Rising income inequality won’t favor economic growth

By Nurul Najwa Zulkifli

Since the dawn of civilization, income disparity has been a hot topic of discussion. This issue is particularly relevant in today’s economic world as the gap between the rich and the poor appears to be widening, even in industrialized countries. We need to explore the issue of the increasing income gap and how it affects economic growth, review various arguments regarding the topic and determine how serious and severe the issue of income inequality and the economy is.

In Southeast Asia, Malaysia has the greatest economic discrepancy between rich and poor, surpassing the Philippines, Thailand, Singapore, Vietnam, and Indonesia. According to the United Nations Human Development Programme (UNHDP) report in 2004, Malaysia’s wealthiest ten percent own 38.4 percent of the country’s economic income, while the poorest ten percent own only 1.7 percent.

This topic is related to SDG Goal 1: No Poverty and Goal 8: Decent Work and Economic Growth. Based on Goal 1, rising inequality is a major cause of domestic financial instability, which is often linked to negative effects on growth, poverty, and distribution. Next, economic growth is predicted to slow down as capital per capita declines. Due to this, it is related to Goal 8 which emphasizes on decent work and economic growth. 

The increasing income gap affects economic growth for several reasons. Inequality leads to weak aggregate demand. For Stiglitz (2012), individuals at the bottom of the income scale spend a larger percentage of their earnings than those at the top. This makes logical sense as the poor must spend all of their wages to survive. 

Secondly, inequality of incomes is associated with inequality of opportunity. Those born at the bottom of the income distribution have a significant risk of not realizing their full potential. According to Stiglitz (2012), as a result, we pay a price not just in terms of a sluggish economy now, but also in terms of future growth.

Thirdly, those in unequal settings are more discouraged to do their jobs or work. These workers find considerable support for the “discouragement impact,” arguing that such changes in behavior affect not only individuals but also the entire economy, which grows at a slower pace (Ku and Salmon, 2019).

Lastly, rent-seeking is one of the main causes of inequality. This is because the wealthy prefer to increase their own money rather than create new wealth, causing the poor to remain trapped in poverty. 

Furthermore, some initiatives can be implemented to overcome or solve the problem of income inequality which affects economic growth. First and foremost, education must be improved in terms of both quality and reach. Human capital reforms are critical for raising living standards and are likely to minimize labor income disparity. Enhanced accountability for schools, greater teacher recruitment and training, and special support for students at risk of dropping out are examples of legislative measures. 

Next, spending on active labor market policies should be increased. High social benefits may lower the motivation to work. Active labor market policies, such as better matching jobs to talents and improving job search support and monitoring, may help to mitigate these negative consequences. Both GDP per capita and labor income equality should benefit as a result of this. 

Moreover, the government can create a wealth tax in terms of tax policies. For the rich, their earnings account for only a small portion of their total wealth. Many billionaires amass their fortunes through the sale of stocks and other assets, which are taxed on capital gains rather than income.

The government has a significant role to play in increasing wealth distribution efforts. It has been established that increasing government spending on social spending reduces economic disparity and poverty. In particular, the government has expanded wealth distribution initiatives in the previous decade, this has had a favorable impact on economic equality in Malaysia. Most believe that the impact could be helpful to the people and also the country in the future.

There is an apparent relationship between rising income inequality and economic growth as evident in previous studies. Rising income inequality is not something that we can ignore any time longer, especially in a developing country like Malaysia. The consequences of this can doom this country and most importantly, the people in it. ***

(Nurul Najwa Zulkifli is a student from Kulliyyah of Economic and Management Sciences (KENMS). The article is part of the ‘Sustainable Development Goals’ course. The views expressed here are those of the writer/author and do not necessarily represent the views of IIUMToday,)

Leave a Reply

Your email address will not be published. Required fields are marked *