essay economic history

Gabriel Aponte
Group 70
Economic History
What is the effect of economic development over inequality and viceversa?
Before delving into the complex relationship between economic development and inequality, it is
necessary to explain each concept as being separate entities within society and then proceed to lay the
groundwork for their interconnectivity.
First off, economic growth is defined as the sustained increase of total output of goods and services
generated by a given society (Gross Domestic Product - GDP), which increases by the efficiency and
the increment of the factors of production. The comparisons in monetary units have an unstable value
and, therefore, is not a constant real value. Development means economic growth accompanied by a
substantial variation in the structure and organization of the whole economy. On the other hand,
progress is not related to the quantity but to the quality of the products that have been produced.
There are varying factors that influence the economic development of a country, the most important of
which are: The constituents of production such as land, labor, and capital. There also exist
fundamental factors such as cultural identity, social institutions, and technological capacities.
According to Dale W. Jorgenson modern economy has been profoundly intertwined with new
technologies, and as such, requires a vast comprehension of technological advances for steady
economic development. This, however, is dependent on the resources in a given society as they
dictate its economic limits. A social function of the social institutions is to provide continuity and
stability, but as they function, these elements may in some instances become obstacles to development
and growth. And when institutions innovate, they can enable more efficient or more intensive use of
resources.
On the other hand, economic inequality allows us to understand why in some cases, nations are
categorized as having a higher economic position (rich nations), or as struggling with their financial
situation (poor nations). In developing countries, however, this does not happen because of a lack of
resources, but due to an improper distribution. This difference in income between rich and poor
countries becomes more extensive every year. Social inequality is also due to a bad distribution of the
nation's resources but is not a sufficient explanation as to why a nation might be considered wealthy
or in a state of poverty. The problem is not that developing nations adopt rich systems because there is
no agreement unto what methods and policies yield high rents in rich nations. Neither is there any
certainty that these methods would work in developing countries. No objective economic
development theory that is operationally useful and generally applicable has been yet presented.
Now with respect to inequality, two points need to be discussed: the rich and poor. How the rich live
and how the poor live, and the great gap between them that the economic system proposed does not
allow the poor to sail from below, in addition to the decrease in the middle class. Also, it may occur
by this cause to get the middle class eliminated and only getting divided into two parts, high and low
class. When inequality exists, it establishes people without access to education and access to health.
Also, it is the lack of political representation, which also exists in corruption and the weakness in
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democracy systems, and in differentiated access to justice. Economic inequality tends to become
social when justice becomes an auction. Inequality is not having a job or having one does not pay a
sufficient salary to maintain decent living conditions. All these are expressions of inequality, are
focused on the poor people. In the case of rich people when inequality exists, it makes them richer
since the gap increases their wellbeing while pushing down the poor people. In result, it eliminates the
middle class and gets divided into only very rich people and extreme poorness.
When we talk about inequality, we must not lose sight of the fact that this is not only how much
money a person earns (it is not only about the gap in the GDP per capita) with respect to another; it
also implies what this individual can access because of that difference in resources.To combat
inequality it is necessary to rethink the economic structure of the country and think regarding public
policies that facilitate the conditions so that the results are equal from the beginning. Inequalities tend
to reinforce each other. Economic disparities cause political inequalities and, in turn, generate all
kinds of social differences. To improve economic growth inequalities can and should be reduced, only
with a more equitable fiscal model, strategic investments in education, research, infrastructures and
better regulation of financial markets. With programs that improve active employment policies and
better salaries.
It has long been known and accepted that high levels of inequality entail high social costs that prevent
social mobility, create social conflicts, increase the crime rate and reduce the prospects of a better
labor market by preventing the economy from taking advantage of the full potential of the most
vulnerable groups.
Historically speaking, inequality can benefit economic growth to the extent that it generates incentives
to work and invest more. That is, if people with a higher level of education have higher productivity,
differences in the rates of return will encourage more people to achieve a higher level of education.
The second mechanism through which greater inequality can lead to higher growth rates is through
greater investment, given that high-income groups tend to have a higher propensity to save and invest.
The effect of inequality on economic development
The effect of inequality on growth unlike the diversity of the impact that an increase can have on
income inequality, it seems clear that inequality can be a brake on economic growth, through
institutional deterioration and the absence of incentives to effort. There are three ways in how this
impact occurs:
First, growth is determined by the accumulation of different types of productive assets, including
physical capital and human capital, and accurate knowledge of production. Incentives to implement
such processes of collection, learning and innovation depend on the ability of citizens to privately
own the fruits of their efforts and this capacity, in turn, depends on fiscal and regulatory policies and
quality of services. In these circumstances, considering «policies to correct inequalities» to improve
growth is a futile academic exercise.
Secondly, the market imperfections can take the form of higher cost of access to credit or higher
collateral requirements. This mechanism does not explain how the initial inequality comes from but
explains that the so-called «poverty trap» or «poverty trap» can persist for a long time.
This problem
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has caused an alteration of the order, passing things like totalitarian governments and deprivation of
essential rights, causing famine and death.
A third way results from the absence of incentives, which helps explain how a "very low" income
level inequality is counterproductive to growth. An artificial equal income distribution by imposing
equal pay effort (as observed in Eastern European economies under communist rule) differs from
optimal allocation, based on differences in talent value, merit, and effort and thus inhibits growth by
reducing incentives for effort and stimulating stowaway behavior. However, there is also empirical
evidence that some income inequality at the top of the income distribution that reflects the ability of
potential investors to capture returns on their innovation projects, can be positive for growth.
Also, violence, generally higher in more unequal societies and in high-growth regions constitute a
social and economic burden that can stop the growth, both for the resources needed for their
elimination and for the uncertainty they engender over the respect of property rights between other
aspects.
The second result that I want to highlight is that the adverse effect of inequality overgrowth is due to
three factors: a) the difficulty of access to economic means that enable development, b) excessive
equality of yields of effort and c) the nature of political and economic institutions. Thus, the existing
institutions play a double role, conditioning both the distributive effects of growth, as the brake that
inequality can impose
about economic growth.
The effect of economic growth on inequality
It seems reasonable to think that the ultimate concern of a government should be the welfare of its
citizens.
Economic growth influences the allocation of resources among productive sectors, on the relative
prices of goods, on the remunerations received by productive factors and, consequently, also on the
distribution of the rent. Unless it grows in the same proportion for all citizens, its distribution will
vary with growth, although it is easy to imagine circumstances under which such growth can lead both
to a more "fair" income distribution and to an unequal distribution. What the meaning of this effect
will depend on many factors, such as the sources of growth, the participation of factors in the
generation of income or the degree of concentration in the ownership of the means of production and,
ultimately, of the distribution mechanisms.
The final result is that inequality initially increases with development, subsequently decreasing from
sufficiently high levels of income. The difficulty in detecting an effect of the rhythm of economic
growth on inequality is not because this effect does not exist, but because it is specific to the
conditions of each country. This is the first result I want to highlight: economic growth has almost
inevitable effects on inequality. Although the sign and intensity of such effects depend on one hand,
on the speed and structural aspects of growth and, in particular, of the dominant distributive
mechanism, which is mostly determined by the quality of political and economic institutions. Political
and economic institutions are endogenous, evolving into a process in which informal political
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institutions. Together with current social values, they delimit the structure of economic institutions;
these, in turn, influence the economic outcome and determine the distribution of income, and the
distributive mechanism determines the future structure of political institutions and dominant social
values.
Precisely the peculiarity of effects that economic growth has on inequality suggests that, although
there is room for interventionist policies that favor a possible redistributive impact of growth, these
should be designed specifically for each case, and not make sense to transplant policies from one
institutional economic context to a very different one.
References:
-Eicher, T. and Turnovsky, S. (2003), Inequality and Growth. Charles I. Jones Department of
Economics, University of California, Berkeley
Aghion, P. Williamson, J. (1999), Growth, Inequality, and Globalization. University College London,
Harvard University, Massachusetts
Campos, A. (2017), How does inequality affect economic growth?. Macroeconomics Unit, Strategic
Planning, and Research Department, CaixaBank
Kuznets, S. (1955), «Economic Growth and Income Inequality», American Economic Review.
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