Impacts of income inequality on a country’s economic and social developments

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  1.      Introduction and basic concepts………………………………………………………………….. 2

1.1      Inequality VS inequity……………………………………………………………………… 2

  1. Relative theories and disputing importance of income equality……………………….. 3

2.1      Equal opportunity theory (Mithaug 1996)……………………………………………. 3

2.2      Utilitarianism theory…………………………………………………………………………. 4

2.3      Rawls (1971)’ difference principle……………………………………………………… 5

  1. Impacts of income inequality on a country’s economic and social developments.. 6

3.1      Economy growth and rural poverty reduction in China…………………………. 8

3.2      Increasing social instability and difficult life in the cities………………………. 9

  1. Suggestions to deal with the income inequality……………………………………………. 10

Reference……………………………………………………………………………………………………… 11
Income inequality

 

1.        Introduction and basic concepts

 

As early as the beginning of the 19 century, Gini (1912) had pointed out that the distribution of income could be an important research subject for both economic and social studies. Ever since them, a lot of researches and studies had been done and a number of theories had been developed to investigate the issue and try to create the benefits for the total economic development and social stability. Income inequality happens when the distribution of the income is not equal, and to put it in short, inequality is the absence of equality (Firebaugh 2003, p.71). A general understanding of income inequality is lack of perfect equality that happens only when the income is equally distributed among units (could be individuals, nations or other units) involved which means that every unit is receiving the absolute average income (total income / number of units). When perfect equality in the actual situations is very rare, researchers turn to the relative income equality by allowing inequality to a certain extent and shifting the focus from whether there is income equality to how much the income equality is and this topic will be discussed further later.

 

1.1    Inequality VS inequity

 

Another concept that is also frequently used is income inequity which could be seen in our daily life. There are similarities and differences between these two fundamental concepts. Inequity indicates how people consider as equal; this is more closed to a psychological feeling in term of what things ought to be. According to some social survey done in the United States about the perception of justice, most of American people do not agree that absolute income equality in term of distribution would be fair (Kelley & Evans, 1993). And obviously different factors including the extent of the income inequality would lead to people’s perception of income inequity.

2.        Relative theories and disputing importance of income equality

 

2.1    Equal opportunity theory (Mithaug 1996)

 

Mithaug (1996)’s equal opportunity theory suggests that all the individuals should have the right to self-determination, in other words equal opportunity could be understand as the offering of sufficient resources to all individuals to develop their own capabilities and potential. In this theory, Mithaug (1996) also pointed out that there are two kind of situation that people may not gain the right to determinate their self development. The first situation is that some people do not have the capacity to develop due to physical or mental limitations and the second situation that may also result in same result is that people have not been offered the sufficient resources or opportunity to develop themselves. In our daily life we can see that actual scenarios of these two cases, for example some children may be not intelligent enough to learn the knowledge in their study though they do learn hard but due to the restriction of the physical and mental conditions, we have to admit that these students have not gain the rights to determine themselves. Compared to this scenario, the second case is more common: many of the children may be due to the financial difficulties and family issues could not gain the opportunity to get access to the study programs so that in the end they also can not develop themselves to their potentials. Theory also argues that the society should optimize the prospects for those least advantaged member (Vitello & Mithaug 1998, p21) so as to help them to get the equal changes to develop themselves and to get the self determination. Regarding the income distribution, according to Mithaug (1996)’s equal opportunity theory it is not that the status of the current income distribution that is important but whether the individuals could obtain the equal opportunity to develop themselves that matters.

 

 

 

2.2    Utilitarianism theory

 

Utility refers to two types of perceived senses: pleasure minus pain and the preference satisfaction (Peter, Hammond & Seidl p388). Early classical utilitarianism theory was developed by Jeremy Bentham and John Stuart Mill who had made the major contribution to the development of the early utilitarianism theory. Most utilitarianism theories suggest that so long as the resource such as income is distributed among all the people that could maximize the total utility in term of creating overall happiness and total welfare and minimize the negative impacts on utility for all the people it does not matter how the distribution of the resource is carried out. In other words, such type of theory shifts the focus from right or wrong dispute to how to maximize the total welfare for the society as a whole. For example, if there one billion dollar to be invested a developed country and developing country then the best distribution percentage could be that the 90% of the one billion dollar should be invested in the developed economy since it will help generate much more outputs instead of investing in the developing country though the developing country needs the money much more than developed country. And the small proportion money given to the developing country may be just used to avoid extreme dissatisfaction then in total the aggregate outs and utility could be maximized. So that regarding to our topic of the income inequality according to the utilitarianism theory, provided that overall benefits and utility could be maximized through high productivity and efficiency it is not a problem whether the income is distributed by equality or inequality.

 

What’s more in my opinion, supported by the utilitarianism theory distribution inequality is not only a minor problem but also sometimes is a necessary condition to push forward the social development and growth of overall utility. For instance, the current North Korea is almost like what could be imagined about China just soon after its independence in 1949. Income inequality is too the largest control in the North Korea like the China before the economy reform, people are banned from doing business with outside business men or even within the country. So that as time passed, we can see that when people are placed under extreme income equality in term of distribution, together with some satisfaction and peace from the imagination of the communist society and much less social instability, from the angle of the utilitarianism theory as the economy is almost static and growth too slow conclusions could be made that the effort targeting for the income equality had too large extent contributed to the slow social and economy development in both China of the last century and the current North Korea.

 

2.3    Rawls (1971)’ difference principle

 

While the utilitarianism theory is widely used actually in our actual life especially in the economy and business life that we are experiencing together with the world’s ambitious progress and advancement toward the biggest outputs that we can possibly made, but the perspective of putting ultimate utility as the first priority also attract widely criticism. The most frequent criticism that one could find out that the utilitarianism theory is being criticized is that the realization of the maximum overall utility in many case would require the sacrifice from the least well off member of society who are also own the least power and rights to dispute which would result inequality in the opportunity to develop themselves for the least well off members of the society.

 

Different from the utilitarianism theory John Rawls (1971)’s difference principle holds that the principle that used in the income distribution is that the least well off members in the whole society should be made as better as possible in term of various well offs as written by John Rawls (1971) that:

Further in difference principle, this principle does not suggest that distribution of income should be equal as well and on the other hand when John Rawls (1971) suggested that the least well off people should be obtain as much income as possible when the income was distributed he also claimed that economy incentives should also be considered, in other words, he admitted that people are driven by economy incentives and benefits so that some income inequality in term of distribution because of economy incentives should be maintained to some extent to keep the momentum for the most people while the poor people are taken good care off. So the difference principle seems to be combining the utility theory and make a better balance in the income distribution issue.

 

In my experience and understandings, I agree with this theory but still I believe that the poor people should be taken care of due to the humanitarian considerations but their life shouldn’t be made too good because this will also deprive the poor people’s motivation to change their life better, we can see the example from the many poor people in some European countries that are famous for the well off society construction who are lazy to work since life is not a problem.

 

3.        Impacts of income inequality on a country’s economic and social developments

 

Before we can study the impacts of the income inequality on a country’s economic and social development, a frequent used concept “Gini Coefficient” needs to be introduced here to help measure a country’s status of how serious the income inequality is. The Gini Coefficient was first developed by the Italian statistician Corrado Gini in the early 20 century and was later widely applied in various industries and study fields. The Gini Coefficient is a number that is between 0 and 1. The Gini coefficient valued 1 represents that the actual Lorenz curve is as far from the line of perfect income equality as possible and thus become the complete income inequality. And instead the another extreme when the Gini Coefficient is valued 0, it stand for a perfect income equality as the figure below shows.

Figure 1. The Gini coefficient as a measurement of income inequality

Source: (Arnold 2008, p.578)

 

Figure 2. Gini index performance of major economies in the world since World War II

As we can see in the figure above that shows Gini index performance of major economies in the world since 1950s, a growth trend of overall Gini index of the world could be seen indicating that the overall income inequality in the world is become more serious than it was in the middle of last century though some of the developed countries did contribute motivations to reduced the income disparity especially those in the Europe but the total trend now is still growing. But the impact of the income inequality on a country’s economic and social developments is yet to be judged as good or bad as advantages and disadvantages are both obvious which below will be discussed.

 

Take China as an example, since the economy reform and opening up policy was first adopted in the 1980s the economy growth has kept surprising the world but as the figure above shows at the same time the Gini Coefficient has also been growing dramatically and even exceed the United States since the beginning of the new century. So it is good or bad for such fast growth in the Gini index or income inequality?

 

3.1    Economy growth and rural poverty reduction in China

 

With the more than 10 years’ double digit GDP growth, China has make great achievement in term of economy growth which makes it known to the world and in last year it had already passed Japan to become the second largest economy just following the United States (Nytimes.com 2010). And the data shows that by 2008 according to the Chinese standard of poverty, the rural poor population who lived a life in an absolute poverty had been reduced from 250 million to 21.48 million. This simple but cheering fact proves that the economy growth is necessary though it comes with the increasing of the income inequality. Now in China we can see that most people are busy working to increase the productivity and total output which in return increase their salary though the income disparity is enlarging but still the life of the people in the lowest level of the society could be improved. And such income inequality in the utilitarianism theory is acceptable so long as it helps add to the total well offs of the society as a whole.

 

3.2    Increasing social instability and difficult life in the cities

 

When income inequality happened among the individuals, it also happened among the different areas in China. As we know, after the economy reform the Chinese economy has been growing majorly in the areas that are close to the ports and in the cities, and this difference was also reinforced by the policy of the government to focus on the economy growth in the pointed cities that were entitled to enjoy the preference polity during the process. This has resulted in a number of problems that the country is trying to resolve all the time but with slow progress. Firstly, regional safety issue had happen in the new century in the provinces such as Xinjiang and Tibet which are both the remote and less developed districts, safety issues there thus become more serious than in the developed provinces. Secondly, life in the cities becomes very difficult for the original residents and the migrant workers as well. On one hand, since the business is developed well majorly in the cities, labor force from the rural areas are rushing into the cities, the living cost is increasing especially when the hosing pricing is growing too high that a migrant worker need to work more than 300 years in order to buy a small house in the major cities. On the other hand, life for the local residents is also not easy most of them had already had houses. With the growing of the number of the population, the quality of life is reducing in term of the recent crown of the “Most Jam City” given to Beijing.

 

 

 

 

 

4.        Suggestions to deal with the income inequality

 

In Chinese case, the increasing income inequality has been an issue that seems can not be avoided during the fast economy development as we can see from the figure that most economies with economy growth would experiencing such problem but this issue as mentioned above has been reinforced by the government’s intension and polities. Now in order to ease this problem, the government should also play the role to be helpful in the resolve of the income inequality. Firstly, developing the remote provinces and rural areas is the fundamental way to resolve the city jam issues. Secondly, the government could control the redistribution of the income to make it more benefits to the poor people especially in the education and other well offs to ensure that the poor people would also have the equal opportunities to develop themselves.

 

 

Reference

 

Arnold, R. A., 2008, Economics, 8th edition, Mason: Thomson South-Western, p.578

 

Barbera, Hammond & Seidl 1998, Handbook of utility theory, Dordrecht: Kluwer Academic Publishers, p388

 

Kelley, J & Evans, M. D. R., 1993, The Legitimation of Inequality: Occupational Earnings in Nine Nations, American Journal of Sociology, 99: 75-125.

 

Firebaugh, G. 2003, The New Geography of Global Income Inequality, US: Harvard University Press, p.71

 

Gini, C., 1912 Variabilita e mutabilita, Studi Economic-Giuridici dell’Universita di Cagliari 3: 1- 158

 

Mithaug, D. E. 1996, Equal opportunity theory. Thousand Oaks: SAGE

 

Nytimes.com 2010, China Passes Japan as Second-Largest Economy, view on 9th April 2011, from: http://www.nytimes.com/2010/08/16/business/global/16yuan.html

 

Rawls, J., 1971, A theory of justice, Cambridge, MA: Harvard University Press

 

Vitello, S. J. & Mithaug, D. E., 1998, Inclusive schooling: national and international perspectives, Mahwah, NJ: Lawrence Erlbaum Associates, Inc., Publishers, p21