Effects of Economic Inequality

By: EconomyWatch   Date: 13 October 2010

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Inequality in the parlance of Economics is generally understood as a lack of parity in the entitlement to resources and income among all economic agents. Economic inequality is seen to exist in the developed and developing nations, across different income groups of a country's population and among different races to name a few.

There are various measures of economic inequality available, prominent among them is the Gini Coefficient. The effects of economic inequality among the world populace cover a wide spectrum. The era of globalization and interconnectivity has added a new dimension to the whole process.

Gini Coefficient: A Measure of Income Inequality

Gini coefficient is a statistical measure, which is used for the measurement of income inequality across nations. It is a number, which ranges from 0 to 1. In this measurement perfect equality is depicted by 0. It is a situation, where everybody possess the same income. Perfect inequality in income distribution is said to exist when the Gini coefficient is 1. This refers to a situation where a single person commands the entire income of a country and the rest have absolutely zero income.

Economic inequality measures, which are used for making 'inter-country comparisons' of incomes of individual entities need to take proper account of the country-specific factors so as to get accurate results.

Gist of IMF Report on Globalization and Inequality

Globalization is considered by many to be the main cause behind the perpetration of an increased income inequality in wide areas of the globe. As per the reports from International Monetary Fund technological advancements have indeed led to an increase in global income inequality. The other contributing factors have been an increased financial globalization and FDI or foreign direct investments.

However, an increased trade globalization has only worked towards the eradication of this inequality.The need of the hour is policies, which will ensure that the proceeds from technological innovation and globalization are distributed among the cross section of a country's population.

Emphasis is to be laid on measures for improving the human capital base of an economy. This can be done through the provision of quality education for all. The modern day world economy is a “knowledge-based” one.

Governments of countries need to promote policies, which would safeguard the financial interests of the poor in a globalized market.

Developing countries are primarily agriculture based and they can promote agricultural exports for reaping the benefits of trade liberalization .

Factors Causing Inequality

The factors responsible for causing inequality in an economy are usually interrelated. They can be grouped under the heads of labor market, development patterns, innate ability, wealth condensation, education, risk taking behavior, labor -leisure preference, gender and culture to name a few.

Modern day labor markets are characterized by the free play of market forces. It has been observed in the developing economies that for unskilled jobs the supply of labors far outstrips the demand for the same. This leads to a low wage for the workers.

The situation may be completely opposite in the market for skilled labors. Thus there exists a wage differential or inequality among different sectors of an economy. However, wage differentials on a global scale is affected by a complex set of factors, one being the present day concept of outsourcing.

Wealth condensation is another factor, which may give rise to inequality. Put simply it means the rich only gets richer. A minority of a country's population is seen to possess the majority of its wealth. The person with a higher income and wealth displays a higher marginal propensity to save as compared to one with a low asset base. This saving is then turned into investment. Wealth begets more wealth but only for the lucky few. Disparities in entitlement to productive resources more often than not lead to the persistence of huge income inequalities in developing nations.

The phenomenon of wealth condensation also leads to an intergenerational inequality. In simple terms offspring of wealthy individuals get a head start in life while those belonging to less fortunate parents need to depend primarily on their innate ability and available social security.

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