Question

WHY MIGHT HIGH LEVELS OF INEQUALITY LEAD TO LOWER RATES OF GROWTH AND DEVELOPMENT AND DO DEVELOPING COUNTRIES CAN ESCAPE THESE TRAPS?

Answer 1

At a high rate of growth for a country with high initial inequality has lower rate at which income is evenly distributed among the poor. So, it is possible to be on high on inequality and poverty despite high rate of growth.

It has been surveyed by many theorists that countries with high initial inequality like most developing countries, reduces the impact of growth on absolute poverty.

The relationship between inequality and rate of growth and development was discussed in the most popular Kuznet's curve which is an inverted U shaped curve implies that countries at initial level of growth or low rate of growth have rising inequality as it is transitional phase for them and this would eventually fall as these countries become richer. But this relationship hold true only in the initial phase, when an economy is in the early development stage, returns from physical capital is higher than human capital and so inequality may lead to economic growth but an economy at an advanced stage of development has lower returns from capital so relying more on human capital implies that high inequality can lead to negative growth.

Also, poverty is an intrinsic concept and goes beyong just economic growth which is numerically calculated. It is related to human development as an important resource and its livelihood and well being affects the productivity of human capital which can alter inequality.

Hence, developing countries should develop a knowledge base and let there be a spillover effect and learning curve for their human capital and further implement policies to eradicate poverty and inequality altogether.