Politics: Economic Inequalities
Income Inequality
Defined as flow of revenues received over one year by wages, self-employment, dividends, interest and pensions minus taxes). Per capita income per year.
Explain and evaluate the capability approach by Amartya Sen as a form of measurement for economic inequality.
AMARTYA SEN - CAPABILITY APPROACH Focuses upon the moral significance of an individuals' capability of achieving the kind of lives they have reason to value. It focusses exclusively on subjective well-being and the availability of means to having a good life. It examines a person's capability (uses capability as an measurement) to a good life based on the underlying determinants of the relationship between people and commodities (goods). Goods not important in themselves but what they can enable people to do is important. E.g. Social (class, ethnicity, education), environmental (climate, pollution), personal (age, disability, gender) are determining factors. +An alternative to standard economic frameworks for thinking about poverty and economic inequality (Clark, 2005) - Capability is an imperfect measure, capabilities are adpative, so sometimes a lack of capablity is the person's own responsibility (Gasper, 2009)
What can foreign aid achieve?
Aid is more effective when it is aimed at a singular, predetermined end, such as reducing malaria. Because central planning "works" when it has only one will to satisfy and one goal to focus on achieving. Under such circumstances, there is no economic problem to solve because there are no competing demands for resource uses and consequently no trade-offs for planners to negotiate. (Hayek, 1944) Successes in aid include the Green Revolution in Asia, the eradication of small pox, improvements in children's health, dispersions of vaccines, reductions in the spread of malaria, control of African river blindness, the eradication of polio, improvements in family planning, and the mobile phone revolution in Bangladesh. (Sachs, 2006)
Explain and evaluate the gini-coefficient by Corrado Gini as a form of measurement for economic inequality.
CORRADO GINI - GINI COEFFICIENT Measure of statistical dispersion, used to measure inequality of income or wealth. It has a range of 0-1 where 0 is perfect equality. +Most commonly used measure of inequality. -Insensitive to changes at the top and bottom of income distribution and overly sensitive to the middle of the income distribution. Because the 'middle' group between the richest and poorest always capture approximately 50 per cent of gross national income. (Investopedia, 2019)
According to the dependency theory by Frank what is the cause of global economic inequalities?
CRITICAL THEORY: (Structuralism) DEPENDENCY THEORY Focuses on individual countries. Foucs on resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former. Poor countries are dependent on wealthy states e.g. natural resources, cheap work force are used to produce goods etc for the wealthy countries and this strucutre is upheld through politics, education, corporations institutions and so forth. 'Core nations'= Metropolis' have historically exploited 'peripheral' nations by keeping them as satellites in a state of dependency and under-development. Developed nations become wealthy by exploiting the poorest nations and using them as a source of cheap raw materials and labour. He claimed that this exploitative relationship was evident throughout the course of history (e.g. in the practice of slavery and in Western colonisation of other parts of the world) and was maintained into the twentieth century through Western countries' domination of international trade, the emergence of large multinational companies and the reliance of less-developed countries on Western aid. SURPLUS DRAIN THEORY: Surplus drain' theory which predicted erroneously that the Third World would be unable to achieve significant levels of industrialization. The Third World was doomed to stagnation because the surplus it produced was appropriated by the advanced capitalist countries, through agencies such as transnational corporations. Surplus of labour/commodities go to rich countries. (Frank, 1970s)
According to the world system theory by Wallerstein what is the cause of global economic inequalities?
CRITICAL THEORY: (Structuralism) WORLD SYSTEM THEORY: One must look at the world system as a whole, rather than just at individual countries. The world system can divide countries in 3 groups. Core nations: Developed countries that control world wages and monopolise the production of manufactured goods e.g. USA. Semi-peripheral nations: Includes countries like South Africa or Brazil which resemble the core in terms of their urban centres but also have areas of rural poverty which resemble the peripheral countries. Peripheral nations: Mainly in Africa, provide the raw materials such as cash crops to the core and semi periphery. These are also the emerging markets in which the core attempts to market their manufactured goods. Countries can move upwardly or downwardly and are mobile in the world system. Thus a semi-peripheral nation might become a core nation. (Wallerstein, 1970s)
What according to the Marxist perspective causes widening in-country economic inequalities?
Capitalism creates conditions that promote inequality between the rich and the poor or more appropriately, between the capitalists (bourgeois) and the working class (proletarians). As Capitalism creates 2 classes of people a class struggle will occur between these classes due to competing interests. Members of the working class would naturally aspire to receive higher wages. However, capitalism is all about maximising profitability and competition against counterparts with similar business or trade. Capitalists would aspire to have higher gains because the success of their businesses depends on the level of their profitability. One of the ways to maximise profitability is to keep wages or labour cost as low as possible. Capitalists exploit the working class.
Relative Poverty (Relative terms)
Defines poverty in relation to the economic status of other members of the society: people are poor if they fall below prevailing standards of living in a given societal context. E.g. UK defines relative poverty as a household income (adjusted for family size) which is less than 60% of median income
Describe the historical process of Financialization and how it may be a cause of economic inequality.
Definition Financialization: The process by which financial institutions, markets, etc., increase in size and influence. Historical Trend: Since the 1970s, shift from Industrial Capitalism to Finance Capitalism, the finance market has become the key global dominant sector in terms of economic activities since the. Historic correlation that between postwar, the Western world did not experience any financial crises and went hand in hand with social and democratic achievements with a new and more rigorous regulation of financial markets. Periods before and after have both been hit by financial crisis with some regularity (Wall Street Crash, 1929), and in each period one of these financial crises developed into a serious depression (The Great Depression) that erased millions of jobs and increased inequality. Example: In the US trend among manufacturing firms that in recent years, earnings generated through financial channels have been greater than half of the total profits earned by the average manufacturing firm. Over the same period, on multiple dimensions, income inequality has soared. (Hou Lin, 2013) Cause of Economic Inequality: When finance gets too dominant a position in society, financial, and social instability follows causing widening economic inequality.
Describe the historical process of neoliberal economic policies and how it may be a cause of economic inequality.
Definition of Neoliberal economic Idealogy: A policy model that emphasizes the value of free market competition. Advocate a free market approach to policymaking: promoting measures such as privatisation, public spending cuts, and deregulation. It is generally antipathetic to the public sector and believes the private sector should play a greater role in the economy. Historical Trend: Neoliberalism has been the dominant economic ideology since the 1980s (because of Thatcher and Reagan promotion of the ideology.) Example: The neoliberal economic policies have had unclear benefits however clear costs in terms of increased inequality. Such costs epitomize the trade-off between the growth and equity effects of some aspects of the neoliberal agenda. (Ostry et al, 2016) Cause of Economic Inequality: Policies on austerity and the freedom of capital to move across borders has led to increased economic inequality and instability, and undermines economic growth.
Describe the historical process of colinialism and what impact it has on current global economic inequalities.
Definition of colonialism: The policy or practice of acquiring full or partial political control over another country, occupying it with settlers, and exploiting it economically. Historical Trend: Colonialism from the 15th century until the late 18th century left very different institutional legacies in different parts of the world, with profoundly divergent consequences for economic development. Theses differences are dependent on the density of indigenous population and 'extractive institutions' (based on the control of and the extraction of rents from indigenous peoples). Example: Extractive institutions, strip the vast mass of the population of incentives or opportunities and are associated with poverty. African societies today are as unequal as Latin American countries (Portugese colony), whilst North America (French colony) that was less densely populated did not experience to the same extent of extravagate institutions. (Acemoglu et al. 2001, 2002)
Name and explain some causes of economic inequalities.
Education: Individuals with different levels of education often earn different wages. This is probably related to reason one: the level of education is often proportional to the level of skill. With a higher level of education, a person often has more advanced skills that few workers are able to offer, justifying a higher wage. The impact of education on economic inequality is still profound in developed countries and cities. Although there are usually policies of free education in developed nations, levels of education received by each individual still differ, not because of financial ability but innate qualities like intelligence, drive and personal ability. Moreover, receiving the same level of education does not mean receiving education of the same quality. Growth in Technology: Growth in technology arguably renders joblessness at all skill levels. For unskilled workers, computers and machinery perform a lot of tasks these workers used to be do. In many jobs, such as packaging and manufacturing, machinery works even more effectively and efficiently. Hence, jobs involving repetitive tasks have largely been eliminated. Skilled workers are not immune to the nightmare of losing jobs. The rapid development in artificial intelligence may ultimately allow computers and robots to perform knowledge-based jobs.
What can foreign aid not achieve?
Foreign aid cannot make recipient economies grow. Foreign aid is akin to central planning with externally gifted funds. Central planning cannot create economic growth because it lacks private property and market prices, which prevents it from solving economic problems. It follows that aid, therefore, cannot generate economic growth either. (Easterly, 2006) Developing countries confront an economic problem— one regarding appropriate resource allocations. Foreign and domestic aid planners don't know how to use aid in ways that generate a pattern of resource movement away from less-valued uses toward more-valued one. Aid cannot solve economic problems. (Skarbek et al, 2009)
Explain and evaluate the palma ratio by Gabriel Palma as a form of measurement for economic inequality.
GABRIEL PALMA- PALMA RATIO The Palma ratio is the ratio of the income share of the top 10% to that of the bottom 40%. In more equal societies this ratio will be one or below, meaning that the top 10% does not receive a larger share of national income than the bottom 40%. In very unequal societies, the ratio may be as large as 7. Palma Ratio as a measure of gap between richest and poorest. +As it measures the gap between richest and poorest, it is seen as more accurate than Gini Coefficient that 'hides' levels of inequality. -Palma does not measure inequality in the entire distribution. Should not fully be relied on by policymakers. (Cobham, 2013)
How may financialization cause widening economic in-country inequalities?
Historic correlation that in postwar, the Western world did not experience any financial crises and went hand in hand with social and democratic achievements with a new and more rigorous regulation of financial markets. Periods before and after have both been hit by financial crisis with some regularity (Wall Street Crash, 1929), and in each period one of these financial crises developed into a serious depression (The Great Depression) that erased millions of jobs and increased inequality. When finance gets too dominant a position in society, financial, and social instability follows causing widening economic inequality. Example: In the US trend among manufacturing firms that in recent years, earnings generated through financial channels have been greater than half of the total profits earned by the average manufacturing firm. Over the same period, on multiple dimensions, income inequality has soared. (Hou Lin, 2013)
Absolute Poverty (Absolute terms)
Measures poverty in relation to the amount of money necessary to meet basic needs such as food, clothing, and shelter.
Describe Milanovic's observation of cyclical global inequality throughout history, give examples!
Milanovich's theory: Inequality has regularly waxed and waned over recent centuries, as indicated by modern economists' studies of historic records. Forces that drive inequality up or down are economic (demand high and competition low), demographic (moving from countryside to city) and political (Policies such as the distribution of land to landless people, the introduction of widespread education and the creation of state-owned enterprises). They can also be divided into 'malign' or 'benign' both may push inequality up or down. Malign forces: epidemics, civil conflict, state breakdown and war Benign forces: technological change, globalization, education and demographics Implication of the historical data is that at some point, forces - malign, benign or both - will halt and reverse the current increase in inequality. Examples: 16th and 17th century inventions: Steam engine and cotton gin --> those who invested in new products had large returns_ --> UK inequality peaked in 1870 20th century: rising demand for labour, improved education, creation of welfare states. war and depression drove decline in global inequality.
Explain why Moyo argues that aid to Africa is dead aid?
Moyo points out that grants and concessional loans are forms of dead aid given by western nations as grants may sustitute local governments domestic revenue and make them dependent on the grants whilst the concessional loans only in debt African nations further as they would have to repay the loans in the future by for example raising taxes.
Explain how neo-colonialism has caused global economic inequalities.
Neo-Colonialism: the use of economic, political, cultural, or other pressures to control or influence other countries, especially former dependencies. Neo colonial regime in food emerging, as rich governments and corporation buy up the right to millions of hectares of agricultural land in developing countries to secure own long-term food supply. (not a deal between equals) E.g. Telegraph 2009, S Korean firm Daewoo Logistics made a deal for 99 year lease on a million hectares in Madagascar to grow palm oil and maize. Half of Madagascar agricultural land. The deal due to criticism of being of a neocolonial nature did not go through.
How may neoliberal economic policies cause widening in-country economic inequalities?
Neoliberal economic policies that were introduced in the 70s and 80s by Thatcher and Reagan became the world's dominant economic idealogy. However some parts of the neoliberal agenda of freeing the market and reducing state control have had policies of austerity included (cutting governmental budget by spending cuts, increase taxes etc) and opening the borders of freedom of capital movement has led to increased economic inequality and instability as these policies undermines economic growth. (Ostry et al. 2016) EXAMPLE: Neoliberal policies in the U.S. led to low wages (30 percent of the working-age population) and inadequate employment (60 percent of the working-age population). The wealth discrepancy between the rich and the poor, usually the working class, hence widens. (Howell et al, 2007)
National Economic Inequalities
OECD: Organisation for Economic Co-operation and Development. • Inequality within countries is rising - with regional variation, indicating that institutions and policies matter in shaping inequality. • In-country inequality rise for OECD countries, rapidly in countries such as USA (increase by 20%), China, India and Russia. Whilst moderately in Europe (Western Europe up to 12%) and in Latin America (Brazil, Mexico, Argentina) has declined (due to Government policies) however is still at an extremely high level. • Income inequality at its highest level within nations. The average income of the richest 10% of the population is about nine times that of the poorest 10% across the OECD, up from seven times 25 years ago.
Economic Inequality
People's different positions within economic distribution referring to the difference between levels of living standards, income, pay, wealth etc. across the whole economic distribution.
Describe Piketty's historical perspective of accumulating wealth over the past centuries give examples!
Piketty's theory: Rate of return on capital is more than rate of growth of economy ( r>g) thus wealth grows faster than economic output leading to economic inequalities. This condition automatically increases inherited inequalities of wealth due to the rate of return on assists and gives a positional advantage to those that inherit wealth over a period of time. Examples: In the 18th and 19th centuries western European society was highly unequal. Private wealth dwarfed national income and was concentrated in the hands of the rich families who sat atop a relatively rigid class structure. This system persisted even as industrialisation slowly contributed to rising wages for workers. Only the chaos of the first and second world wars and the Depression disrupted this pattern. High taxes, inflation, bankruptcies and the growth of sprawling welfare states caused wealth to shrink dramatically, and ushered in a period in which both income and wealth were distributed in relatively egalitarian fashion.
Critically evaluate Milanovic's (2016) theory on global inequalities.
THEORY: Global Inequality moves in cycles, over recent centuries it has waxed and wanesd due to malign and benign forces that are economic (demand high and competition low), demographic (moving from countryside to city) and political (Policies such as the distribution of land to landless people, the introduction of widespread education and the creation of state-owned enterprises). These forces drive inequality up and down. • Malign forces: epidemics, civil conflict, state breakdown and war • Benign forces: technological change, globalization, education and demographics Composition of global inequality which is driven by large gaps between mean incomes among countries. IMPORTANT for 2 reasons: 1. Citizenship Rent: People born in rich countries have, regardless of their work effort, much higher incomes than others, which to some extent globally speaking implies lack of global equality of opportunity. EXAMPLE SOLUTION: At some point, forces - malign, benign or both - will halt and reverse the current increase in inequality. HOWEVER if you want to have lower inequality, then really a way to do that is to make market income, which basically means concentration of income from capital, much more equal. Solution for not allowing income inequality to get out of bounds. It is to be really "working" on the distribution of capital and human capital (education quality) endowments. A global distributive scheme to tackle global inequality is also proposed in order to make poor countries richer. CRITICISM: - Milancovic focuses on income inequality however talks about poverty throughout his article and even conflates cases regarding poverty with income inequality. -It is unclear if limiting "inherited advantages" or "citizenship rent" will actually have an impact on the gap between rich and poor. It will relieve some poverty in the short term however might not efficousely reduce inequality. (Bocchiola, 2013)
Critically evaluate Piketty's (2013) theory on global inequalities.
THEORY: Where the rate of return on capital is more than rate of growth of economy ( r>g) persistent economic inequalities will occurs a wealth grows faster than economic output widening economic inequalities. This condition automatically increases inherited inequalities of wealth due to the rate of return on assists and gives a positional advantage to those that inherit wealth over a period of time (rich get richer). Force of divergence is the most predominant in todays' society according to Piketty and therefore explains the historical trend of the widening gap of economic inequality in advanced industrialized countries. It is important to note that Piketty points out that there are various forces that can push alternately toward convergence and divergence between the poor and the rich. However the forces of convergence generally cannot overcome the forces of divergence within capitalism. Forces of Convergence: economic growth, technological growth, diffusion of knowledge Forces of Divergence: r>g, market recognition of value, self-regulation of income This pattern of accumulating wealth can be broken by war, depression etc. (not the only way) EXAMPLE: In Oxfam's Working Paper, statistics show that in 24 of 26 countries researched, indeed the richest 1 percent increased their share of income between 1980 and 2012. SOLUTION: A progressive global tax on capital to decrease economic inequality around the world. But also raise the minium wages. (follow footsteps of welfare and socialist states) CRITICISM: -Human assets (HUMAN CAPITAL) if taken in account when analysing economic inequalities tend to diminish the differences between the rich and the poor in terms of capital ownership. Piketty's choice of omitting human capital from his methodology has therefore some implications for his analysis, as he does not sufficiently emphasize in his book that if human capital would be included in his research it may shift his findings significantly towards convergence rather than divergence. For example diffusion of knowledge is a force of convergence and as people through education accumulate a similar set of skills and knowledge, economic inequalities between the poor and rich in the advanced industrialized countries are more likely to shift towards convergence rather than divergence. (Martin, 2015) - Rather than forces of convergence and divergence, state forces are perhaps a more important factor regarding the cause of widening economic inequalities. As they found that it was impossible to find a positive correlation between the gap between r and g and the concentration of wealth. Especially as they found that inequality dynamics were closely linked to institutional factors. They found that it is not certain the two laws of convergence and divergence are laws of capitalism, because in all the societies around the world there are economic inequalities but not all societies are capitalist. (Acemogly et al, 2015)
Global Economic Inequalities
• Inequality between countries is falling (due to emerging economies, BRICs - especially China and India which skew aggregates). • 1975: The world income distribution was bimodal, with the two-humped shape of a camel. One hump below the international poverty line and a second hump at considerably higher incomes—the world had divided into a poor, developing world and a developed world that was more than 10-times richer. Extremely high level of global inequality which still exists. Now, that level is higher than the level in even the most unequal countries such as South Africa or Brazil or Colombia. So saying it is declining sounds good but...
