Wednesday, May 16, 2007

Poverty, Income Inequality and Economic Growth



In this essay I looked at: Whether economic growth reduces relative poverty and inequality.

It is a controversial subject and there have been numerous studies examining this issue in both developed countries and developing countries.

Another controversial question is whether income inequality matters

Does it Matter if Economic Growth does not reduce Income Inequality?

Some economists argue that inequality is essential for creating suitable incentives for people to work, innovate and take risks. If economic growth was managed to reduce relative inequality, it may cause a situation of lower growth rates. They argue that as long as people’s real incomes are increasing, it shouldn’t matter if other people experience faster increases in income.

However, contrary to this position, other economists argue that reducing relative poverty should be a goal of the government.

  1. Inequality can often be a cause of social problems such as alienation, leading to crime, vandalism and even rioting (as in the case of Paris 2006 and Brixton, UK 1981)
  2. Inequality is often the result of inequalities of opportunities. For example, those on low incomes and unemployed often have a lack of education and skills. This kind of inequality should be reduced.
  3. Economic Growth is a poor indicator of living standards and well being. Governments should consider other objectives as more important.
In addition to economic arguments, there are of course, many other arguments we could add to these 3 suggestions

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