Theme 4 - Poverty and inequality

Question 1

what is income

Answer 1

flow of money measured over time

Question 2

what is wealth

Answer 2

stock concept
- money measured at a given point in time

Question 3

what are assets

Answer 3

anything with market value that can generate income

Question 4

How Income Relates to Wealth

Answer 4

• Individuals with higher incomes are able to save more after covering their basic expenses.
• These savings can be used to purchase assets such as property, stocks, or bonds, which grow in value over time
• The income generated by these assets can be reinvested to acquire even more assets or enhance the value of existing ones.
• This creates a compounding cycle where wealth continues to grow, independent of the original income.

Question 5

reasons for differentials in income and wealth

Answer 5

Age
As individuals age, they gain work experience and seniority, leading to higher income levels.
- This allows older individuals to save more, invest in assets, and accumulate wealth over time.
- younger individuals often have lower incomes and limited opportunities to build assets.

Education
- Higher levels of education provide individuals with specialized skills that are in demand, enabling access to higher-paying jobs.
- This leads to greater lifetime earnings, higher savings potential, and the ability to invest in wealth-generating assets like property or stocks.
- As a result, individuals with advanced education build and sustain more wealth than those with lower education levels.

Ownership of Financial Assets
- Individuals who own financial assets, such as stocks or bonds, earn income through dividends and capital gains.
- This generates additional streams of income, enabling further investments and the compounding of wealth.
- Consequently, those with financial assets experience accelerated wealth accumulation, widening the gap with those who lack such ownership.

Ownership of Properties
- Property ownership provides rental income and benefits from property value appreciation over time.
- Wealthier individuals can reinvest rental income into further properties or other investments, compounding their wealth.
- This creates a cycle of increasing wealth for property owners, while non-owners face stagnant wealth and reduced savings due to rent payments.

Wage Differentials
- High-skilled workers in sectors like technology or finance earn significantly more than low-skilled workers.
- This enables high earners to save more, invest in financial assets, and build long-term wealth.
- The impact is that wage disparities translate directly into wealth inequalities, as low-skilled workers struggle to accumulate savings or assets.

Question 6

what is absolute poverty

Answer 6

incomes below a threshold($2/day), individuals unable to access basic needs,

Question 7

what is relative poverty

Answer 7

incomes below a given median in society

Question 8

equity vs equality

Answer 8

equity - fairness in the distribution of income
equality - EQUAL distribution of income

Question 9

what is horizontal equity

Answer 9

equal treatments of equals, eg those with the same incomes will be taxed the same

Question 10

what is vertical equity

Answer 10

higher income earners in society have to pay the highest tax rates, progressive/proportionate tax systems

Question 11

causes of poverty

Answer 11

Unemployment (Cyclical/Structural)
- Unemployment reduces individuals’ ability to earn income, pushing them into poverty.
- Cyclical unemployment arises during economic downturns, while structural unemployment reflects a mismatch between workers’ skills and job market needs.
- The impact is a loss of income, reduced standard of living, and increased reliance on government support, deepening poverty levels.

Poor Education/Skills
- Lack of education or relevant skills limits access to higher-paying jobs.
- This reduces individuals’ earning potential and confines them to low-paying or unstable employment.
- As a result, poverty persists as individuals struggle to save or invest in long-term opportunities.

Poor Health/Healthcare
- Health problems reduce individuals’ ability to work and increase their medical expenses.
- Inadequate access to affordable healthcare worsens health outcomes, reducing productivity and job retention.
- This creates a cycle of poverty, as individuals are unable to escape financial hardship due to ongoing health issues.

Wage Differentials (Relative Poverty)
- Wage disparities mean low-income earners cannot afford the same standard of living as higher earners.
- This creates relative poverty, even in economies with high average incomes.
- The impact is social inequality, reduced social mobility, and long-term disparities in wealth and opportunities.

• Bad Luck (Born into Poverty/Single Parent)
• Individuals born into poor families face fewer opportunities for education, networking, and career advancement.
• Single-parent households often have limited income streams and higher living costs.
• The result is intergenerational poverty, as disadvantaged individuals struggle to break out of their circumstances.
• Tax Cuts for Well-Off (Relative Poverty)
• Tax cuts for high-income earners increase income inequality by concentrating wealth among the already affluent.
• This reduces government revenues for welfare programs and social support systems.
• The impact is a widening income gap, with low-income earners falling further into relative poverty.

Subsistence Agriculture (Developing Countries)
- Dependence on subsistence farming limits income potential, as output is consumed rather than sold.
- Farmers are vulnerable to weather shocks and lack access to modern technology or credit.
- This results in persistent poverty, with little opportunity for economic advancement or savings.

Benefit Levels
- If unemployment benefits, disability payments, or other social welfare programs are inadequate, individuals reliant on these schemes struggle to meet basic needs. This leads to higher levels of absolute poverty,
- Poor benefit levels exacerbate income inequality, reduce social mobility, and place additional strain on charitable organizations and public services like healthcare.

Employment Law Levels
Weak employment laws contribute to poverty by allowing bad working conditions and low wages.
- In countries with minimal regulation, employers may offer insecure contracts, low pay, and limited benefits. For example, workers on zero-hour contracts or in the gig economy may lack job security and income stability, trapping them in working poverty.
- leaves individuals vulnerable to financial shocks, while low pay perpetuates cycles of poverty, particularly in sectors with high labor demand but low bargaining power, such as retail or hospitality.

Trade Unions
Declining trade union membership weakens workers’ ability to negotiate for better wages and conditions, worsening poverty.
- Trade unions historically provided a counterbalance to employer power, ensuring fair pay and decent working conditions. As union influence declines, wage growth stagnates, and the share of income accruing to workers falls, particularly for low-income earners. Without collective bargaining, workers in industries with limited skills or competition are more likely to face exploitation.
- Reduced union influence contributes to income inequality and working poverty, particularly in sectors dominated by low-paid, non-unionized workers. This also increases reliance on government welfare programs to fill the income gap.

Question 12

explain the lorenz curve

Answer 12

The Lorenz Curve is a graphical representation of income or wealth distribution in an economy. It compares the cumulative share of income (or wealth) received by percentages of the population, starting with the poorest.

The x-axis represents the cumulative percentage of the population (from 0% to 100%).
The y-axis represents the cumulative percentage of income or wealth.
A 45-degree line represents perfect equality (everyone has the same income).
The Lorenz Curve lies below the 45-degree line, showing the actual distribution of income or wealth.

Question 13

explain the gini coefficient

Answer 13

The Gini Coefficient quantifies inequality based on the Lorenz Curve. It is calculated as the ratio of the area between the Lorenz Curve and the 45-degree line to the total area under the 45-degree line.

Formula:
𝐺 =𝐴/𝐴+𝐵
A = Area between the Lorenz Curve and the line of perfect equality.
B = Area under the Lorenz Curve.

G: Value between 0 and 1, where 0 indicates perfect equality and 1 indicates maximum inequality.
Interpretation:

𝐺=0 : Everyone has the same income (perfect equality).
𝐺=1: One person has all the income (maximum inequality).

Example:

A country like Sweden might have a Gini Coefficient of 0.25, indicating low inequality.
A highly unequal country, such as South Africa, might have a Gini Coefficient of 0.63.

Question 14

difference between wealth and income

Answer 14

income is a flow whereas wealth is a stocn

Question 15

what are transfer payments

Answer 15

payments made from the govt to economic agents

Question 16

what are mean tested benefits

Answer 16

benefits given to people who desperately need it, then taken away when living conditions improve

Question 17

policies to redistribute wealth and income

Answer 17

1. progressive tax systems
   - a progressive tax system imposes higher tax rates on higher income earners, redistributing income from the wealthy to lower groups
   - this reduces income inequality by increasing the disposable income of the less well off through govt spending on public goods or direct transfers
2. Reducing regressive taxes
   - reducing regressive taxes like VAT, benefits lower income households who spend a larger proportion of their income on consumption
   - this helps reduce II by improving the purchasing power for the poorest groups
3. Increased benefits/ means-tested benefits
   - increased welfare payments supports those in poverty by increasing their quality of life, allowing them to spend
4. Max/Min wage and bonus caps
   - setting a min wage ensures workers earn a face income, reducing wage inequality and lifting some out of poverty. max wage caps or bonus caps prevent excessive income disparities
   - this promotes fairness in the labour market and redistributes income more evenly across society
5. Legislation
   - laws ensuring fair treatment, such as leaves, anti discrimination laws etc, promote equality and prevent income disparities due to biases
   - ensures better workplace equity and long term economic participation from diverse groups
6. Increased government spending on education, training and healthcare
   - investing in education and training equips individuals with skills to access higher paying jobs, improving income mobility. Spending on healthcare ensures a healthier workforce, increasing productivity
   - overtime these measures reduce II and improve quality of life

Question 18

policies to redistribute wealth and income(eval points)

Answer 18

1. Progressive tax systems
   - may reduce incentives for higher earners, potentially leading to brain drain, reduced productivity or tax avoidance
2. Reducing regressive taxes
   - can strain govt finances, potentially limiting funding for essential services like healthcare and evaluation
3. increased benefits/means tested benefits
   - Means tested benefits can create a poverty trap, discouraging recipients from seeking better jobs as they may lose eligibility. Additionally, such programs place a strain on govt finances
4. Min/Max wages and bonus caps
   - minimum wages may reduce employer demand for labour, increasing unemployment
   - maximum wage caps could disincentivise high performing workers or executives, potentially reducing productivity and innovation
5. Legislation
   - can be costly to businesses
   - weak enforcement may make ineffective policies
   - poorly designed laws may lead to govt failure, harming businesses without achieving redistribution goals
6. Increased govt spending on education/healthcare/training
   - time lags, benefits take years to materialise
   - high opportunity costs
   - strain on govt finances
7. Equity vs. Efficiency
   - Redistributing income often creates a trade-off between achieving greater equity and maintaining economic efficiency.
   - Policies such as progressive taxes or minimum wages can reduce income inequality but may distort market incentives, lowering productivity and growth.
   - If efficiency falls significantly, the overall economic pie may shrink, potentially reducing total welfare despite more equal distribution.
8. Normative Judgments
   - Policies on redistribution depend heavily on subjective values about fairness and societal priorities.
   - Some may view significant income inequality as unacceptable, advocating for aggressive redistribution, while others may prioritize individual effort and market outcomes over equal outcomes.
   - This leads to political and ideological debates, making the implementation of redistribution policies contentious and dependent on public sentiment.
9. Is Inequality Always Bad?
   - Moderate levels of income inequality can provide incentives for hard work, innovation, and entrepreneurship, driving economic growth.
   - Some degree of inequality reflects differences in skills, effort, and risk-taking, which are essential for a dynamic economy.
   - Excessive inequality, however, can lead to social unrest, reduced social mobility, and inefficiencies such as underutilization of talent among low-income groups. Policies should aim to balance these effects.

Question 19

how is poverty measured

Answer 19

• the human poverty index
• HPI-1 - used to measure deprivation in the most severely affected nations in the world, eg Haiti
• HPI - 2 - More relevant for developed nations
• both use components like life expectancy,employment,literacy levels,and relative income to other countries

or
the ratio method, where poverty is measured by calculating income proportion spent on necessities

Question 20

some countries gini coefficient

Answer 20

Avg gini = 0.3
UK - 0.35
US - 0.37
South Africa, top 1% own 30% of all income (0.67)
After moving to capitalism, China gini increased from 0.44 to 0.55
Netherlands and Denmark gini has been < 0.28 since 1970s

Question 21

Causes of wealth and income inequality between countries

Answer 21

Natural Resources
Some countries possess vast natural resources yet struggle with poverty due to governance issues and external exploitation.
Analysis: Countries like the Democratic Republic of Congo (DRC) have an abundance of valuable minerals like cobalt and gold. However, weak institutions, corruption, and foreign exploitation result in the mismanagement of these resources. Resource wealth often leads to conflict and the “resource curse,” where dependency on raw materials hinders diversification and sustainable development.
Evidence: The DRC, despite its mineral wealth, has one of the highest poverty rates globally, with approximately 60% of its population living on less than $2 a day.

Geographic Location
Strategic geography often plays a crucial role in economic prosperity, while less advantageous locations can hinder growth.

Analysis: Coastal nations with access to trade routes, like Singapore, leverage their geography for economic growth. In contrast, landlocked countries face higher transport costs and limited trade opportunities, reducing their competitiveness. For example, nations reliant on neighboring countries for port access face delays and increased costs, limiting their export potential.
Evidence: Singapore’s location on key maritime routes has helped it become a global financial and trading hub, while countries like Chad, a landlocked nation in Central Africa, struggle with poverty due to limited trade access and high transport costs.

Political Stability
Political instability undermines economic development, discourages investment, and worsens poverty.

Analysis: Stable governments create environments conducive to investment and growth, whereas unstable ones deter investors and mismanage resources. Corruption often diverts funds from public services, exacerbating poverty. In countries like Zimbabwe, hyperinflation, land seizures, and weak governance have worsened living standards. Similarly, Nigeria’s systemic corruption has concentrated wealth in the hands of elites, leaving public services underfunded.
Evidence: Nigeria, despite being Africa’s largest oil producer, has 40% of its population living in poverty due to corruption and mismanagement. In Zimbabwe, inflation peaked at 79.6 billion percent in 2008, devastating savings and incomes.

Trade Liberalization
Access to global markets boosts economic growth, while trade barriers isolate countries and hinder development.

Analysis: Economies that integrate into global trade networks gain access to larger markets and foreign investment. For example, Japan’s post-WWII growth was fueled by trade liberalization and access to US markets. On the other hand, protectionism can limit export opportunities and lead to inefficiency, as industries may lack competition.
Evidence: Japan’s GDP grew at an average rate of 9.7% annually from 1950–1973 after opening its economy. Conversely, North Korea remains isolated due to trade restrictions, with limited growth and persistent poverty.
Technological Changes
Access to technology boosts productivity and income, while technological gaps widen global disparities.

Analysis: Advanced economies lead in sectors like AI and renewable energy, gaining a competitive edge in global markets. Developing nations often lack the infrastructure, education, and capital needed to adopt these technologies. As a result, they remain reliant on low-value-added industries, trapping them in poverty.
Evidence: South Korea invested heavily in technology and education, transforming from a low-income country in the 1950s to a tech giant by the 21st century. Conversely, many African nations lag in technological adoption, limiting industrial growth and innovation.

Macroeconomic Objectives
Poor macroeconomic management leads to instability, deterring growth and deepening poverty.

Analysis: High debt levels, inflation, and unemployment reduce a country’s fiscal capacity to invest in infrastructure and welfare. For example, Italy’s persistent public debt limits its ability to stimulate growth or fund social programs. Inflation erodes purchasing power, disproportionately affecting the poor.
Evidence: Italy’s public debt stands at 144% of its GDP (2023), leading to limited fiscal flexibility and slow economic growth. Similarly, Argentina’s inflation rate exceeded 120% in 2023, plunging millions into poverty.

Colonialism
The legacy of colonialism continues to affect economic outcomes in many countries.

Analysis: Colonizers extracted resources and suppressed local industries, leaving economies dependent on raw material exports. Post-independence, many nations inherited weak institutions, artificial borders, and limited infrastructure. These structural issues hinder diversification and economic progress.
Evidence: African countries like Sudan and the DRC face ongoing conflicts partly due to arbitrary borders drawn during colonial rule. Meanwhile, former colonies like India have managed to industrialize but still struggle with income inequality rooted in colonial policies.

Question 22

what is UBI

Answer 22

universal basic income is a welfare policy that guarantees a monthly income to EVERYONE in the population, regardless of their current income, employment, or other factors

Question 23

features of UBI

Answer 23

• covers basic needs
• unconditional
• funded through taxation

Question 24

pros of UBI

Answer 24

1. Supports Those Out of Work
   - UBI ensures that individuals who are unemployed still receive a stable income, providing financial security.
   - Reduces poverty rates and prevents individuals from falling into severe financial hardship during periods of unemployment, such as economic recessions or personal crises.
2. Overcomes Problems with Means-Tested Benefits
   - Means-tested benefits can disincentivize work due to the “poverty trap,” where increased income leads to a loss of benefits. UBI eliminates this issue by providing income unconditionally.
   - Encourages more individuals to seek employment or increase working hours without fear of losing their financial safety net.
3. Always an Incentive to Work
   - Unlike some welfare systems, UBI is not reduced or withdrawn as individuals earn more, ensuring that there is always a financial reward for working.
   - Encourages workforce participation, increasing productivity and potentially leading to economic growth.
4. Everyone is Eligible (Income Top-Up)
   - UBI is universal, meaning all citizens receive it regardless of their income level, acting as an income supplement for low- and middle-income earners.
   - Reduces income inequality and provides greater financial security for the entire population, promoting social cohesion.
5. Supports Socially Beneficial Activity
   - UBI allows individuals to engage in unpaid but socially valuable activities, such as caregiving, volunteering, or community service, without financial strain.
   - Enhances societal well-being by encouraging activities that may not generate direct economic output but have significant social value.
6. Can Support Entrepreneurship
   - With a guaranteed income, individuals are more likely to take risks, such as starting a business, as UBI provides a financial safety net.
   - Encourages innovation and entrepreneurial activity, potentially leading to job creation and economic growth in the long term.

Question 25

cons of UBI

Answer 25

1. Can Encourage Laziness or Living Off Benefits
   - Since UBI is unconditional, some individuals may choose to rely solely on it rather than seeking employment, reducing their contribution to the economy.
   - May lead to a decline in workforce participation, potentially lowering overall productivity and creating a culture of dependency among some individuals.
2. Can Reduce Labour Market Flexibility
   - UBI may decrease the willingness of workers to relocate for jobs or take up low-paid or demanding roles, as the basic income reduces the necessity to accept such employment.
   - Labour immobility could worsen skill shortages in certain industries or regions, negatively affecting economic efficiency and growth.
3. High Costs and Poorly Targeted
   - UBI is expensive to implement universally, and since it is distributed to everyone, even those who are financially well-off receive it. - This makes it less efficient compared to targeted welfare programs.
   - The strain on government budgets may require higher taxes or spending cuts in other critical areas like healthcare and education, potentially worsening overall welfare.
4. Inflation Concerns
   - Providing every citizen with a basic income could increase overall demand in the economy, leading to demand-pull inflation. This would erode the purchasing power of UBI over time.
   - Inflationary pressures might negate the benefits of UBI, particularly for low-income households, leaving them no better off than before.

Question 26

What is wealth tax

Answer 26

tax on individuals assets or net worth, rather than income, eg savings, property

Question 27

pros of wealth taxes

Answer 27

1. Lots of Revenue Generated for Government
   - Wealth taxes can provide significant revenue, as they target high-net-worth individuals with substantial assets. This revenue can fund public goods and services.
   - Enables governments to invest in education, healthcare, and infrastructure, potentially improving living standards and promoting economic growth.
2. Reduced Wealth and Income Inequality
   - By taxing the wealthiest individuals, a wealth tax narrows the gap between the richest and poorest, redistributing resources to create a more equitable society.
   - Helps to address social tensions and provides greater opportunities for low-income groups, contributing to social cohesion.
3. Can Target Windfalls
   - Wealth tax can be designed to target unexpected or unearned gains, such as inheritance or property appreciation, ensuring fairer taxation.
   - Prevents individuals from accumulating excessive wealth through unearned means, promoting fairness in the tax system.
4. Can Promote Efficient Reallocation
   - Wealth taxes may incentivize wealthy individuals to put their idle assets to productive use to offset tax liabilities.
   - Encourages investment in economic activities that generate jobs and growth rather than hoarding wealth in low-productivity assets.

Question 28

cons of wealth taxes

Answer 28

1. Discourages Investment, Income-Generating Activity, and Growth
   - High wealth taxes can reduce incentives for individuals to invest or expand businesses, as returns are taxed heavily
   - This may stifle innovation and entrepreneurship, reducing overall economic dynamism and long-term growth.
2. Risk of Emigration (Brain Drain)
   - Wealthy individuals may relocate to countries with lower tax rates, taking their assets and economic contributions with them.
   - Leads to a loss of high earners, investment, and skilled labor, harming the domestic economy.
3. Tax Loopholes
   - Wealthy individuals often employ accountants and tax advisors to exploit legal loopholes, reducing the effectiveness of the tax.
   - Revenues generated may fall short of expectations, and perceived unfairness in the system could erode public trust.
4. Administrative Challenges (Assets, Valuation)
   - Accurately valuing assets like real estate, art, or shares is complex and time-consuming, leading to disputes and inefficiencies.
   - Administrative costs may offset the revenue generated, reducing the overall effectiveness of the tax.

Question 29

what is poverty trap

Question 30

eval points for wealth tax

Answer 30

1. Depends on the Rate
   - The effectiveness of a wealth tax hinges on the tax rate. A high rate may generate substantial revenue but could discourage investment, while a low rate might fail to address inequality.
   - Striking a balance is critical—too high a rate risks emigration and reduced economic activity, while too low a rate may not justify administrative costs or achieve redistribution goals.
2. Depends on Assets Chosen
   - The design of the tax—whether it applies to real estate, financial assets, or other wealth—affects both fairness and revenue potential. Excluding certain assets may create inequities or inefficiencies.
   - Poorly designed criteria can lead to distortions, where individuals shift wealth into untaxed assets, undermining the tax’s objectives.
3. Depends on Enforcement
   - Strong enforcement mechanisms are necessary to minimize tax evasion and loopholes. Without effective monitoring and valuation systems, compliance may be low.
   - Weak enforcement diminishes the credibility and revenue-generating potential of the tax, leading to public criticism and loss of trust in the system.

Also Laffer curve