. (Bardhan, 1996) 2. b) Leakages from transfer programmes to non-target groups are often considerable. Using a model of incentive arguments due to Besley and Coate (1992), illustrate the behavioural response and the associated issue of self-targeting. The problem of transfers not reaching the target groups and instead taking a diversion in the form of leakages to land in the hands of the non target groups is a common problem and a challenge faced by governments and non profit organisations. This begins in the political lobbies when subsidies reach the non target groups instead of reaching the vulnerable groups first. This may be attributed to the fact that in most developing countries, there is a strong affiliation between political parties as well as pressure and interest groups. Also, in such countries, the black market for any kind of product emerges before the actual product reaches the market. This is done through gaining those transfers that are meant for vulnerable groups. By procuring products at subsidised rates, people are able to sell the same in the black market at a little higher rate. Thus, there is a basic deprivation of consumption in these countries due to leakages in transfers. (Bardhan, 1996) In context of this issue, Beasley and Coate (1992) have come up with an incentives model for the illustration of behavioural responses to the issue of self targeting. This model basically consists of two separate arguments that go under "screening" and "deterrent". Both the arguments have been presents as instruments that can encourage poverty reduction investments in developing countries. (Beasley and Coate, 1992) These two arguments are based on garnering appropriate incentives through a self targeting plan for developing countries. To be more precise, since the poor relief cannot reach the truly need groups in developing countries due to lack of highly evolved administrative machinery, the relief system has been formulated along the lines of self targeting so as to fulfil the following factors: (Beasley and Coate, 1992) Presentation of self through statement of work requirement Screening requirements through a study of alternative economic opportunities Through these two factors, the screening argument comes into play. One it has been satisfied, the deterrent argument emerges in order to focus on the origins of poverty and help the person in question avoid the chronic poverty trap. Therefore, through this model, Beasley and Coate have focussed on measures for poverty alleviation rather than increased welfare options. This model prompts questions and solutions through the two distinct arguments through the behavioural response in the issue of self targeting. (Beasley and Cotae, 1992) Outline the fundamental debates in poverty measurement. One of the most basic and fundamental debates in poverty measurement is that of adequately armed administrative machinery. In developing countries where there are few resources to simply feed the poor, there are even fewer resources to create and maintain adequate administrative machinery that can collect data at the rural and urban level, as well as translate the same effectively into a study of the target groups. Then there is the question of arriving upon a decision regarding the measure of welfare which must be in a unified monetary unit. Further, in most developing countries, the poverty line is not properly defined and outdated in most cases as there is lack of administrative machinery to cater to updates on census and other such reports. On the basis of data that is not valid or reliable, it is difficult to construct an aggregate measure of poverty. An important debate in poverty measurement includes income v/s total expenditure. This is a measure that cannot be accurately followed in developing countries as most people are in rural areas where accounting systems are unheard of. Further, there is the problem of adjustment of household composition and cost of living expenses. Another debate is the recognition of individual and household poverty which in most cases gives an awry picture regarding the entire household and thus does not hold good for the household composition or cost of living expenses. Also, actual poverty v/s potential poverty and temporary poverty v/s chronic poverty are factors that need to be recognised through the comparison of past records through proper administrative machinery so as to depict an accurate measurement of real poverty. (Ravallion, 1996) 3. a) What are the main causes of population growth in developing countries and how can fertility best be controlled What are the economic consequences of rapid population growth in developing countries Are control policies justified Population growth has reached explosive rates in the past century. This started in 1800 when global population sizes rose by a factor of six. This figure is projected to rise to a factor of ten by the year 2100. The basic causes of population growth are a decrease in mortality rates, increase in fertility rates and various socio economic and socio cultural factors. (Lee, 2003) To begin with, mortality rates have decreased with an increase in life expectancy rates. This has been fuelled by widespread advancement in medical sciences and technology in general. In most of the developing countries, the trend of declining mortality rates took over during the early twentieth century, and this trend gained speed after the World War II. Increase in nutrition as well as a complementary increase in quarantine measures for curbing diseases has accelerated the decline of mortality rates. Further, these advancements have showed an increase in fertility rates around the world. Rising incomes in many rich countries of the world have helped focus on consumption outside necessities. (Lee, 2003) The scope of having greater disposable income has also increased fertility rates. In the past, it may be seen that most developing countries were more focussed on having a certain number of living children. The growth of life expectancy has helped this rate grow as well and the fertility rates have benefited from these trends. Socio economic and socio cultural factors also come into play here with more children being a sign of good luck in countries like India. Further, in developing countries, the concept of using contraceptives is yet to reach rural areas. Even the poor in urban areas cannot afford to use contraceptives. (Dasgupta, 1995) Rapidly growing populations do nothing for economic growth. With more mouths to feed, it becomes difficult to sustain a certain level of economic growth and development. This is due to the fact that with an increase in the household compositions, there is a decrease in employment opportunities and subsequent scarcity of resources. Yet, there is silver lining as various industries thrive with a growth in population as far as large scale production is concerned. Fertility can be controlled through creating awareness in all quarters of the society, especially women and minorities. Further, there must be a proper incentive plan for people with fewer children. Also, contraceptives must be distributed freely. (Lee, 2003) Control policies launched by the government have been justified in countries like Taiwan, South Korea and China, where fertility rates have fallen well below replacement for these industrialised countries. In other countries, like India, the sheer reason for the failure of control policies includes a lack of reach of such measures to rural quarters. (Dasgupta, 1995) 3. b) Discuss Becker's model of fertility choice Explain the rationale for government policy on population Becker's and Barro's model for fertility choice states that there is a continuous fertility choice based on the cost per surviving child and cost per birth. This has been expressed in the utility function below: (Doepke, 2005) U(c, n) = c1 1 + n_V. (Doepke, 2005) This model demonstrates that parents generally care about their own consumption c as well as the number n and utility V of their surviving children. Here, it is assumed that , , _ (0, 1) and V > 0. According to this model, if the utility related with having zero children is negative infinity, the risk aversion parameters are null. In this case, the choice of having a child depends of parameters like health, income and existing number of children. (Doepke, 2005) The government rationale behind policies on population point to the choice of something greater. If the population is under control then economic growth is accelerated. Also, direct foreign investments are secured as the necessary infrastructure is built up to invite immigration through investment and employment options. (Doepke, 2005) 4. What is child labour and what are its causes Use the model by Basu and Van 1998 to discuss whether it should be banned, and the evidence concerning the effect of child labour on children's educational attainment in developing countries. Are children being used as luxury goods Child labour is one of the greatest evils of modern society. In recent times, the abuses of child labour have become documented closely by various individuals and organisations. The International labour Organisation (ILO) has estimated the currently child labour force at 250 million. Though on the decline, this is still a rate to get worried about. (Ray, 2000) Child labour may be defined as the use of the services of a child below the age of 14 for production of various types of goods for commercial gains. Child labour stems from causes like lack of income, poverty and chronic poverty traps. The lack of income and poverty forces parents to give birth to children so that there will be people contributing to the income. The lack of money to send a child of school and lack of basic awareness regarding the basic development of a child are factors that contribute to the rise of child labour. Children are also used as domestic help in countries like India, Pakistan, Peru and many others. The poverty trap is a chronic one that makes parents believe that children are meant to work and contribute to the household's income. This is the most dangerous of all causes as it depicts suffering in the true sense of the word due to ignorance and lack of awareness. (Ray, 2000) It has been believed that child labour must be banned. The Basu and Van model shows that "A family will send the children to the labour market only if the family's income from non-child-labour sources drops very low." This gives rise to testing on the basis of the "luxury axiom". According to this theory, the basic axiom that comes into play is that children are used as luxury goods in many countries. This creates policy significance in terms of empirical evaluation. In this regard, child labour must not be banned - it must simply extend to create certain regulations. For starters, children must not be allowed to do any work that is hazardous or heavy. Further, the number of hours per week must be in keeping with regular education that can be obtained at government schools. Also, there must be a licensing system for using child labour within one's premises for certain kinds of jobs. (Basu, 1999) According to the Basu and Van model, child labour must be banned entirely as it will help generate economic growth and it is important for those living below the poverty line. The contribution of all hands in the household in such cases is important. (Ray, 2000) Child labour has greatly affected the attainment of education in developing countries. According to Rajan Ray's report (2000), economically active children do not go to school or dropout of school early on. These studies were carried out for two countries - Peru and Pakistan, which have a high rate of child labour. While enrolment peaks at the age of 13 for the average Peruvian, the enrolment age for the average Pakistani peaks at the age of 11. These are poor statistics for schooling rates. While Pakistan's low enrolment arte can be blamed on poor schooling methods, it has been recognised that good quality schooling can be used to lure economically active children into school and prevent them from dropping out. Also, the strict Islamic laws keep girls from entering school and carrying on with studies. This is not the case in Peru, where the gender bias is less obvious. Further, in India, most part of the 90 million school going population is economically active. In India, the rates are better as the Indian workforce receives better and more regular wages as compared with Peru or Pakistan where most cases of domestic labour goes unpaid altogether. (Ray, 2000) It is true that children are being used as luxury goods. If one looks at the luxury items that are being consumed by the higher income classes of the west, most of the goods are being produced in South America and Asia by children. For example, in a study of child labour in India's carpet industry, Levison and others (1996: abstract) find "a competitive cost advantage to hiring child labour with its magnitude relatively small for industrialised country sellers and consumers but relatively large for poor loom enterprise owners." (Ray, 2000) References Ray, Ranjan (2000) Child Labour, Child Schooling, and Their Interaction with Adult Labour: Empirical Evidence for Peru and Pakistan. The World Bank Economic Review, Vol 14. Basu, Kaushik (1999). Child Labour: Cause, Consequence and Cure with remarks on International Labour Standards. Journal of Economic Literature, Vol 37. Doepke, M (2005). Child Mortality and Fertility Decline: Does the Barro - Becker Model Fit the facts CDDRL, Working Papers. Bradhan, P (1996). Efficiency, Equity and Poverty Alleviation: Policy Issues in Less Developed Countries. The Economic Journal. Vol. 106. Beasley, Timothy; Coate, Stephan (1992). Workfare versus Welfare: Incentive Arguments for Work Requirements in Poverty-Alleviation Programs. The American Economic Review Vol 82. Ravallion, Martin (1996). Issues in Measuring and Modelling Poverty. The Economic Journal, Vol 106. Lee, Ronald (2003). The Demographic Transition: Three Centuries of Fundamental Change. The Journal of Economic Perspectives. Vol 17. Dasgupta, Partha (1995). The Population Problem: Theory and Evidence. Journal of Economic Literature. Vol. 33. Sen, A (1992). Progressive Reduction of Economic Inequality as a Macromarketing Task A Rejoinder. (P 313 - 317) Haworth Press. Read More