Inequality is defined as the state of not
being equal, especially in status, rights and opportunities. Inequality is a
very prevalent issue and can be seen all around the world. A recent Oxfam
report states that 62 individuals currently own as much wealth as the poorest
half of the global population. The relationship between growth and inequality
has been studied by economists for more than a century given the multi-dimensional
impact of inequality on economic, social and environment aspects. The role that
inequality plays in economic growth has also been given a fair bit of MO1 attention
with the World Bank including boosting the incomes of the bottom 40% of
developing countries in their key global objectives for development goals, and MO2 the IMF
recently releasing a report that discusses the causes and consequences of
income inequality suggesting that an increase in inequality can be harmful for economic
growth.  In this essay, I will discuss
the extent to which inequality can hinder economic growth in developing
counties, exploring the different types of inequality, including, income,
gender, health and education and the effects they haveMO3 . It
seems from the outset of this essay that inequality does have a harmful impact
on growth in developing countries.

 

 (4.
See Dabla-Norris, J. et al. (2015), «Causes and Consequences of
Income Inequality: A Global Perspective», IMF.

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Income inequality is the extent to which
income is distributed unevenly in a group of people or population. Income
inequality impacts economic growth massively and many argue that it plays a
contributing role in keeping developing countries and certain societies in the poverty trapMO4 . In
many developing countries the distribution of income between households is more
unequal now than it was two decades ago. One of the biggest impacts on economic
growth from income inequality is that lower income households are deprived and
therefore the propensity of this large segment of the population to invest is
much lower than it could be otherwise. An IMF report on the consequences and
causes of income inequality states that if the income share of the top 20%
increases, the GDP growth declines over the medium term. In contrast, an
increase in the income share of the bottom 20% is associated with higher GDP
growth. This suggests that reducing income inequality will have a positive
effect on economic growth and development. Empirical research by the IMF has
shown that another potential harmful effect of income inequality is through
financial instability. IMF research has indicated that growth spells tend to be
shorter when income inequality is high. When other determinants of growth
duration are accounted for, a 10% decrease in inequality increased the average
expected duration of a growth spell by 50MO5 %. Thereby
giving weight to the claim that income inequality has a harmful effect on
economic growth.

 

(A.Berg and J.Ostry, ‘Inequality and unsustainable
Growth: Two Sides of the Same Coin?’ IMF Staff Discussion Note No. 11/08, April
2011, International Monetary Fund.

 

Raghuram Rajan, former governor of the
Reserve Bank of India, argues that governments often respond to inequality by
easing the flow of credit to poorer households which will inevitably have
detrimental effects, leaving them even more deprived. Ben Bernanke and Larry
Summers argue that income inequality may also contribute to the global “savings
glut” which describes the situation whereby the desired amount of saving
exceeds the desired investment. This occurs because the rich are less likely to
spend an additional dollar than the poor. Joseph Stiglitz, former Chief Economist
at the World Bank, has said that “growing inequality in most countries of the
world has meant that money has gone from those who would spend it to those who
are so well off that, try as they might, they can’t spend it all”. This can be
harmful to economic growth as it may contribute to weak aggregate demand.  Governments react to this weak aggregate
demand through expansionary monetary policy which encourages unsustainable
borrowing and can lead to the emergence of asset bubbles, potentially leading
to recession. Several influential economists including Stiglitz have argued
that inequality was a contributory factor leading to the 2008 financial crisis.
The Stiglitz hypothesis is that in the face of stagnating real incomes, poorer households
borrowed to maintain a standard of living. This borrowing proved unsustainable and
lead to defaulting which puts a strain on financial institutions. This shows
that widening income inequality can have adverse effects on the financial
system and therefore hinder growth in developing countries. The other side of
argument would be that in developing countries there are limited funds and
resources, a certain level of income inequality would mean the rich have the
means to invest and start businesses which supports economic activity and
stimulates growth. Without the incentive of large financial rewards, risky
entrepreneurship and innovation would grind to a halt.MO6 

 

 

(http://www.nuff.ox.ac.uk/Users/Atkinson/Paper-  ThisEconomic%20Crises%20and%20Inequality.pdf)

 

Despite years of policies and measures to
tackle gender inequality, it still exists and is very

prominent around the world. The degree of gender
inequality is particularly bad in

developing countries, with gender gaps
favouring males being systemically larger in more

impoverished countries than richer ones. Women
are one half of the world’s population, gender equality is therefore
fundamental to whether and how a country thrives.

Gender inequality is a major hindrance on
economic growth as it prevents countries from reaching their full productive
potential with a large chunk of the population either out of work or doing
menial tasks. For example, in India, men are 3 times more likely to work than
their female counterparts. In the UN’s 2005 Millennium Development Goals (MDGs),
Kofi Annan writes ‘full participation of women to all levels of decision making
is a basic human right’. Women play a fundamental role in development, reducing
the gender gap will therefore have beneficial consequences society-wide. Kofi
Anna argues that gender equality is a ‘pre-requisite’ to achieving the other MDGs,
emphasising its importance.

 

Female empowerment is a very important topic
as it is believed to be a means of improving

children’s outcomes (Duflo, 2012). Former
World Bank President, James Wolfensohn gave reasons on how women’s empowerment
can result in economic development. Wolfenson agrees with Duflo by saying that
greater empowerment would lead to better outcomes for children and greater participation
to influence changes – changes that are going to be better and differentMO7 . In a
paper by Bernham and Rosenweig (2002) they use data of mothers who are
identical twins to see how a mother’s educational level affects a child’s
education, they show that there is a significant positive and robust
relationship between a women’s schooling and the schooling of their children.
This shows that there are positive effects when women are more educated and
have more say. Greater empowerment of women will lead to improved outcomes for future
generations, this will support growth and development through creation of a
more able and productive work force.

 

The very limited decision making power of
women that comes from gender inequality in developing countries hinders economic
growth. Women make better fertility choices: Ashraf, Field and Lee (2010)
provide a clear demonstration of this phenomenon in Zambia. Women who were
advised alone were more likely to use contraception. Better fertility decisions
would slow the rapid population growth in developing countries, which would
reduce the strain on the already limited resources available. If men and women
were treated equally in developing countries, women would have a larger say and
ultimately better decisions would be made, decisions that could benefit economic
growth and development. Female Participation in an economy is a major economic
resource, limiting the education and therefore opportunities that women have
means a large amount of a country’s talent pool is inaccessible. A report by
the International Labour Organisation finds that Asia and the Pacific reportedly
lose between $42 billion to $47 billion annually as a region because of women’s
limited access to employment opportunities. Gender inequality downgrades human
capital thus slows down economic growth. Tackling gender inequality has been a
hot topic for policymakers for many years, policies should be aimed at
improving education for women, improvements in health care and at giving women
an equal voice in cultural, social, economic and political spheres. Gender
inequality should be reduced through economic growth, Galor and Weil (1996) say
that there are physically-intensive tasks and mentally-intensive tasks and
capital raises the relative returns to mentally-intensive tasks. Women have a
comparative advantage in these tasks and therefore with more capital and growth
the female-male wage gap will decrease and in turn lead to increased female
labour force participation to increase. MO8 

 

https://economics.mit.edu/files/7417

Income and gender inequalities are an
important determinant on the access to and quality of education, health and
nutrition in developing countries. Large disparities in education, health and
nutrition exist between households within countries, especially those that are
more impoverished.  Human capital is of
course vital for a functioning society and economy and therefore health and
education are key to ensuring good quality human capital. There are huge
inequalities in access to education and educational attainment, it is not like
much of the developed world whereby a child must legally attend school until a
certain age. The lack of universal education due unequal distribution of
academic resources inevitably presents unequal opportunities for much of the
developing world. A lack of education means that those at the bottom are never
given a real chance; without an education opportunities are very limited.  On the other hand, it can be argued that in terms
of educational inequality, a degree of inequality could in fact benefit
economic growth in a country. This is because those with a greater education
will be more productive and the differences in the rate of return will
encourage more people to attain a higher level of educationMO9 , this
is good for growth potential as human capital would be improved.

 

 A
UNESCO report on inequality undermining educational opportunities states that
in developing countries, only one in three children reaches primary school age
having had their brain development and education prospects impaired by
malnutrition. Health and nutrition play a huge role in economic development as having
a healthy upbringing allows you to stay in school and obtain a better
education. This leads to improved human capital which will have a positive
effect on economic growth. However, this is not the case for huge segments of
the population in developing countries. Like academic resources, there is
unequal distribution of health resources. Medical care and attention can be very
limited to certain groups of people due to inequalities and discrimination. Unfortunately
for many women around the world it is the hard truth that their male
counterparts are usually the ones that benefit most from the already limited
health care and resources available. Amartya Sen finds that in India the death
rate is higher for women than men throughout all age groups until the late 30s.
This fact relates to higher rates of disease from which women suffer which
indicates the inequality and neglect women face, particularly in terms of
health care they receive. Sen coined the term ‘missing women’ which makes
apparent the gruesome truth of gender inequality. She states that ‘a great many
more than a hundred million women are simply not there because women are
neglected compared with men’. (http://www.nybooks.com/articles/1990/12/20/more-than-100-million-women-are-missing/) This links back to the fact that
different groups of people are given unequal opportunities. The fact that your
gender affects the medical attention you receive, either allowing or
disallowing you to lead a healthy life and reaching your full potential.

This affects economic growth as many people
don’t have the opportunities to reach their potential and be a productive
member of society due to illness and poor health which is largely down to
neglect in developing countries. There is empirical evidence that countries that
achieved higher growth rates also started out with higher initial levels of
education, health and nutrition outcomes. This suggests that improvements in
education, health and nutrition for all should benefit future growth.

 

Another way high inequality hinders growth in
developing countries is from the political pressure it creates for governments
to adopt harmful forms of redistribution. In democracies, political power is
more evenly distributed compared to that of economic power, therefore a
population will have the power and incentive to vote for redistribution. Many
argue that redistributive policies hurt growth, higher taxes and subsidies
dampen incentives to work and invest. Potential investors may perceive that a
countries inequality level makes future redistribution more likely, this
prospect could indeed deter investment in these countries, ergo reducing
growth. This has been evident in Venezuela when inequality rose sharply in the
early 90s. As discussed above, this could in fact send a warning signal to
investors leading to deterred investment or investors moving their money. The
1998 election of Hugo Charez did indeed result in a shift in policy to radical redistribution,
largely through destructive anti-market measures – measures that have
contributed to their current crisis. On the other hand, some argue that if
implemented properly, redistributive policies can be effective and won’t harm
growth in developing countries. An OECD paper on the trends of income
inequality and its impact on economic growth finds now evidence that
redistributive policies, such as taxes and social benefits, harm economic
growth, provided these policies are well thought out.

 

In conclusion, it is clear that persistent inequality
between different segments of a population in developing countries can hinder
growth and development. Many people are locked in poverty due to the
inequalities they face on a day-to-day basis. All the factors I have discussed
in the essay show that there are high levels of inequality of opportunities in
developing countries, which occurs when people living in the same society do
not have access to the same opportunities. Their circumstances at birth
determine the lives they will lead. Reducing inequality and giving these people
an opportunity will unlock the potential from a huge segment of the population leading
to improved human capital thus increased growth. The OECD Secretary-General
Angel Gurria states that ‘countries that promote equal opportunities for all
from an early age are those that will grow and prosper’, although certain redistributive
policies can be harmful we must tackle this inequality though well-designed and
targeted policies in order for developing countries to growMO10 .

 MO1delete
– not academic language.

 MO2Delete,
new sentence or else is too long.

 MO3It’s
normally good to state your conclusion right at the end of the intro with a
phrase like “It seems from the outset if this essay that inequality does/does
not dramatically harm growth” – we get told to do this so the reader has it in
their mind when the read any point that you’re ultimately leading to one
conclusion.

 MO4Do
you need to define this term here?

 MO5As
this is the end of a paragraph, add a short sentence to link back to your main
point – I know the stats say it but as this is an essay add something like
“This shows that…” or “Thereby giving weight to the claim that…”

 MO6In
this para you’ve looked at both sides, so just add a short sentence to say
which one you think is right as you need to create a clear case for your final
conclusion

 MO7delete
this, sounds unacademic and a bit subjective.

 MO8a
brief sentence to say why this is good for economic growth, just to link it
back and make it absolutely clear.

 MO9This
is good for growth potential because…

 MO10Conclusion
needs to be neater. At the beginning of the conclusion, acknowledge the points
which disagree with your conclusion. “Having looked at …, it is clear there is
some weight to this argument but the more convincing claim is that….”

Then go on to state your conclusion and why you have
reached it, ie from the studies you’ve cited and the points you’ve looked  at in the essay.

Then finish with a very VERY clear sentence that
exactly answers the question. “Therefore, inequality can fundamentally and
fatally hinder economic growth in developing countries.” 

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