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Home Economic Development Re-Distribution with Growth (RWG)

 

Re-Distribution with Growth (RWG):

 

Theories or Methods of Income Distribution:

 

The reports of ILO, World Bank and other international agencies also promoted this view that along with economic growth there should be a fairer distribution of incomes. Therefore, the economists present a set of four theories to attain the combination of economic growth and fairer distribution of wealth. By following them individually or collectively the incomes of lower classes can be increased. However, how such methods will be implemented depends upon the social and economic conditions of a country. Such theories (methods) are as:

 

(1) To enhance the growth of GNP by raising the savings, and allocate the resources in a better way so that all the sections of the economy could be equally benefited.

 

(2) To take steps to get education, loans and other public services for the poorest sections of the society.

 

(3) The fiscal systems of the countries be devised in such a way that the distribution of income could move in favor of the poor class. For this purpose, the consumer goods be provided to the poor people on subsidies.

 

(4) The existing assets of the countries be mobilized in favor of the poorest class as the case of taking up Land Reforms.

 

Components of RWG:

 

Now we evaluate the components of the strategy of RWG:

 

(1) As far as growth of GNP is concerned it is a necessary condition to remove the poverty, but it is not a sufficient condition. Just depending upon growth it will require a greater time on the part of the poor people to increase their incomes. As there exists a weaker relationship between the incomes of the poor people and the remaining economy, therefore, the incomes of the poor class will always lag behind the overall growth of the economy. No doubt, the poor class will also be benefited as compared with no rise in GNP, yet, to avail the better benefits due to the strategy of growth of GNP, some package of redistribution will have to be implemented.

 

(2) As far as the matter of raising of the incomes of the poor is concerned, govts. should invest in 'Human Resource Development'. No doubt, such investment in Man may have the effect of decreasing the outputs for sometime and such investments will not yield the quicker results, yet it will lead to increase the productivity and incomes of the poor class in long run.

 

(3) The redistributional policies will be consisting of taxing the rich and exempting the poor from taxes. Moreover, the poor class be provided with the subsidies in consumption. This will improve the efficiency of the poor class. But in case of so many UDCs the income levels are poor and they cannot be redistributed.

 

Moreover, taxing the rich for re-shuffling of income and wealth may have a negative effect on savings and investment. Again, the rich in a country are a few, but they are very much influential they would never allow to shift the resources towards the poor.

 

(4) As far as shifting the existing assets towards the poor is concerned (through progressive system of taxation and land reforms) they will also have the effect of bringing an equality in the distribution of income. Particularly the land reforms will provide protection to the tenants. Consequently, their productivity and income will increase.

So many economists has criticized the RWG because it stresses upon to follow an evolutionary path rather a revolutionary way. Moreover, this approach does not consider the political change which is something very necessary for 'Redistribution', Again, this approach does not pay attention over that resistance which will be displayed by the Rich Segments of the society.

 

Experience with Growth and Distribution:

 

Kuznets Curve or U-Shaped Curve:

 

Regarding 'Growth and Distribution' Simon Kuznets (1955) gave the following views:

 

In the initial stage of economic development the issue of distribution of income gets worsened. But later on it is improved. On the basis of statistical data Kuznets obtained an inverted 'U-shaped' curve. Later on after Kuznets in 1976 Ahluwalia improved inverted U-shaped curve on the basis of statistical data of 50 to 60 poor countries.

Kuznets says that in the initial stage of economic development the unequal income distribution is something imperative. It is so because that the population shifts from a stagnant agri. sector to higher income modern sector. The modern sector gives lower wages in the initial stage because of the increased supplies of labor. But with the passage of time when the population falls short in agri. and backward sector the supply of labor decreases. Now the industrial sector will be forced to pay them higher wages. Thus in the beginning the distribution of income becomes unfavorable for the poor class, but later on it becomes favorable for the poor class.

 

Mexico and Brazil which heavily depended upon capital intensive technology which did not absorb the labor who migrated from agri. sector. As a result, the growth in these economies (and even in Pakistan during 1960's) led to concentration of wealth in a few hands. On the other hand Taiwan and Korea which depended upon labor intensive technologies the growth led to distribute the benefits to common man. The inequality in income distribution in the initial stages of development is also attributed to this fact that the demand for skilled labor increased more than unskilled labor. In this way, their wages increased more than unskilled labor. Again, in the initial stages of development for creation of infrastructure etc., govts., have to spend more in the urban areas. This also led to raise the incomes of those residing in urban areas In this way, the income inequalities grew between the classes in the UDCs.

 

The Kuznets curve which presents an average behavior between rising incomes and their distribution shows that the income of 40% poor population increased very slowly till they reached $700 or $900. After crossing this level, the incomes of the poor segments of society increased more rapidly than average incomes. This is the reason that the extent of inequality remains low in case of DCs as compared with UDCs-----as their per capita

incomes have crossed the level of $700 or $900. The Kuznets curve has two parts:

 

The first part lasts till the level of $800 per annum. Till this level, the problem of distribution of income remains aggravated. After this level, the distribution of income is improved. In this first phase the incomes of the rich rises from $300 per capita to $1600 per capita, while the income of the poor rises from $100to $300.

 

Kutzents and other economists got the following results on the basis of data regarding growth and distribution.

 

(i) The growth biased economies came into being like Mexico and Brazil.

 

(ii) Sri Lanka which experienced a low growth rate but here the distribution of income became fairer.

 

(iii) In case of Korea, Taiwan and former Yugoslavia the higher growth rate was accompanied with fairer distribution of income. In addition to Korea and Taiwan, Israel, Singapore, Malaysia, Indonesia and Hong Kong are also included in this group.

 

As we have already told that during 80s the East Asian countries like Korea, Taiwan, Thailand, Indonesia, Malaysia and Philippines grew very rapidly. As in 1980s the growth rate of GDP of Korea and Taiwan was more than 9%; it was 7% in Thailand; and it was above 5% in Indonesia and Malaysia. The proportion of poor persons in the population of East Asian countries which was 12% in 1985 decreased to 10% in 1990. This shows that in case of these countries the efforts to remove poverty remained effective along with higher growth rates. Thus the objectives of greater growth and a fair distribution of income are not contradicting in case of East Asian Countries.

 

On the other side, the South Asian Countries like Pakistan, India, Nepal, Bangladesh etc., attained satisfactory growth rates but the efforts to reduce poverty did not turn to be fruitful. As in Pakistan during 1980s the growth rate was 6% but poverty could not be depressed as their occurred no change in the standard of living of average persons. In 1985, the proportion of poor persons in total population was 52% which slightly decreased to 49% in 1990. This shows that in South Asia despite higher growth the poverty could not be eliminated. In this way, a contradicting situation developed regarding "Growth and Distribution". In 1990 even more than half of population of South Asian Countries was living below "Poverty Line". The marvelous and remarkable performance of East Asian Countries is attributed to the followings:

 

(i) The saving rates heavily increased due to better economic policies.

 

(ii) The labor force of these countries was found highly efficient, dutiful and hardworking.

 

(iii) The govts. of these countries left no stone unturned to encourage the entrepreneurs.

 

(iv) These countries laid heavy stress upon boosting their exports.

 

(v) These countries did not hesitate in importing technologies and knowledge etc.

 

(vi) These economies altered themselves in the purview of world circumstances.

 

(vii) These economies attempted to maintain macro economic stability.

 

The elimination of poverty in East Asian countries is attributed to the fact that the govts. of these countries spent reasonable amounts on the provision of education, health, nutrition, clean water, water drainage and infra-structure. All such led to enhance the productivity and efficiency of the poor class. Thus, in these countries the fall in poverty and rise in output level were observed moving side by side. The poverty of South Asian countries did not decrease because their govts. spent very limited incomes on education, health and I infra-structure.

 

These countries failed to create such a circumstances whereby the 'Human Resource Development' could have been permitted both by the public as well as by private sector. In this way, a compatibility could not be brought between rise in output and elimination of poverty. The growth of output was linked with private sector, so it increased. While the poverty was concerned with official and governmental efforts which could not prove to be effective. In this way, despite economic growth the issue of distribution of income could not be settled, particularly when the rich are taxed low and their revenues an: profits are increasing.

 

The circumstances whereby the population is increasing at ant alarming rate, govt. revenues are not rising, govt. expenditures arc rising, the budget deficits are mounting, and heavy expenditures are being made on defense (in case of Pakistan and India), how the poverty can be removed. Therefore, to remove poverty the South Asian Countries will have to improve their taxation structures; education will have (to be made more purposeful; public sector enterprises will have to be privatized; unnecessary expenditures (even on so called defense) will have to be abolished; reforms will have to be introduced in agri. sector; and the competitive forces will have to be brought in goods, money, labor and credit markets.

 

Moreover, these countries will have to change their socio political and institutional circumstances. The outlook of the people toward work will have to be changed. They will have to pay more attention on the promotion of savings. Thus, as a result of all, it may happen that in the coming 40 to 50 years a compatibility could come into being between 'Growth and Distribution'. It is also told that if the South Asian countries could not promote 'Human Resources Development' along with greater rise in savings the development and distribution would never coincide.

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Physical Quantity of Life Index (PQLI)
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Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
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Elasticity of Demand
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Equilibrium of Demand and Supply
Economic Resources
Scale of Production
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Determination of National Income
Theories of Employment
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Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
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History of Money
 

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