Poverty and Income Inequality

Introduction

The issue of poverty and income inequality has been an ongoing debate for decades. The issue has now taken center stage in the policy debate across the globe. Inequality matters in its own right, and it is likely to reduce poverty. Big players such as the World Bank, OECD, and the UN have set goals as well as outlined recommendations to tackle poverty and inequality. Inequality has become a global problem that needs to be solved with global participation. With regard to income, the way income is distributed in many countries affects the welfare of people in that country. Aggregate welfare tends to be higher, and poverty tends to be lower in states with equal distribution of income. Lower inequality can contribute to greater economic inefficiency. However, there are many solutions to this issue. By increasing salaries, ensuring that tax regulators expand earned income tax, developing initiatives to build assets for working families, ensuring people invest in education and health, poverty and income inequality can be solved. 

Relationship between Poverty and Income Inequality

Disparities in income distribution within a country can result in significant effects on poverty. This is because inequality has a direct impact on the growth of an economy. More to this is that it can indirectly affect poverty. This is because economic growth have a direct impact on poverty. A study done in the 20th century has reconfirmed that income distribution is a determinant of economic growth (Naschold, 2002). According to the study, greater income inequality reduce future growth. The results obtained from this study led to debates, but according to Knowles (2001), current studies have reaffirmed the negative effect of inequality on growth. On the other hand, nations with lower levels of inequality are characterized by faster growth, which can, in turn, reduce poverty. Either way, the level of income inequality affects the impact of poverty.

Background information

Drivers of Poverty

In order to address them effectively, it is very vital to these issues came into existence. Some of the factors which led to the existence of poverty include poor economy, lack of employment, lack of job security, insufficient salaries, and limited livelihoods (Shepherd, 2011). All the drivers stated above led to the existence of poverty as well as to the inability to escape poverty. High levels of inequality or disparity in income tend to weaken the sustainability of economic growth and thus, can impede poverty reduction. This is because, according to Handley, Higgins, & Sharma (2009), high levels of inequality have adverse effects on human capital, institutional legitimacy, and social cohesion. 

Another driver that led to the existence of poverty is poor governance. Poor governance makes it difficult to generate pro-poor growth. It also makes it difficult to create institutions to tackle problems, and this can sustain poverty. A weak civil society also plays a vital role in the existence of poverty. This is because it makes it very difficult to hold governments to take responsibilities on their strategies and policies to address issues. Another factor that led to the existence of poverty is the lack of respect for human rights. This is because it can result in denial of the right of access to social services such as education and health care services(Handley et al., 2009).

Drivers of Income Inequality

With regard to inequality, many drivers led to the existence of income inequality. One of the drivers is domestic policies on taxation and finance. According to Pikkey (2014), what regulators or government recognize to be ‘just’ or ‘unjust’ can result in the implementation of policies that can widen the gap of income inequality. Unequal distribution of benefits across and within nations can be driven by inadequate regulation of the financial integration process as well as by trade liberation process. The way these processes are done determines if the intervention will weaken labor market institution. This, in turn, will determine if it will drive inequality.

Current studies indicate that returns on capital as the primary driver that led to the existence of income inequality in many nations (Pikkey, 2014). This is because individuals with capital have the ability to invest and accumulate wealth very fast compared to those without capital. Other dimensions of inequality, such as gender inequality, also drive income inequality. The intersecting nature of inequality can cause this dimension of inequality to persist. According to the World Bank (2006), other forms of inequality, such as gender inequality, economic inequality, and political inequality, tend to form ‘inequality traps.’ All the drivers discussed above led to the existence of income inequality in many countries. 

Existence of Poverty and Income Inequality: Interpretation of Statistical Data

Angelsen did a study, & Wunder (2006) on per capita incomes in both developed and developing countries from 1960 to 2006 shows the persistence of income inequality. The study also how the economy of these nations developed with regard to substantially improved per capita Gross Domestic Product (GDP). While many countries experienced episodes of growth between 1960 and 2006, economic development has not been sustained in many countries. More to this, the growth has also not generated decent jobs. When it comes to per capita GDP, the income gap between developed and developing nations have not reduced. This is illustrated in the figure shown below (Figure 1). 

Figure 1: Per Capita Income in 2000 US Dollars. Source: ( Angelsen, & Wunder, 2006)

From figure 1, it is evident that the difference in per capita incomes between the rich and developing countries in 1960 was so large. For instance, in 2006, the average per capita income in America was 15 times higher when compared to the average income in East Asia. The gap was also larger in other countries and still growing, especially in developing countries. For instance, when to compare to the per capita income in South Asia in 1960, the income was 34 times higher in nations that are in the eurozone; the gap increased to 36 times by 2006. The gap was large in sub-Saharan Africa as it was 15 times less than the average income for nations that are in the eurozone. By 2006, the gap widened to 38. 

The Gini coefficient is a statistical measure used to measure or compare the income inequality of countries. The coefficient varies from one country to another. A Gini scale of 0 represents perfect inequality, and a Gini coefficient of 1 represents total inequality. In general, when compared to developed or rich countries, the Gini coefficient is very high in a third world or developing countries. The coefficient range from 0.25 to 0.45 in developed countries, whereas for developing countries, the coefficient is more than 0.50. 

Perspectives on Poverty and Inequality: Developmentalist and Marxist View

Strong and polarized positions characterize the debate on poverty and income inequality, as well as the link between the two. Various scholars hold different positions on the discussion about this issue. First, the ‘developmentalist position’ hold that insufficient economic growth leads to poverty (Angelsen & Wunder, 2006). This view argues that poverty and income inequality can be solved through economic development and by making the ‘cake’ (in this context which refers to the total income or GDP) bigger. Second, ‘class-based' theories, which was inspired by Marxist, view poverty as an issue which is caused by uneven development and exploitation. According to the Marxist view, the inequality results in disparity in income (Angelsen & Wunder, 2006). According to this view, the poor ought to be given a bigger in order to shift the inequality to equilibrium. 

The two views stated above produce fundamentally different positions on how to reduce poverty and income inequality. For instance, according to Adelman and Morris (1978, as cited by Agelsent a& Wunder, 2006), the typical Marxist view hold that in states or nations that are underdeveloped, any kind of structural changes, like commercialization or industrialization tends to benefit the richer, increasing the gap between the rich and the poor. However, much empirical work over the past few years has enlightened this debate. Currently, there is a growing consensus on two sets of issues.

First, macroeconomic growth tends to increase income. To add to this, macroeconomic growth reduces poverty, and thus it reduces the poverty gap. Second, in some cases, due to unequal distribution or bad economic growth, little or no poverty reduction can be achieved. This development pattern, in most cases, is characterized by a high level of corruption, especially among political leaders. It also characterized by low labor intensity as well as by low human-capital accumulation.

Addressing Poverty and Income Inequality

There are numerous ways to minimize rising poverty and income inequality that is prevalent in America. Some of these ways include increasing salaries, ensuring that tax regulators expand earned income tax, developing initiatives to build assets for working families, ensuring people invest in education and health. The issue can also be addressed by making the tax code more progressive as well as by ending residential segregation. With regard to expanding, this solution can lift approximately 4.7 million children above the poverty line every year (Meyer, 2010). According to Meyer, this solution is effective as it will pull children out of poverty. At the same time, the solution will prove economic support to people living beyond the poverty line.

Improvement in wages can help lift millions of people out of poverty. Cooper states that if the minimum wage in America is raised to $15 by 2024, it will help approximately 41 million people working in the country. The minimum wage is a mechanism for improving the living standards of people as well as mechanisms for combating inequality. This is because the lowest-paying jobs will benefit a lot from the raise in salary. 

Reducing multidimensional poverty and income inequality requires sustained investment in human capital (Handler et al., 2009). Example of such investments includes investment in education and health, as well as investment in food and nutrition security. Increasing parent’s schooling and per consumption is likely to reduce poverty for the parents and future generations. In order to reduce poverty, specific policies, and programmes that target the poor ought to be implemented to help them overcome the barriers they face. Such policies should address the structural causes of poverty and focus on anti-discrimination and empowerment. For instance, gender, political, and other dimensions of equality can contribute to economic growth as well as speed up the reduction of poverty (Kabeer & Natali, 2013). 

Inclusive policies enable nations to reduce inequality. At the same time, it allows countries to achieve strong economic growth. Responsive governments tend to increase the income of marginalized households and groups (Kabeer & Natali, 2013). According to Piketty (2014), investment in education as well as in training, and skills can reduce inequalities. Also, access to essential services and human rights, such as water, sanitation, health and nutrition, and education is vital for promoting equality of opportunity. According to the World Bank (2006), the government should also implement fiscal policies such as progressive income taxation, and policies aimed at improving education and health spending. This is because it will help promote equality. Through anti-discrimination legislation, the government can challenge the underlying actions that perpetuate inequality. 

Ethical Outcomes 

Economic insecurity is one of the main factors that lead to violent conflicts in many countries, such as the Middle East. Even in developed nations, like America, inequality has led to social issues like the opioid epidemic. Many have called for solutions to address poverty and income inequality, such as the one mentioned above. However, this has raised many ethical issues as powerful voices in developing nations claim that current income inequalities are fair (Basu, 2018). This is because they believe the disparities are fair because they are as a result of free markets. However, there is no moral justification for economic inequality. Ethically, it is important to ensure fairness and equity in all dimensions of equality. However, under current conditions, pushing for income equality could erode the incentive to work, and this can, in turn, lead to a widespread economic breakdown (Basu, 2018). Today’s world requires us to tolerate some inequalities in order to keep people and economies working. 

Conclusion 

Poverty and income inequality can be addressed by increasing salaries, ensuring that tax regulators expand earned income tax, initiatives to build assets for working families, ensuring people invest in education and health. However, there is an ethical issue that arises from these solutions as some people, especially power voices, claim the inequality is fair as the free market shapes it. Although it would be difficult to reduce poverty and eliminate income inequality significantly, measures and policies ought to be implemented to at least mitigate these gaps.

References

Adelman, I., & Morris, C. (1978). Growth and improvement in the middle of the 19th century. World Development, Vol. 6 (3); 245-273. 

Angelsen, A., & Wunder, S. (2006). Poverty and inequality: Economic growth is better than its reputation. [Online]. Retrieved from: https://pdfs.semanticscholar.org/9120/7a92fccea3ef5394e4dcc87b45a3b2ae11ef.pdf . Accessed 23rd September 2019. 

Basu, K. (2018). The ethics of reducing inequality. [Online]. Retrieved from: https://www.brookings.edu/opinions/the-ethics-of-reducing-inequality/ . Accessed 23rd September 2019. 

Cooper, D. (2011). Raising the minimum wage to $15 by 2024 would lift wages for 41 million American workers. [Online]. Retrieved from: https://www.epi.org/publication/15-by-2024-would-lift-wages-for-41-million/ . Accessed 23rd September 2019. 

Handley, G., Higgins, K., & Sharma, B. (2009). Poverty and poverty reduction in sub-Saharan Africa: An overview of key issues. Working Paper 299: London; ODI. 

Kabeer, N., & Natali., L. (2013). Gender equality and economic growth: Is there a win-win? IDS Working Paper 417. Brighton: Institute of Development Studies. 

Knowles, S. (2001). Inequality and economic growth: The empirical relationship reconsidered in the light of comparable data. Helsinki: WIDER. 

Meyer, B. (2010). The effects of the earned income tax credit and recent reforms. The University of Chicago Press Journals, Vol. 24 (1); 153-180. 

Naschold, F. (2002). Why inequality matters for poverty. Overseas Development Institute, Briefing Paper No. 2 (2 of 3). 

Pikkey, T. (2014). Capital in the twenty-first century. London: The Belknap Press of Harvard University Press. 

Shepherd, A. (2011). Tackling chronic poverty: The policy implications of research on chronic poverty and poverty dynamics. Chronic Poverty Research Center. [Online]. Retrieved from: http://www.chronicpoverty.org/uploads/publication_files/Tackling%20chronic%20poverty%20webcopy.pdf . Accessed 23rd September 2019. 

World Bank. (2006). World development report 2006: Equity and development. Washington, DC: World Bank.