ib economics hl ch 12 - causes of economic inequality and poverty

inequality of opportunity

• concerned with inequalities in standards of living that arise from monetary factors like income and wealth

• parents’ level of education and occupation and level of income, place of birth, gender, race and ethnicity

• real world example: an early study of six Latin American countries found that circumstances over which people have no control contributed to economic inequality from at least 25% in Colombia and at least 51% in Guatemala

different levels of human capital

• refers to skills, education, and good health that people posses

• low levels translate into low incomes

• generally a positive direct relationship between skill/educational attainment and income levels

• real world example: several parts of Appalachia are designated as medically underserved; major factors for the lack of access are low income, geographic isolation and poor education of available programs

different levels of resource ownership

• some people inherit, or accumulate, through savings from very high incomes, financial capital, or other forms of property

• gives them both an income advantage as well increased wealth

• many others have no resources to rely on other than their labor

• real world example: history of apartheid policies in South Africa led to the dispossession of land from indigenous communities

discrimination

• some social groups (racial and ethnic groups, women) often face discrimination in the job market, with the result that they may receive lower wages than others for the same work, or may find greater difficulty finding work the worker who does not face discrimination

• real world example: redlining in the mid-20th century, the federal government and private institutions systematically denied loans and insurance to residents of predominantly African American neighborhoods, regardless of their individual creditworthiness; led to disinvestment in these communities, limited access to homeownership and small business loans, and a cycle of poverty that has persisted for generations

unequal status and power

• status refers to one’s social or professional position in a society

• may be due to level of education, or level of income and wealth, or some form of social arrangement

• individuals or groups with a high status are often able to control and influence other people or events

• real world example: India’s caste system affects education, employment, and social status

government tax and benefits policies

• people on low incomes often rely heavily on transfer payments and social services and merit goods provided or subsided by the government

• tax policies that favor the rich and do not favor redistribution contribute to increasing income and wealth inequalities and poverty

• real world example: payroll taxes in the US which fund programs like Social Security and Medicare are regressive: taxes are applied at a fixed rate up to a certain income threshold

technological change

• while development of new technologies contributes greatly to improving labor productivity and therefore to promoting economic growth, in recent years it has contributed to greater inequality

• it has eliminated some jobs by replacing human labor by machines

• real world example: jobs in packaging or manufacturing that require a lot of repetitive work have been replaced by machines that can complete the work faster and more effectively

globalization

• contributes to technological change

• refers to economic integration on a global scale, involving increasing interconnectedness throughout the world in many areas (trade, finance, investment, people, technology, ideas, knowledge, communications, and culture)

• increased foreign direct investment investment from developed economies increase income inequalities in both developed and developing economies since it tends to involve greater demand for skilled rather than unskilled workers

• real world example: Indonesia, poverty rates increased by at least 50 percent after the 1997 currency crisis in that country; the rupiah depreciated by 95 percent against the US dollar in 1997 and by 73 percent in 1998, while inflation rose to 58 percent in 1997 and 20 percent in 1998

market-based supply-side policies

• some cases lead to greater unemployment, or lower incomes for lower-skilled workers and hence to increased income inequalities and poverty

• real world example: since 1980s, they have been increasingly used in many countries around the world and have been found to contribute significantly to increasing inequalities

high abnormal profits of firms with increasing market power

• some large firms with market power have been able ot earn very high and increasing abnormal profits which transfer income and wealth away from consumers who have to pay higher pirces towards the owners of the firms

• real world example: Democratic Republic of Congo and industy of natural resource extraction being exploited by multinational mining companies, generating substantial profits while a large portion of the population remains impoverished

increases in pay of certain occupations

• certain occupations, in particular executives and professionals in the financial sector and non-financial executives have been enjoying huge increases in pay

• real world example: in the United States, the ratio of pay of CEOs to pay of the average worker increased from 20 to 1 in 1965 to 300 to 1 in 2013

unemployment

• an unemployed individual receives no income but may receive some unemployment

• these are generally low relative to income received for work

• in most countries, they are provided for limited periods

• real world example: Greece during the economic crisis in the 2010s received international aid that came with significant cuts in public spending and public sector layoffs, leading to a sharp increase in unemployment and directly impacted poverty rates

geography

• some people may live in remote, isolated geographical regions, with limited possibilities for employment, and with limited possibilities to relocate to other more economically active regions

• real world example: Bangladesh has a significant portion of its landmass of delta regions formed by the confluence of delta regions formed by several major rivers, making the country highly susceptible to various natural disasters; the poor who often live in more hazard-prone areas due to limited housing options can be disproportionately affected by these events

age

• older people may receive pensions that are barely enough to cover minimum needs

• in many countries, they may receive no pension at all if they have been living and working in the informal economy (outside the legally registered economy)

• real world example: Japan has one of the world’s most rapidly aging populations due to low birthrate and high life expectancy; welfare system is strained because of the increasing elderly population

poverty

• if people do not have access to essential services, a self-perpetuating cycle may be set into motion where low incomes lead to low human capital, and further to low incomes

• real world example: significant portion of the population in Nigeria has limited access to quality education, lead leads to limited access to well-paying jobs and continues into the next generation