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Is Greater Inequality Desirable for Economic Development?

This report is an analysis of whether greater inequality is desirable for economic


development. I begin by defining key terms. I then attempt to answer the questions:

What are some of the requirements of economic development?1

Do these lead to or necessitate inequality?

Note that none of the factors listed is sufficient for economic development, nor are all
of them necessary (nor is the list comprehensive). Instead, a mix of these is found in each
developed economy, depending on other factors, such as the historical period. Finally, the
factors can be categorized as environmental or human-related. Only a single factor, natural
endowment, is not a direct result of human influence (with the exception of created
comparative advantage and global pollution).

Economic development can be defined as an ongoing process of meeting the basic


needs of a population and enhancing options for the allocation of resources both today and
in the future to increase the choices citizens have in their daily lives, as well as their overall
well-being.i

Inequality can be defined as the degree of income disparity between the lowest and
highest income groups (such as quintiles) in a population, as demonstrated, for example, by
the Gini coefficient.

Natural endowments refer to any conditions bestowed upon a geographic area which
can catalyze or slow economic development. Natural endowments can include oil and
minerals, domesticable plants and mammals, geographical barriers (i.e. the Sahara or the
Andes), natural disasters (such as droughts in Africa, flooding in Bangladesh, and tsunamis in
Southeast Asia), and even a north-south versus an east-west geographical orientation2.
Human migration, for example, gave Eurasia a 5,000-year head start over the Americas (note
that Africa’s head start did not make up for its geographical orientation and barriers). Thus,
nonhuman factors set the stage for later inter-country inequality.
                                                            
1
 I am referring to Least Developed Countries (LDCs) in today’s global economy.   
2
 Note that, the fewer degrees of latitude one must traverse, the easier has been the diffusion of people, 
information (ideas, discoveries, technologies), and even plant and wildlife.   

© May 2006, Jesse Kedy    Economic Development in Latin America 
        www.jessekedy.net    University of Richmond 
 

Some argue that democracy is not a requisite for social and economic development,
claiming that, unless it is based on stable political and economic foundations (not common
in most LDCs) it can wreak havoc on a developing nation.ii For example, an Iraqi citizen
driving the wrong way on a one-way street explained, “We have democracy now. I can do
whatever I want!” Another salient example is the contrast between the economies of
Singapore (a restrictive non-democracy) and South Africa (a new democracy, which has high
murder and inequality rates). Whether or not democracy is necessary, political stability is
required for economic development, though it is a rarity in newly-independent former
colonies. The same holds true for another requirement, sound macroeconomic policies.

Indeed, evidence shows that “sound macroeconomic… policies are associated with
higher (economic) growth.”iii After gaining independence, many former colonies are
distrustful of foreign influence. Some have tried to shield their economies from the
inequitable conditions of global trade and become self-reliant by using inward-looking,
noncompetitive, inefficient (more equitable), protectionist policies. Examples of these
include Import Substitution Industrialization (ISI), overvalued fixed exchange rates,
nationalizing enterprises and heavy government spending (and the resulting monetization of
debt and inflation), import tariffs, and other, non-tariff barriers. The main goal here has
usually been to achieve industrialization independently. While these policies may initially
lead to rapid growth, the long-term lack of sound macroeconomic policies has caused
increased disparity in developing economies, such as those in South America.

Access to new capital (hard currency) from direct and indirect capital markets is also a
requirement for development. An issue LDCs face is reducing the perceived risk of
investment and attracting foreign direct investment (FDI).3 One way of gaining capital has
been to follow the International Monetary Fund (IMF) model4. Another method which is
slowly gaining popularity is known as microlending (or microfinance).

However, new capital can actually increase inequality if it is not allocated equitably
and into appropriate production technologies (given available inputs and their costs).
Inequitable access to capital also stifles “the innovation and investment that lie at the heart of
modern economic growth.”iv While capital is necessary for growth, it is not utilized most
efficiently without the existence of markets. Simply put, a private sector induces individual

                                                            
3
 By increasing efficiency and introducing the profit motive 
4
 Stabilize‐Liberalize‐Privatize (SLP) 

© May 2006, Jesse Kedy    Economic Development in Latin America 
        www.jessekedy.net    University of Richmond 
 

incentives and elicits more efficient behavior. China and India are two recent examples of the
importance of markets over central planning.v

According to some, population growth reduces the potential per capita growth of
GNP.5 However, more sophisticated explanations account for labor force growth rates. As
such, population growth can be seen as an investment in future growth, contributing to
long-run development.

At the same time, human capital must be cultivated over time, to ensure a per worker
increase in labor force productivity. In every case, human capital development has required
increased educational standards, as well as the fulfillment of basic human needs.

Culture clearly affects development potential. For example, cultures with future time
orientations are more likely to save, creating more reserve capital. China, a clear example of
such a culture, is the biggest consumer of American reserves; essentially, it is financing
America’s trade imbalance. Certain religions (such as Buddhism) tend to value diligent work
and do not emphasize maximizing output efficiency. Thus, countries influenced by
Buddhism may not have developed by the same means as Western nations have.6 Countries
such as Saudi Arabia and Iran are ruled by Islamic law. To them, there is no separation of
Church and State. In fact, Muslim Had crimes7 have a preset punishment, dictated in the
Quran, while their Tazir laws (crimes against society) are punished at the discretion of a
judge. Further, Sharia law claims that charging or paying interest is evil. This has significant
effects on the banking industry and fund transfers. Collectivist cultures that value fairness
may have less corruption and black market activity, though they may also limit competition
and efficiency. Cultures with certain notions of reciprocity (such as Papua New Guinea)
actually value exhibitions of grandeur and waste. Finally, heterogeneous nations increase the
ease of communication, education, and governance. Certain national values, however, create
inequalities from birth (such as the disempowerment of women).

Other developmental requirements that may increase intra- and inter-national


inequality include urbanization and openness to trade, while developmental factors that
concurrently reduce inequality include empowerment and an emphasis on justice.

                                                            
5
 See the Harrod‐Domar Growth Model 
6
 Such as by focusing on capacity utilization and efficiency . 
7
 High crimes, going against the will of Allah and requiring 2 to 4 witnesses. 

© May 2006, Jesse Kedy    Economic Development in Latin America 
        www.jessekedy.net    University of Richmond 
 

Does being a LDC in today’s world help or hinder the speed and rate of economic
development? On one hand, international aid is easier to receive than in the past; the world
has established organizations whose purpose is to help spur economic development through
structured loans. Chad and Cameroon, for example, have received about $200 million in
structured loans from the World Bank, in order to prepare the necessary infrastructure to
develop the Chad-Cameroon pipeline (led by ExxonMobil). On the other hand, those who
seek help must undergo substantial reform programs which hinder economic growth in the
short run (by reducing jobs). Also, the worse-off LDCs have many disadvantages, as they try
and compete with developed nations and other more developed LDCs; this influences terms
of trade and inflow of capital.

Normatively speaking, inequality is certainly not desirable in the long run; that is, it
would seem just to have equitable markets. In fact, high levels of inequality make poverty
reduction more difficult.vi Still, I believe that some degree of it is necessary in the short run,
both within and between countries, especially in the modern world. Privatization, for
example, leads to a loss of jobs in the short run.

What I am getting at, is that global participation is necessary. The global market
affects everyone, and truly free markets do not operate equitably8. In a competitive market,
wages are dictated by supply and demand, not fairness. Also, because the above factors and
their importance are interpreted differently by different peoples, there is no universally
correct way to induce economic development.

Returning to my opening statement, all but one of these factors are directly
influenced by people. While many factors are beyond the influence of individual
governments, some are not. Each government largely affects its country’s pace and degree of
development. It is my belief that each also has a normative (deontological) duty to adopt
forward-looking policies that take into account the inevitability of global participation, the
available resources and constraints, and the will of the people. Economic development in
today’s LDCs cannot occur in a laissez-faire market. Proper regulation of organizations and
markets should increase transparency, disprove Gresham’s Law, and improve inequality
without hindering economic growth and prosperity.

                                                            
8
 In fact, the only rational result of a free market left unchecked is a state of monopoly. 

© May 2006, Jesse Kedy    Economic Development in Latin America 
        www.jessekedy.net    University of Richmond 
 

References
                                                            
i
 Adapted from Franko, The Puzzle of Latin American Economic Development, page 11 
ii
 R. Kaplan (2000), Was Democracy Just a Moment?, Globalization and the Challenges of a New Century, 196‐214   
iii
 Bound Readings, page 150, from Adjustment in Africa, The World Bank (1994), Why Africa Had To Adjust   
iv
 The World Development Report 2006, Equity and Development, page 178 
v
 The World Development Report 2006, Equity and Development, page 226 
vi
 The World Development Report 2006, Equity and Development, pages 84 – 88 

© May 2006, Jesse Kedy    Economic Development in Latin America 
        www.jessekedy.net    University of Richmond