Table of Contents
Introduction
Economic Inequality is a worldwide phenomenon especially in developing countries, Economic Inequality had actually been decreasing since 1920’s, but due to Inequalities in hourly wages, annual earnings, distribution of income and household income have all increased more unequal this trend has apparently reversed itself during the 1970’s that has attracted a lot of attention across the globe.
In broader terms, inequality has many aspects but talking specifically about economic inequality, it has two main factor wealth and income inequality, which is a situation where the wealth or income is distributed unequally among a number of small population groups. As a results a huge gaps created between the rich and the poor, therefore the rich become richer and the poor poorer. Economic inequality is more common in developing countries where economic policies are not effective to eliminate inequality, or these policies ineffectively implemented due to insecurity, corruption, etc.
This question is the topic of this research: the effects of economic inequality on economic growth. The connection between economic inequality and growth is not clear and can go both ways, but this study will focus on growth as the dependent variable to allow for a more focused viewpoint. Before focusing on the linkage between growth and inequality, at the beginning this research examines the measures used for them. The primary measures in this research are GDP per capita for growth and the Gini coefficient for inequality. GDP is divided into several factors that have different levels of importance for countries depending on the structure of their economy. Each of these factors analyzed separately and connected to actual data from three SAARC countries namely: Afghanistan, Pakistan, and India.
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Afterward, studying growth and inequality one by one, then the study will focus on the regression model by the OECD researcher Federico Cingano to confirm the linkage from inequality to growth, after the linkage proved the outcomes are then matched with a same model by Sarah Voitchovsky, that study the inequality impact of various income levels on economic growth .
Thereafter, this study will focus on the main research questions by incorporating the outcomes from the regression analyses to the reasons of economic growth and economic inequality and discuss the measures to decline inequality in light of the findings.
Background of the Study
Current Status of Afghanistan Economy
Afghanistan is slowly edging toward recovery from years of conflict. The country had a continued about a decades of economic growth since 2002 according to World Bank the GDP is about five times greater as compare to 2002 and the GDP per capita has increased by 64% since 2002. Mostly because of foreign aid. Nevertheless, Afghanistan has witnessed a decline in its economy especially between the period 2012 and 2016.
This strong reduction can be described largely to the collective things of the withdrawal of 100,000 NATO army and an intense drop in NATO disbursements, a decrease in international aid, escape of FDI, largely depends on imports, and limited business infrastructure threaten efforts to establish a thriving economy that attracts FDI, promotes trade, creates jobs, and provides much-needed revenue to the Afghan government. And increasing political uncertainty and insecurity that had artificially inflated the country’s economic growth. Another phenomena that hardly affected was the entrance of Afghan refugees to the country and the about 400,000 new job seekers entering the workforce market annually according to the World Bank, Afghanistan have already high jobless rate and carry on to grow.
Afghanistan affected from these factors and face strong economic obstacle the Population vulnerability upraised and remains one of the world’s poorest country as the Asia Foundation reported Poverty rates to 55 % in 2016-17.
According to world population review 2017, Afghanistan has 37.21 million Population. Literacy among the population is only at 38.2% of the population over the age of 15 years, with males at 52% and females at 24%.
Afghanistan is enormously poor, landlocked, and extremely needful on international assistance. Almost more than 50% of the residence carry on to hurt from lacks of housing, clean water, electricity, health care, and Employment. Corruption, Narcotics, insecurity, weak governance, difficulties in execution of rule of law, lack of infrastructure, and unfair distribution of wealth among a small portion of the afghan population created constrains to future economic growth.
Afghanistan is extremely an imports bond country, this fact can described by continues trade deficit (almost $7.63 billion in imports and $700 million in exports according to IMF data).
another issue raised due to imbalance distribution of international Aid among Afghanistan population since 2001 inequalities, between regions, cities and rural areas, and rich and poor Afghans the poor get poorer and the richer get richer and only a small number of people owned the wealth thus, the Poverty headache rates increased in every region between the years of 2011-12 and 2016-17.
Problem Statement
Economic inequality is spreading in developing and new emerging economies, as the results the gaps between rich and poor people are increasing the rich become richer and the poor become poorer. This is an important study to identify the economic Growth three SAARC countries namely Afghanistan, Pakistan, and India from 2008-2017, economic Inequality with its causes, and measure to stimulate growth and decrease inequality in three mentioned SAARC Nations.
Relevance of the study
Following, The Financial Crisis of 2007-2008 that likewise called as the Global financial crisis and recorded as the most horrible economic tragedy since the Great Depression, which was, began on “Black Thursday,’ October 24, 1929 that lasted 10 years. During these economic tragedies, the economic growth has been quiet in most of the world, but there is another phenomenon spreading universally: growing economic inequality
Economic inequality increasing within the developing countries Different studies (Cornia 2004, Birdsall 2005, Van der Hoeven 2008) regarding the economic inequality have determined that last decades have witnessed a symmetric increase of inequality in majority of emerging countries. This continuity is a big constrains to alleviate poverty and support economic Growth.
Alesina and Peroti (1996) studies determined that extraordinary inequality does not only effect economic but can have unwanted impact on political and social significances, thus the government organizations in these countries are weak, difficulties in reducing poverty and sustaining accountable government, inequality further discourage public and social life in making decision for societies well” on the other hand Birdsall (2005) found that too much inequality increase crime rates, and social conflicts and decrease the life expectation in the societies.
Research Questions
This research examines the impact of Economic inequality on Growth for panel of three selected South Asian Association for Regional Cooperation (SAARC) countries; namely, Afghanistan Pakistan and India; over the period of 2008-2017.
The topic was Selected because of its relevance to current Asian Economic Situations, but also because of the author’s interest in the interaction of economic and political issues in shaping both economic inequality and Growth. Understanding and clarifying and to explore the aim of this thesis, the following questions are investigated.
This research has two research questions:
- What is the effect of economic inequality on economic growth?
- What methods could be used to decrease economic inequality without hampering economic growth?
Over these questions, this aims to make more discussion and awareness of these issues and their relevance to the current and the future events of Three SAARC Countries Namely Afghanistan, Pakistan, and India.
Objectives of the Study
- To find effect of economic inequality on economic growth and
- To know what methods could be used to decrease economic inequality without hampering economic growth
Theoretical Framework
Studies on the relationship between income inequality and Growth initiated from the pioneering research by Simon Kuznets (1955) where deliberated economic growth and income inequality and came up with a hypothesis that is currently called as the Kuznets hypothesis or the inverted U-Curve. The Kuznets hypothesis formed the foundation from which most early studies analyzed the relationship between income inequality and growth. Kuznets (1955) assumed that in the initial stages of economic Growth, both a nation’s economic growth and its inequality increase.
As countries grow and develop, the income gap between the rich and the poor should decrease. Indeed, according to Kuznets, there is a slow change from a low-inequality, low-income, agricultural economy, towards a high-income and medium-inequality economy characterized by industrial production. This shift would lead to the inverted U-shaped relationship between real GDP per capita and inequality. Kuznets says that in the initial period, agriculture represents the majority of a country’s economy, which is also characterized by low levels of inequality. According to Kuznets, a shift towards the secondary and the third sectors has in nature two effects in the short term. The first effect is that it speeds up economic growth leading to higher levels of GDP per capita.
The second and most dramatic effect is that this increases the level of inequality. Accordingly, in the initial stages of economic Growth, the level of GDP per capita and inequality are positively correlated. As countries develop they shift more and more resources from agriculture to industry (and later to services), and this will in time decrease the income gap between the industry and agriculture simply because there will be more and more workers working in the industrial sector. So, the long run relationship between inequality and GDP per capita is negative. The Kuznets hypothesis therefore showed connection from Growth to income inequality.
Data Source
The main sources used for this thesis are the book Capital in the 21st century by Thomas Piketty, the Credit Suisse Global Wealth Report of 2014, and the OECD Report Trends in Income Inequality and its Impact on Economic Growth by Federico Cingano 2014 and Does the Profile of Income Inequality Matter for Economic Growth study by Sarah Voitchovsky 2005.
Research Methodology
The thesis will be based only on secondary data. It will review the regression analysis Of Federico Cingano’s findings and then compared to Sarah Voitchovsky’s findings. Their relevance and implications are discussed and compared. The results are then analyzed based on Thomas Piketty’s discussion and conclusions on inequality. A comparative study of economic inequality and economic Growth of APIs nation will be done to recognize the linkage among these two variables.
Limitation of the study
Economic inequality research often suffers from a lack of long period data. This makes it difficult to make analysis on long term development of economic inequality, and so all conclusions are largely based on theoretical data and not empirical data.
Because of the time limits for the thesis, practical examples on growth and inequality are mostly limited to three SAARC countries Afghanistan, Pakistan, and India. This will allow for a focus on the comparison of relatively similar countries, but in slightly different conditions.
