Causes of Inequality & Poverty (SL IB Economics)

Causes of Poverty

• There are many causes of poverty. However, poor countries have several common characteristics, which can be summarised in a poverty cycle diagram
   

Poverty is caused by a lack of both economic growth and human development
 

• Low wages represent the intersection of economic growth and human development and are the major cause of poverty
  • Low wages are usually the result of unemployment, informal employment, a lack of skills, or a primary sector based economy
• Education and healthcare cost money and with lower wage levels these are not accessible, resulting in poor human capital
  • People find it harder to stay well or to recover from illness resulting in lower productivity and shorter life expectancy
• Low productivity results in low wages and the cycle continues
• Populations with a large number of dependents (old people and children) for each working household tend to experience higher levels of poverty

Causes of Inequality

• There are numerous factors that cause wealth and income inequality
• It is generally true that developed countries have a larger tax base and are able to provide a better level of support to the poorest households in the economy, than developing countries are able to

Causes of Wealth and Income Inequality

Cause	Explanation
Differences in human capital	The higher the skill level, the higher the level of income A country with a poor education system will see greater inequality than one with a good education system
Inequality of opportunity	Access to education and health can vary significantly within communities and between different regions Inequality in education and healthcare leads to inequality of opportunity in the job market
Different levels of resource ownership	Assets generate income  The more equal the asset ownership in an economy the less the inequality in income distribution
Discrimination	Gender, race - or any other discrimination increases income inequality in an economy
Unequal status and power	Countries with strong trade union membership provide workers with more power and higher levels of income With low trade union membership, the exploitation of workers through low wages is easier and income inequality is worse
Government tax and benefits policies	Countries that provide a range of benefits (such as unemployment, pension, disability, child support, housing support etc) raise the income of the lowest 20% of the population resulting in more equal distribution Progressive tax systems allow all income earners to contribute to public revenue according to their ability Decreasing taxes on the lower end and increasing it on the upper end would mean that the system is more progressive and there would be a more equal distribution of income
Globalisation and technological change	Globalisation is the economic integration of different countries through increasing freedoms in the cross-border movement of people, goods/services, technology and finance This integration of global economies has impacted national cultures, spread ideas, speeded up industrialisation in developing nations and led to de-industrialisation in developed nations Countries which are more isolated will experience higher levels of wealth and income inequality
Market based supply-side policies	Supply-side policies such as deregulation, privatisation and trade liberalisation can provide great opportunities but also increase inequality E.g. Privatisation of state owned assets often allows a few people to get rich (those who buy the asset) and the service provided by the newly privatised firm may become more expensive to access

• Capitalism is at the heart of free market economics
• Under Capitalism, inequality is inevitable
  • Workers with higher skills receive higher wages
  • Workers with little to no skills receive little to no wage
  • Individuals with higher income will acquire more assets leading to higher levels of income
    • In turn, they can keep on acquiring assets
  • Individuals with lower income will find it hard to acquire assets
• The principles of capitalism are considered important as the incentive to acquire income raises productivity and output
• However, the long-term outcome of capitalism is that the factors of production become concentrated in ownership with relatively few individuals developing extreme wealth, at the expense of many who lose out

The costs of inequality

1. Impact on economic growth
   • At some point, increasing levels of inequality becomes a disincentive for workers to work and be productive
   • This means that some resources (labour) in the economy are not being used efficiently. National output falls and economic growth slows
   • Government unemployment payments and welfare benefits may increase
     
   • Government tax revenues may decrease with increasing inequality
2. Impact on living standards
   • If the inequality gap grows, the rich get richer and the poor, relatively poorer
   • Over time, this will reduce the standard of living
   • The wealthier will access better education and healthcare, creating even less opportunity for poorer households in the future
3. Impact on social stability
   • More equal societies tend to be more stable, tolerant and considerate, with lower levels of crime and better standards of living
   • Less equal societies tend to be characterised by political instability, strife, and social unrest, and in extreme cases, this can lead to revolutions