Inequality dampens investment and growth by fueling economic, financial, and political instabilities
Less equal societies have less economic stability. Rapid levels of income inequality are associated to economic instability, financial crisis, debt and inflation. Economic inequality refers to how economic attributes are rationed among individuals in a society, among groups in a population or among countries or regions.
Economic inequality is a challenge before democracy because it is negatively influencing the civic, political and social life of the citizens. Widening inequality also has significant implications for growth and macroeconomic stabilisation.
The rise in economic inequality in developing countries is tied to several factors. These includes financial globalisation, change in labour market institutions, financial deepening, and redistributive policies among others.
One important thing about poverty and inequality is that in a way income does two different things; that is, the goods and services that income buys for us and second, how it places us in the social hierarchy, the effects of social positioning which is substantially influenced by our income.
Poverty is not just about material factors it’s an invidious distinction between classes especially in developing countries such as South Africa, Eswatini, Mozambique, and Zimbabwe among others.
The population growth rate is one of the reasons why developing countries have a high degree of income inequality at relatively higher levels of industrialisation.
The rapid widening of income inequality is the defining challenge of our time. There are pervasive inequalities in access to education, health care and finance. Not surprisingly, the extent of inequality, its drivers, and what to do about it has become some of the most hotly debated issues by policymakers.
Why rising inequality a concern; high and sustained levels of inequality, especially inequality of opportunities can entail large social costs. Entrenched inequality of outcomes can significantly undermine an individual’s education and occupational choices. In addition, inequality of outcomes does not generate the right incentives if its rests on rents.
Hence, individuals have an incentive to divert efforts towards securing favored treatment and protection resulting in resource misallocation, corruption and nepotism with attendant adverse social and economic consequences. In particular, citizens can lose confidence in institutions, eroding social cohesion and confidence in the long run.
Income distribution matters for economic growth. There is an inverse relationship between the income share accruing to the rich and economic growth. This is a positive relationship between disposable income and higher growth.
Inequality dampens investment and growth by fueling economic, financial, and political instabilities as witnessed in Zimbabwe, South Africa, and Eswatini.
Inequality affects economic growth drivers. Higher inequality lowers growth by depriving the ability of lower-income households to stay healthy and accumulate physical and human capital. For instance, it can lead to under-investment in education as poor children end up in lower-quality schools and are less able to go to colleges.
As a result, labour productivity will be lower than it would be in a more equitable society. Conflicts; extreme inequality may damage trust and social cohesion thus, also associated with conflicts which discourage investment.
Conflicts are particularly prevalent in the management of common resources where inequality makes resolving disputes more difficult. Inequality affects the economics of conflict, as it may intensify the grievances felt by certain group or can reduce the opportunity costs of initiating or joining a violent group.
Inequality can lead to policies that undermine economic growth. In addition to affecting growth drivers, it can result in poor public policy choices.
It can lead to a backlash against economic growth-enhancing economic liberalisation and fuel protectionist pressures against international trade and market-oriented reforms.
In so doing, enhanced power by the elite could result in a more limited provision of essential goods that boost productivity and growth which disproportionately benefits the poor.
Inequality hampers poverty reduction. Income inequality affects the pace at which economic growth enables poverty reduction. Economic growth is less efficient in lowering poverty in countries with high initial levels of inequality and distributional trends of growth that favors the non-poor.
The fact that, developing economies are periodically subject to shocks of various kinds that erode economic growth , higher inequality makes a greater proportion of the population vulnerable to extreme poverty.
Lowering income inequality does not need to come at the cost of lower efficiency. Redistribution through tax and transfer systems is found to be positively related to economic growth for most countries.
Fiscal policy can be an important tool to reduce inequality. Fiscal policy is critical in ensuring macroeconomic stability and can help avert crises that disproportionately affect the disadvantaged population.
Fiscal redistribution carried out in an appropriate manner, that is consistent with other macroeconomic objectives can raise the income proportion of the vulnerable group and middle class, thus supporting economic growth.
The fiscal policy already plays a significant role in addressing income inequality in most countries but in Zimbabwe and other developing countries like South Africa, the redistributive role of fiscal policy could be reinforced by greater reliance on wealth and property taxes, more progressive income taxation, and removing opportunities for tax avoidance and evasion better targeting of social benefits while minimizing efficiency costs in terms of incentives to work.
In developing countries like Zimbabwe raising agricultural productivity by way of creating a sustainable market for those products so that farmers can be able to purchase inputs in time.
Accumulation of capital and technology diffusion in labour-intensive sectors can substantially lift growth and ensure that the fruits of prosperity are more broadly shared.
Sustaining economic growth in developing markets will require more intensive trends of growth, greater flexibility to shift resources within and across sectors, and the capacity to apply more skilled personal in intensive production techniques.
Policies to improve skills for all, to ensure that a nation’s infrastructure meets its needs, and encourage innovation and technology adoption are thus all essential to driving economic growth and ensuring more inclusive prosperity. The high rate of unemployment in developing countries will continue to hamper economic growth and development.
Economist Clemence Mupfunya is a correspondent for The Sunday Express. He writes in his personal capacity. Contact him at (27) 67 208 2236.
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