To what extent is the inequality good or bad for the economic development?
According to the research paper of François Bourguignon (2004), the poverty reduction and growth are the objectives that have triangle-interrelation together with inequality. With the regard to economic development, poverty alleviation must be advocated by both economic growth and distribution policy towards the poor. On one hand, absolute poverty can be alleviated by an increase in income per capita or economic growth, on the other hand, relative poverty that adjusted for rising average income can still persist when the gains are not distributed with equality. Thus, the poverty reduction is determined by growth of mean income of the population and changes in the distribution. However, the redistribution or more equitable society has its cost and therefore we must discuss the foregone development in order to achieve equity.
First, in general, the distribution effect in comparison to the growth effect on poverty reduction will depends on the initial condition of development and income disparity of a country. For example, a low-income and low-inequality country benefits more from economic growth than distribution policy. On the contrary, high-income and high-inequality country, the effect on poverty reduction will be less elastic to growth and more elastic distribution of income. Therefore, the optimal strategies for development depends on a country's characteristic.
Second, it is questionable that there could be a tradeoff for more equal society and growth. In this case, the statement we made so far would have to be reconsidered as we assumed that both instrument of development can be functioning simultaneously to optimize the level of development. The relations of growth and inequality may be interrelated or independent from each other, depending on our assumptions and hypotheses.
The effect of growth on inequality will normally be inconclusive due to the structural of economy that is determined by many factors such as political philosophy, institutional standard, social relations, and so on. But with regard to economic development in consistent with growth, there should be more social participation demanding for more equitable society. However, it is statistically insignificant to prove with the data.
Having said that, it still comes back to initial condition and policy choices that will determine the mixture of economic growth and distribution policy, resulting in the effect of growth on level of inequality.
The effect of inequality on growth is even far more complex but it can be generalized that extreme inequality or equality is not good for economic growth. The paper has discussed that on the negative impacts of high inequality would resulted in inefficiency due to credit market imperfections and political instability when the poor cannot have fair opportunities as the rich do.
Notwithstanding these effects, the thing that should be emphasized on the political context is the perspective on the redistribution policies i.e. progressive and regressive tax. According the paper, the high-inequality implies regressive tax in favor of the rich due to political influence which in turn promoting economic growth. Vice versa, the more equitable society implies progressive tax that would lead to lower growth if it reduces efficiency or incentives of productivities but it may not always be the case.
The progressive tax - as mentioned it depends on discretions - may increase efficiency on transferring wealth instead of income. Although the progressive income tax will reduce the incentive on productivity and economic efficiency, the wealth redistribution can be growth-enhancing such as land reform or social protections that advocate the poor to accumulate capital in various forms e.g. education equality, without reducing income of the rich which will reduce their incentives and productivities.
In conclusion and on personal comments, extreme inequality or equality is not good for economic development as we have discussed there are many possible routes of development that depends on various conditions. This paper has introduced the route of redistributing wealth from the rich to the poor. To put it differently, it is the changing how much poor people would get out of the pie size which is difficult due to many political constraints. Another route would be increasing the pie size from the grass-root level or for the poor people which will also reduce the income disparity thought many policies e.g. functional redistribution on traditional sector enlargement and enrichment that will not necessary harm the rich people or even generate benefits because the sectors are generally positively linked to the others. It is always important that policy approach do take into consideration of more sustainable development from the other perspective as poverty-growth-inequality may not be only triangle-relation but multidimensional determined by other important factors as well.
Reference: Bourguignon, F. (2004). The Poverty-Growth-Inequality Triangle. Indian Council for Research on International Economic Relations, New Delhi, India, Working Paper 125.
This writing is an assignment for my economic development class to summarize a research paper after reading it. Thank you for your time.
According to the research paper of François Bourguignon (2004), the poverty reduction and growth are the objectives that have triangle-interrelation together with inequality. With the regard to economic development, poverty alleviation must be advocated by both economic growth and distribution policy towards the poor. On one hand, absolute poverty can be alleviated by an increase in income per capita or economic growth, on the other hand, relative poverty that adjusted for rising average income can still persist when the gains are not distributed with equality. Thus, the poverty reduction is determined by growth of mean income of the population and changes in the distribution. However, the redistribution or more equitable society has its cost and therefore we must discuss the foregone development in order to achieve equity.
First, in general, the distribution effect in comparison to the growth effect on poverty reduction will depends on the initial condition of development and income disparity of a country. For example, a low-income and low-inequality country benefits more from economic growth than distribution policy. On the contrary, high-income and high-inequality country, the effect on poverty reduction will be less elastic to growth and more elastic distribution of income. Therefore, the optimal strategies for development depends on a country's characteristic.
Second, it is questionable that there could be a tradeoff for more equal society and growth. In this case, the statement we made so far would have to be reconsidered as we assumed that both instrument of development can be functioning simultaneously to optimize the level of development. The relations of growth and inequality may be interrelated or independent from each other, depending on our assumptions and hypotheses.
The effect of growth on inequality will normally be inconclusive due to the structural of economy that is determined by many factors such as political philosophy, institutional standard, social relations, and so on. But with regard to economic development in consistent with growth, there should be more social participation demanding for more equitable society. However, it is statistically insignificant to prove with the data.
Having said that, it still comes back to initial condition and policy choices that will determine the mixture of economic growth and distribution policy, resulting in the effect of growth on level of inequality.
The effect of inequality on growth is even far more complex but it can be generalized that extreme inequality or equality is not good for economic growth. The paper has discussed that on the negative impacts of high inequality would resulted in inefficiency due to credit market imperfections and political instability when the poor cannot have fair opportunities as the rich do.
Notwithstanding these effects, the thing that should be emphasized on the political context is the perspective on the redistribution policies i.e. progressive and regressive tax. According the paper, the high-inequality implies regressive tax in favor of the rich due to political influence which in turn promoting economic growth. Vice versa, the more equitable society implies progressive tax that would lead to lower growth if it reduces efficiency or incentives of productivities but it may not always be the case.
The progressive tax - as mentioned it depends on discretions - may increase efficiency on transferring wealth instead of income. Although the progressive income tax will reduce the incentive on productivity and economic efficiency, the wealth redistribution can be growth-enhancing such as land reform or social protections that advocate the poor to accumulate capital in various forms e.g. education equality, without reducing income of the rich which will reduce their incentives and productivities.
In conclusion and on personal comments, extreme inequality or equality is not good for economic development as we have discussed there are many possible routes of development that depends on various conditions. This paper has introduced the route of redistributing wealth from the rich to the poor. To put it differently, it is the changing how much poor people would get out of the pie size which is difficult due to many political constraints. Another route would be increasing the pie size from the grass-root level or for the poor people which will also reduce the income disparity thought many policies e.g. functional redistribution on traditional sector enlargement and enrichment that will not necessary harm the rich people or even generate benefits because the sectors are generally positively linked to the others. It is always important that policy approach do take into consideration of more sustainable development from the other perspective as poverty-growth-inequality may not be only triangle-relation but multidimensional determined by other important factors as well.
Reference: Bourguignon, F. (2004). The Poverty-Growth-Inequality Triangle. Indian Council for Research on International Economic Relations, New Delhi, India, Working Paper 125.
This writing is an assignment for my economic development class to summarize a research paper after reading it. Thank you for your time.