Economics Development Strategies for Developing Countries

A Sample Essay On Strategies of Economics Development

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ESSAY ''To combat poverty and increase growth in the world's poorest countries policy makers need to focus on decreasing world income inequality'' Poverty refers to the situation of scarcity of funds or money to live a better life.

Overpopulation, social inequality, unstable political situation, discrimination, high level of nation debts and natural disaster are its causes. It impacts economic development in an adverse manner as increasing the poverty results in lowering the income levels of the citizens.

Thus, poor people are not able to meet their basic needs such as food, cloth and shelter. Large number of people are living scarcely due to lack of funds.

Nowadays, income inequality is the reason for increasing poverty. Therefore, it is very necessary for the country to decrease poverty and make economic growth., . Therefore, policy makers need to focus on decrease in income inequality. The present essay will identify the policies available for making economic development through reducing income inequalities.

Agree or disagree with the statement: In current economic situation, poverty reduction is one of the major goals of the countries. Reduction in income inequality plays a significant role in it, as a major cause of poverty. In present era, a large number of people are suffering from extreme poverty due to low income level (Perkins and et. al., 2012). Poverty can be measured through detecting the percentage of population who are spending their lives below specified consumption standards.

Income inequality: Increase in income disparity is a major challenge faced by government of different countries. It refers to the salary gap between rich and poor citizens (Matthews, 2012). Unequal distribution of pay among the population is known as income inequality. It is arising at an exponential rate in emerging markets and developing countries (EMDCs).

In UK, Organization for commercial and economic development (OECD) found that 10% of the richest person’s income are almost 10 times greater than 10% of poor person. In value terms, the average of 10% of the deprived class pay is 8468£ comparatively very lower than average of 10% earning of the privileged class, amounted to 79042£. Moreover, the difference between original and net income is also very high in UK. 10% of underprivileged class’s original salary is 3738£ while top richest 10% people have an actual pay of 102366£.

Hence, it is approximately 27 times greater. Thus, it can be said that income is distributed in an uneven manner among the UK population. Further, imbalanced spread of earning across

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the regions also results in enlarging poverty. In context to UK, London is having higher income as compare to North east. In addition to it, wealth distribution is also unequal as only the 10% of the richest society have more than 45% of wealth contribution. On the basis of above, it can be said that income disparity is a great reason for increasing poverty and it affects economic growth in a negative direction. Thus, by eliminating or reducing the uneven pay distribution, UK will be able to combat poverty consequences. Another,

impact

of

income inequality is reducing economic growth. It is because savings are greatly depended upon the earning level hence, lower the income lead to lesser savings and vice versa results in lowering the economic development (Leigh and Blakely, 2013). Further, providing incentives on the basis of skills also results in income differentiation and increase inequality.and affect growth adversely. Moreover, high lending rates than interest will impact country's growth negatively. Higher wage payment to skilled employees than unskilled turn out to enhance disparity and distract economic development.

Henceforth, I am completely agree with the statement that to combat poverty and increase growth is the necessary requirement of the countries. In order to reduce the poverty, policy makers need to focus on decreasing world income inequality. Rise in the income of poor persons help to reduce poverty.

Measurement of income inequality: Measuring the income distribution helps to determine the level of earning disparity in a great manner. For instance, two economy A and B having income structure of {50, 50} and {0, 100} than it can be said that economy B has high level of inequality. According to Anonymity principle, income inequality measure dissimilarity in the

income distribution in society. It can be represented as {y1, y2,

y3,......yn) in which y1<y2<y3......<yn. For instance, y1 income is 100, y2 is 200 and y3 is 300 then it can be said that pay is distributed in an unequal manner hence, represent as {300<200<100}. Thus, it became clear that this principle indicate that one person have higher income than other persons in the society.

Population principle measures the proportion of two resident earning which are having different income levels (Hanley and Douglass, 2014). The principle says that comparing the salary distribution of n population with the population of 2n people having the same income pattern hence, there is no difference existed in disparity between the pay distributions of both the population. It can be represented as {100, 200, and 300} = {100, 100, 200, 200, 300, and 300}.

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Relative income principle says that income distribution is not unequal in the situation where the pays are {100, 200, and 300} and {200, 400, 600}. The reason behind the decisions is that inequality should not be measure in absolute terms. It is a relative term hence, income variations in {100, 200, 300} is same as to the earning inequalities in {200, 400, 600}.

Dalton principle measure discrimination through transfer the money of poor people to rich. For instance, measuring inequality between income distribution of {100, 200, 300} and {90, 200, 310}. Transfer of funds from poor to rich people is known as regressive transfer indicates higher variation.

Lorenz curve: It helps to measure inequality level of income distribution. According to the curve, dissimilarity can be measured through plotting economy's earning distribution on a graph (Lewis, 2013). The curve says that perfect equality is existed at 45ยบ line while moving further away with the curve line from the level of 45ยบ will indicate inequality. The diagram is presented here:

According to the curve, if Lorenz consistent is below than the level of 45% for all the pay levels then it indicates that income is distributed in an uneven manner (Herndon, Ash and Pollin, 2014). Henceforth, the curve can be applied for all the anonymity, population, relative

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proceeds and Dalton principle. Moreover, comparison between two curves also provide better understanding of inequalities.

The graph indicates that L2 is more unequal than L1 as it is greater far away from 45ยบ line. Although the curve has certain limitations as it could not make clear comparison between Lorenz curve of two countries. For instance, in case where one country's Lorenz curve is below than another curve up to a certain income level and after that level, it moves in upward direction than other curve than it can not be said that one country's income distribution is more unequal than another country.

Gini coefficient: It is an appropriate inequality measurement and satisfies all the four principle efficiently. It measure the ratio of Lorenz curve area at 45ยบ line and below 45ยบ as a whole hence, it is a good measurement compare to others such as Range, Mean deviation and variance.

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Policies are available to policy maker to combat poverty and increase growth: As per the statement, it is necessary for the policy makers to address the situation of income difference and identify the consequences for making necessary strategies. Following policies may be implemented to reduce earning inequality described here as under: Fiscal policy: The policy plays a vital role in ensuring financial stability in the country as it minimizes the monetary crisis. Changing the tax rates will affect the availability of disposable money to the population (Dosi and et. al., 2015). There are two types of taxes that are direct and indirect. Income tax comes under direct tax as it has to be borne by imposed party called assessed. Lower level of income group does not require paying taxes as their pays do not come under the taxable income classification. In UK, the progressive tax structure has been applied. In this taxation policy, poor people have no obligations to pay tax up to a certain limit. However, people who earn more than prescribed income limit and does not exceed the maximum incomes have to pay tax at basic rate of 20%. However, richest people whose earnings are very high obliged to pay high tax rate of 40% or 45%. Hence, high income tariff rates impose higher liabilities to rich people as they have to pay great amount of money. It results in lowering the disposable money and helps to decline income inequality (Hull, 2009).

On contrary, indirect tax rates are maintained at a regressive proportion as it has a large impact on poor society. Thus, reducing tax reliefs, evasion, avoidance, progressive direct tax structure and regressive indirect tax effects are key components to reduce inequality and make economic growth (Hansen, 2013). Further, redistribution in terms of wealth and property taxes also makes possible to reduce inequality through declining rich

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people incomes. Privileged class incomes can be reduce through receiving high taxes from them. Another way of reducing disparity and improving growth is changing the government spending levels. High government expenditure on education, health and other kind of public services will help to enhance growth rate. Thus, it can be concluded that fiscal policy gains significant importance in order to income inequality reduction and moving towards economic development and growth.

Education policy: In the present age of competition, technological innovations has taken place at a faster rate lead to enhance mechanizing jobs in a great manner. Unskilled and uneducated people are not able to understand new technology in a quick manner. Therefore, their wages rates are comparatively lower than skilled labour force wages results in income inequality (Gilder, 2012). Education policy is a way of improving educational quality and boost people skills. It helps to enhance the earnings of future generation as they will be highly skilled and able to handle new and innovative technology. In developing countries, it can be done at primary school levels. Moreover, higher the governmental spending on public education also helps to promote education and reduce inequality. However, in advanced economy, the apprenticeship programs and high educational policies will promote people ability, skills and their knowledge. Thus, wage rate discrimination can be reduced results in lowering the earning disparity and enhance economic growth.

Labour policies: Another policy to reduce unequal distribution of income making labour policies. It helps to support and provide assistance to lower or middle income levels.

In national minimum wages policy, government can set minimum labour wages for all the industries. Therefore, wage rate differentiation can be reduced between skilled and unskilled labours (Deakin and Morris, 2012). It directly helps to remove the consequences of poverty pay. Low labour pay can arise due to lack of accessing labour market, individuals bargaining power and lack of skills. Further, high wage rate will reduce workers demand. This in turn, they have to accept lower wages rates and generate lower the incomes results in failure of labour market. Thus, nation minimum wages policy provides assistance to overcome such problems. Moreover, the policy helps to eliminate dualism in terms of permanent and temporary workers. Another benefit of the labour policy is that it eliminates excessive labour regulations on the workers (Fukuda-Parr and Lopes, 2013). In addition to it, sectoral retraining schemes also helps to provide assistance and proper guidance to the workers and improve their skills. Reducing power of trade unions, employment subsidies and improve

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labour market flexibility will results in ensure success of labour market. This in turn, income inequality can be declined resulted in improving economic growth in a great extent.

Monetary policy: Changing the interest rate is the part of monetary policy. Altering these rates tend to change the exchange charges as they are closely related. In context to UK, the policy is designed by the Monetary Policy Committee (MPC) of Bank of England. Under the official money market rate, MPC set repo rate to reduce inflationary pressure. It is the rate which is charged by Bank of England on provided short term loans to other financial institutions. The other interest rates on loans, mortgages and credit cards are changes accordingly to it. For instance, increasing the repo rate will lead to increase these charges on loans (Connolly, 2013). This in turn, the loans became much expensive as borrower need to pay high interest charges to the bank. Therefore, disposable income of people who borrowed higher funds can be declined. The reason behind that is people have less availability of cash after serving their debts. On contrary, it is ineffective for poor or middle class society as they will be unable to borrow the funds for their requirement. However, falling in these can make the loans less costly thus, it encourage people spending and investment. This in turn, income inequality can be reduced. Moreover, it affect the savings as rising interest rates will results in decreasing disposable income and customer savings and vice versa (Herz and Hohberger, 2013). Another impact of interest rate can be seen on the exchange rates. Rising interest rates contributes to incline the exchange rates results in increasing the export prices and declining overseas demand and vice versa. Thus, it can be said that monetary policy helps to make effective control on nation's money supply and maintain liquidity.

Job creation schemes: Government can create more number of the jobs through designing work creation schemes. It is an effective way to increase the number of occupations within the country and increase the incomes of the people. It provides assistance to the government to reduce the number of individuals who are spending their lives below poverty line. Tackling the scarcity consequences makes government able to decline income inequality (Roemer and Stern, 2014). Jobs can be created through making larger the investment in the economy. Higher spending, lower interest rates, higher infrastructural investment and higher tax rates will helps to reduce unemployment and decrease poverty.

This in turn, unequal distribution of income can be eliminated and helps to ensure economic growth.

Most Appropriate policy to reduce economic inequality and improve economic growth: On the basis of above identified strategies, it can be concluded that fiscal policy is a

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best approach to combat poverty through decreasing income inequality and moving towards economic growth. The reason is both the governmental incomes and spending levels is altered in that policy helps to decline income inequality (Dosi and et. al., 2015).

Under the fiscal policy, progressive direct tax structure and regressive effects of indirect taxes will tends to reduce the earning level of rich people and move towards to income equity. According to the policy, higher income generating people are obliged to pay high percentage of duties while tax rates for middle class people are comparatively low (Fulcher, 2015). Another, poor persons do not oblige to pay any tax. Thus, it became clear that the policy will help to reduce disposable income of upper class society and do not impact lower level groups. Another, regressive structure of indirect tax is retained in order to reduce adverse impact to the poorer. . Moreover, larger income tax will help to spend more on public services and provide benefit to poor people in a great extent. Large governmental spending on health, education, hospitality, roads and other important public sector services provide assistance to unprivileged groups (Fosu, 2013). In context to UK, spending on National Health Services and education are administrated by local authorities. Thus, it can be said that the policy majorly contribute towards reducing income inequalities without affecting the earnings of poor people.

Impacts of lower income inequality: The essay concluded that as a result of decrease in earning inequality tends to enhance Gross Domestic Product and per capital income. It is a sign of improving economic growth and reduction in the negative consequences of income disparity. Thus, poor people will able to spend better quality of life due to

increase in

income and helps to improve their living standards. The reason behind that is high salary will contribute to enhancing the purchasing power of poorclass. Moreover, it increases the customer demand; improve living standards, industrial production and their revenues.

Henceforth, the aims of building economic development and growth can be achieved.

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REFERENCES Books and Journals 

Connolly, R., 2013. Economic Growth and Strategies for Economic Development in Russia. Russian Analytical Digest. pp. 5-9.

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Deakin, S.F. and Morris, G.S., 2012. Labour law. Hart publishing.

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Dosi, G. and et. al., 2015. Fiscal and monetary policies in complex evolving economies.

Journal of Economic Dynamics and Control. 52. pp.166-189.

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Fosu, A.K. ed., 2013. Achieving development success: Strategies and lessons from the developing world. OUP Oxford.

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Fukuda-Parr, S. and Lopes, C., 2013. Capacity for development: new solutions to old problems. Routledge.

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Fulcher, G., 2015. Disabling policies?: A comparative approach to education policy and disability. Routledge.

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Gilder, G., 2012. Wealth and poverty: A new edition for the twenty-first century. Regnery Publishing.

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Hanley, C. and Douglass, M.T., 2014. High road, low road, or off road? Economic development strategies in the American states. Economic Development Quarterly. 28(3). pp. 220-229.

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Hansen, A.H., 2013. Fiscal Policy & Business Cycles. Routledge.

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