International Political Economy

Health Education Income Inequality

R. Lucas (2004), developed the idea that in order to be rigorous in your analysis you just have to concentrate on issues of efficiency, and you have to forget about distribution of income. It wasn’t like that in the past. In the history of economic ideas famous economics such as Pigout were caring about efficiency and equity.

Pigout believed that every economic policy could be justified on two grounds if it increases national income and if it distributes in most equal way. Both circumstances would justify an economic policy intervention. This idea changed with the work of Pareto: he believed that it was not the task of an economist to discuss whether the distribution of income is fair. The economist should try to find a way to improve the performances of the economic system given that distribution of income.

For a long time, inequality was not an object of study. In the last few years this changed, also thanks to an influential publication of the French

economist Piketty (“Capital in the XXI Century”, 2014) in which he observes how inequality has been evolving in some industrialized countries. There have been other important publications in famous mainstream economics journals.

There seems to be a link between inequality and growth in the sense that higher degrees of inequality seem to have a negative effect on growth. Recently, economics have been more interested in inequality because of this link with economic growth.

Inequality in the distribution of income, USA, 1910-2010 Piketty shows in a case study the trends over the long run, starting from the beginning of the 20th century until the great financial crisis and a couple of years after that.

Here you have the percentage of national income that is owned for the 10% by the richest part of the population. There are significant trends after the first crisis of 1929 this percentage had been growing significantly from 40% to 50 %. After that there’s a downward trend, maintained.

Throughout the post-WW2 period until the 1980s, there was a constant increase in income distribution. However, from the 1980s onwards, we see a continuous increase again. When this increase reaches 50%, it is considered the Great Financial Crisis.

These data suggest that there might be linkages between the dynamics of income distribution and financial crises. The Great Financial Crisis usually brings along a significant economic crisis with drops in GDP.

This trend is triggered by the top 1% of the population. If we take the top 10% richest and decompose it into the 1% richest, 5%, and 10%, we can observe that the share of income resembles that of the top 1% richest, who own up to 25% of the national income.

Kumhof suggested that there could be a link between this trend of inequality, leverage (degree of debt within a country), and the crisis. When a small part of the population owns a significant amount of resources and capital, they need to find ways to invest those resources and are willing to lend to others.

At the same time while the distribution becomes more unequal, you will have part of the population that needs to get indebted. This in the long run creates imbalances that are not sustainable and can create financial crisis.

The Work of Piketty became a hot topic in the debates in economics and policy making circuits because it stated that between 1977 and 2007 in the US the total growth has gone for three quarters to the richest 10% of the population. Moreover, the richest 1% of the population has gained about 60% of the growth of that period. Despite having a growth of income for the country, this has gone for the vast majority to a small part of the population and the rest was left aside. This is an example of the fact that the growth of GDP does not go hand in hand with the wider process of development because an increasing GDP might be coupled with a more unequal income distribution. This means that the opportunities for development are available for a little part of the population. Higher GDP

Might not be employed for uses that the society considers desirable, such as health, education, environment. There are many possible indicators of inequality: two of them are the Lorenz curve and the GINI coefficient.

The Lorenz curve represents income distribution of a country or area. To build it, you order the population by income levels. Then you measure how much of national income is owned by each percentage of the population. If you have a perfectly equal distribution of income you would be on the 45° line. Any distribution that moves further away from 45° means a more unequal distribution of income.

The GINI coefficient is the most widely used. It is based upon the Lorenz curve and it consists of the area that lies between the 45° line and the Lorenz curve. It is a number that lies between 0 and 1 (or 0 and 100 depending on how it is measured). It tells you how uneven the distribution of income in a given country. The closer to 1, the worst the inequality.

The GINI coefficient does not measure poverty. You might have places where income is distributed equally but it doesn't say about poverty, it could mean that people are poor in the same way.

An alternative of these two methods is the decile dispersion ratio: average consumption of income of Decile dispersion ratio richest 10% / average income of bottom 10%. It is readily interpretable by expressing the income of the top 10% as a multiple of that of those in the poorest decile.

At a world level, countries are experiencing some conversion. There are some improvements in terms of income distribution (like in China and other emerging economies), but at the same time we are also observing the rich becoming richer and richer. We are observing income inequality generally worsening within many industrialized countries, particularly after the 2008 crisis.

Poverty: relative or absolute concept? Relative measurement of poverty would be defining poor whoever owns less than 25% of the average income.

In this case, we consider the average income of everyone else and then whoever owns less is considered poor. But relative measure has its limits. During a crisis, we could have a drop in the average income of everyone but the poverty line is fixed at 20/25%. That's why the vast majority of indicators to calculate poverty are "absolute indicators". Because the average can change, and the absolute indicator can capture it. According to A. Sen, in order to be a good poverty indicator, it should have these three aspects:

• focus: index has to be independent from the income of non-poor people;
• monotonicity: it has to increase if the income of a poor person decreases;
• transfer: a transfer of wealth from a poor person to a richer one has to increase the poverty index;

Head count ratio

The most widely used measurement of poverty is the head count ratio. It is the idea of setting a poverty line and the head count ratio is the proportion of people under that

“poverty line”.H = q/n (q= number of people under the poverty line; n= total population)

It does not satisfy the three axioms: monotonicity (if one person passes from 2 dollar to 1 it is NOT captured)and transfer (if a poor person becomes poorer because he gives up some money to a richer person it is notcounted with this method)are not satisfied.

Policy implications favor those “just under” the poverty line. This method pushes policy makers to focus onwhat happens just below and above that line, trying to make people jump that poverty line to reduce poverty.However, because you are focusing on the number of people, there is an incentive to concentrate on peoplethat are just below the poverty line. Because it is easier to lift someone from 2 dollars to 2.6 dollars thansomeone from 1$ to 2.6$. There is a tendency to forget those that are way below that poverty line. Still, it isthe most commonly used index because it is simple and easy to understand but as we saw

Il concetto di povertà basato sulla privazione si basa sulla privazione stessa. Crescita e disuguaglianza. L'approccio di Rostow-Lewis suggeriva che per un paese crescere rapidamente e svilupparsi è necessario accettare un certo aumento della disuguaglianza perché è necessario accumulare capitale e c'è una parte della popolazione che deve essere autorizzata a risparmiare abbastanza per investire e creare una domanda di lavoro che si sposti dal settore primario a quello manifatturiero. Pertanto, questo dà l'idea intuitiva che per alcuni studiosi, se si desidera intraprendere un processo di crescita, è necessario accettare in qualche modo un aumento della disuguaglianza. Il ragionamento può andare anche al contrario: se si intraprendono politiche redistributive, sarà necessario rinunciare a una certa crescita. Per molto tempo, la maggior parte degli economisti e il consenso sostenevano che potesse esserci un compromesso tra redistribuzione e crescita: si può cercare di aumentare il reddito nazionale o di ridistribuirlo. Ridistribuire il reddito nazionale per avere una distribuzione più equa potrebbe avere effetti negativi.