Thus, the degree of consumption or income inequality in India in the year 1999-2000 as measured by Kuznets’ ratio was 2.04 which is quite high. With summing up of such squared deviations of incomes of all households and then taking a square root of it we get standard deviation. Consider two Lorenz curves A and B with the same levels of mean income which cross each other as shown in Fig 65.3. In other words, if functioning of free market economy brings about rapid growth which causes absolute poverty to fall, the existing income inequalities will be socially acceptable. labour services but because of the highly skewed distribution of property or assets and also of the differential access of the people to such facilities as education, health, housing and employment. Disclaimer Copyright, Share Your Knowledge This article attempts to explain economic inequality, particularly income inequality, and how it changes as economic development proceeds in a developing economy. And it shows that, far from being either necessary or good for economic growth, excessive inequality tends to lead to weaker economic performance. Thus-. Inequality … The Point: This paper from 1955 his of historical importance in the study of inequality. To give a concrete illustration we give in Table 65.1 the distribution of national income of India according to the ascending order of household disposable income of India for the years 1999-2000, 2005 and 2011. This increases the rate of capital formation. As a result, capital formation takes place in the society. Economic growth will reduce income inequality if: Wages of the lowest paid rise faster than the average wage. In Fig. It will be observed from Table 65.1 that in the year 1999-2000 the top of 20 per cent of households in India had 43.3 per cent share of consumption expenditure, whereas bottom 20 per cent of population had only 8.9 per cent share of consumption expenditure in India. Of special mention are the Scandinavian countries of Sweden and Norway which have developed and become rich while maintaining relative equality in income distribution. In the third place, Gini Coefficient attempts to capture the extent of dispersion underlying the size distribution of income or consumption. First, the inequality that is based on merit or people’s contribution to social product can be considered as ‘functional inequalities’. Even if we had data to approximate the income structure just out-lined, the broad question posed at the start-how income inequality changes in the process of a country's economic growth-could be Therefore, economic growth will be of little value if it benefits only a few rich, keeping a good number of the population in the state of poverty and unemployment. They were able to achieve high rates of economic growth with active participation of Government in their economies. A higher rate of capital formation brings about rapid economic growth and greatly increases the level of national production. Therefore, if the objective of economic equality is to be realised we have not only to improve the access of the people in general to the facilities of education, health, and housing but also to redistribute assets (for example, land reforms). In Inequality, Growth and Investment (NBER Working Paper No.7038), Barro studies a broad panel of countries between 1960 and1995 and finds that growth tends to fall with greater inequality when income per capita is less than $2,000 (in 1985 dollars) and to rise with inequality when income per capita is … Lerner, drew distinction between functional and dysfunctional inequalities. Besides, to ensure relative equality, adequate employment opportunities are to be generated to ensure earnings from work to labourers. The poverty of the person who fails in life is due to bad heredity and unfavourable social environments. The principal objective of developing countries, especially of India, is to raise the levels of living of the people of a country. Both have seen considerable growth. They estimate that a one percentage point increase in the income share of the top 20% will drag down growth by 0.08 percentage points over five years, while a … It is the policy of privatisation and liberalisation of the economy that is responsible for the current large inequalities of income in China. Late Prof. Suresh Tendulkar provided an economic rationale for rising income inequalities during periods of rapid economic growth because they cause upward income mobility for the people. Lance Taylor with Özlem Ömer, Macroeconomic Inequality from Reagan to Trump: Market Power, Wage Repression, Asset Price Inflation, and Industrial Decline, Cambridge University Press, 2020. 65.2, the Lorenz Curve H (dotted) will indicate greater inequality of income distribution than the Lorenz Curve L. The maximum deviation of actual distribution from the line of perfect equality will be represented by the area of a triangle OAD in Fig. 4. Thus, in Fig. Poverty and inequality imply absence of social justice. Pension poverty has fallen due to more generous state benefits. Economic development means economic growth plus more desirable changes that must occur to raise the levels of living of the people at large. Interest-bearing wealth. On the basis of this hypothesis, the supporters of free market economy argued that increased inequality is a necessary condition for economic growth. 2. Coefficient of variation is the most common measure of dispersion of income that is generally used by statisticians and is based on standard deviation (σ) which squares all deviations from the mean. 65.1 is given by the ratio of shaded area (representing the actual deviation of observed income distribution from the line of perfect equality) to the area of triangle OAD. Looking at annual income levels over the course of roughly 50-75 years Kuznets finds that beginning in as early as the nineteen-twenties, the inequality of income distribution in the UK, US, and Germany narrowed rather than widened. In the study "Economic Growth and Income Equality" (1955), Simon Kuznets compared the ratio between the shared income of the richest 20% of the population and the shared income of the poorest 60% of the population in two categories of states: developing economies and already developed states. – from £6.99. Further, large inequalities of income may create economic instability which may adversely affect the investment and growth. When the distribution of income is less than perfect equality, Lorenz Curve will be below it, as shown by OD curve in Fig. This promotes capital formation and economic growth which in turn raise the levels of living of the people. Minimum wages are increased in line with average earnings. Obviously, the distribution of income from wealth depends on distribution of wealth or assets among households in a society. Another side … Let us illustrate this point with the help of Lorenz curve. Welcome to EconomicsDiscussion.net! Overall the picture is ambiguous as there is literature which suggests a statistically significant negative relation between income inequality and growth and simultaneously there exists literature which establishes a positive relation between the two. The top earners will benefit more from the economic recovery than the bottom earners will. long-term sickness and disability). According to Lorenz Curve criterion of income distribution, the farther the Lorenz curves to the line of absolute equality, the greater will be the inequality in the distribution of income. For the wealthy, it is a wealth creating cycle – which increases their share of income. This hope or ‘expectations calculus’ produces gratification that overcomes envy and raises society’s tolerance for -inequalities. A noted welfare economist- Tibor Scitovsky was one of the earlier economists who suggested three criteria for social acceptability of inequalities. What is wanted is that reasonable inequalities of incomes should be established. The coefficient of variation is just the standard deviation divided by the mean and, therefore, it reflects only relative incomes. Income from work or earnings from labour services of the members of the family who are employed. In India, the situation hasn’t worked out as well for the poor. ECONOMIC GROWTH AND INCOME INEQUALITY: THEORETICAL BACKGROUND AND EMPIRICAL EVIDENCE The greater the inequality in the distribution of wealth or assets, the greater will be the inequality in income distribution. Progressive taxes redistribute income. Economic growth creates job opportunities which reduce the level of unemployment. 2. Governments acted as catalyst which helped markets by providing the requisite physical and institutional infrastructure, by remedying market failures and by promoting saving and technology.”, Further, Stiglitz writes, contrary to what has happened in India, “East Asian countries proved that the initial stages of development did not have to be associated with an increase in inequality. 2. The result of these forces is that an individual possesses certain inborn qualities. Inequalities of income beyond the point necessary to furnish incentives are not justified on grounds of higher productivity and growth. Economic growth: A 2016 meta-analysis found that "the effect of inequality on growth is negative and more pronounced in less developed countries than in rich countries". Thus, Nobel Laureate Joseph E. Stieglitz in his recent book, “The Price of Inequality” points out that there is clear association between inequality and economic instability. Share Your PDF File The first is based on the fundamental idea that inequality benefits economic growth insofar as it generates an incentive to work and invest more. Inequalities of income that prevail today are much more than what are required to furnish incentives to work hard and innovate or use their capabilities fully. There has also been an improvement in income of pensioners. Economic growth often creates the best opportunities for those who are highly skilled and educated. It is worth mentioning that data regarding income of the individuals or households is difficult to collect.