M1.2 Inequality.pdf

Inequality Outline Inequity vs. Inequality Defining Inequality Why Inequality is a Problem Causes of Inequality Inequality Trends Inequity vs. Inequality Inequity Inequality Ex-ante event Ex-post event Degree of equality of Curre...

Inequality Outline Inequity vs. Inequality Defining Inequality Why Inequality is a Problem Causes of Inequality Inequality Trends Inequity vs. Inequality Inequity Inequality Ex-ante event Ex-post event Degree of equality of Current spread of life opportunities to generate or outcomes achieve future life outcomes Measured through Gini Relative probability Coefficients and Lorenz curves De Janvry and Sadoulet (2015) Tuaño and Cruz (2019) Defining Inequality Among whom In what space Over what time Inequality Among Whom Individuals or households within a particular society Across different groups (age, gender, ethnic/religious groups) Regions within a particular country In the world as a whole Inequality Among Whom Individuals or households within a particular society Across different groups (age, gender, ethnic/religious groups) Regions within a particular country In the world as a whole Vertical Inequality → among different individuals or households Horizontal Inequality → within a group Inequality in What Space Income Capability Access to resources Inequality Over What Time The nature and extent of inequality and its consequences are very different if particular individuals move in and out of poverty/riches Inequality needs to be measured over different time periods to understand its full welfare implications Why Inequality is a Problem Leads to economic inefficiency Undermines social stability Simply unfair Inequality leading to economic inefficiency The higher the inequality, the smaller the fraction of the population that qualifies for a loan or other forms of credit Can create debt or poverty traps People in lower income brackets may not meet credit/load criteria of more manageable/regulated agencies Limits capability to navigate unexpected shocks Reliance on informal sources with suspicious interest rates or collateral Inequality undermines social stability High inequality strengthens the political power of the rich and hence their economic bargaining power High inequality facilitates rent seeking behaviors: distorting policy decisions, and misallocate resources through Excessive Lobbying Large Political Donations Bribery Cronyism Inequality undermines social stability Excessive Lobbying Lobbying involves interest groups or individuals influencing policymakers in favor of their interests Large Political Donations Financial contributions made to political campaigns, parties, or candidates Large donations can give wealthy individuals or corporations disproportionate influence over political candidates and the policies they support Bribery Offering, giving, receiving, or soliciting something of value to influence an action of an official or other person in charge. It can distort economic and social outcomes, reduce the quality of public services, and divert public resources into the hands of a few Cronyism The practice of favoring close friends, especially in political appointments or business matters, irrespective of their qualifications This can result in mismanagement, waste of public resources, and reduced trust in institutions The Corrupt History of the Food Pyramid https://www.youtube.com/watch?v=SOgH9LDwBzY Inequality undermines social stability Bahramdipity The suppression of serendipitous discoveries or research results by powerful individuals The Inequality Experiment John Rawls (American philosopher) Suppose that before you were born into this world, you had a chance to select the overall level of inequality among the earth’s people… Such that there has to be inequality Where would choose to be placed? But reality doesn’t allow us that… So, you can’t choose your identity What or how would you respond? Inequality is simply unfair Inequality is simply unfair Veil of Ignorance: experienced uncertainty of your position in society Behind it, you can act impartially According to Rawls, it allows us to test for fairness Under this veil, most vote for less inequality But, is that true when you can choose where you are born or when you know where you stand in society? Inequality can be reality by chance The world is built on inequality and inequity The lack of assurances and insurances Causes of Inequality Weak institutions Uncertainty of property rights and opportunities to bribe Flimsy legal system makes resolving disputes and contracts difficult Political instability causing uncertainty Corrupt markets leading to market failure Causes of Inequality: History Path Dependence Processes where past events or decisions constrain later events or decisions The future development of a country is locked by its past decisions Future outlooks are given blinders Causes of Inequality: History Colonization Extractive states Settler colonies Which to choose? Feasibility of settlements Places where the disease environment was not favorable to European settlement, the formation of the extractive state was more likely In places where the early settlers faced high mortality rates, there would be less incentive for new settlers to come Causes of Inequality: History Extractive States Transfer as much of the resources of the colony to the colonizer, with the minimum amount of investment possible Did not introduce much protection for private property, nor did they provide checks and balances against government expropriation Settler Colonies The settlers tried to replicate European institutions Great emphasis was placed on private property and checks against government power History and Institutions Causing Inequality Why do weak institutions persist? When the new elites inherit extractive institutions, they may not want to incur the costs of introducing better institutions and may instead prefer to exploit the existing extractive institutions for their benefit When individuals make irreversible investments that are complementary to a particular set of institutions, they will then be more willing to support them, making these inefficient institutions persist These are examples of path dependence Megatrends of Inequality Megatrends Large, transformative, and global forces that shape the world Have far-reaching impact on disparities in wealth, resources, and opportunities Can be harnessed to encourage a more equitable and sustainable world Can also exacerbate inequality According to the UN-DESA (2020), we are experiencing four megatrends Technological Innovation Climate Change Urbanization International Migration Technological Innovation Technological change tends to create winners and losers Implications on job destruction, creation, and remaking Highly skilled workers are benefiting the most from the 4IR Large movement towards reskilling and upskilling Multisectoral innovations due to digitization and artificial intelligence Access is critical and crucial: those without it lose out, creative ‘digital divides’ Close to 87% have internet access in developed countries, compared to 19% in the least developed countries Lack of access can exacerbate inequalities (e.g., internet during COVID-19) Climate Change Rising temperatures have adversely affected economic growth in countries located in the tropics Very unpredictable weather and environmental shocks and trends Some evidence that cooler countries actually tend to do better developmentally The marginalized are disproportionately exposed to climate change, especially those living rural areas Difference between income of the richest and poorest 10% of the world is 25% larger than it would be in a world without global warming Chronic and persistent poverty is intensified Urbanization For the first time in history, more people now live in urban than rural areas Urban areas are catalysts for economic growth, innovation and employment Weak institutions can further exclude and marginalize Under or unregulated land and housing markets Poor urban planning Congestion issues International Migration International migration is a powerful symbol of global inequality, whether in terms of wages, opportunities or lifestyles Millions of people move each year across countries and continents to seek better job opportunities, study, marry, reunite with family members or flee conflict or natural disasters Positives: Remittances and other transfers by migrant communities abroad Migrants abroad and those who return can generate flows of knowledge, foreign direct investment and trade (Reverse brain drain) Negatives: Can lead to shortages of professionals with key skills, such as teachers, doctors and nurses (brain drain) Hampers economic growth and essentially subsidize richer countries with highly trained workers Zemblanity of the world Coined by William Boyd: making unhappy, unlucky, and expected discoveries occurring by design Inequality and inequity by design? What then do we do? How do we combat seemingly intentional build-up of inequality?