Economic Development Strategies

This assignment delves into the complexities of economic development strategies. Students are tasked with analyzing various approaches to promoting economic growth and addressing issues like poverty reduction and inequality. The analysis involves examining the effectiveness of different policies and understanding their impact on evolving economies. Key concepts such as fiscal policy, monetary regimes, and inclusive growth are explored within the context of real-world examples and academic research.

STRATEGIES OF
ECONOMICS
DEVELOPMENT

ESSAY
''To combat poverty and increase growth in the world's poorest countries policy makers need
to focus on decreasing world income inequality''
Poverty refers to the situation of scarcity of funds or money to live a better life.
Overpopulation, social inequality, unstable political situation, discrimination, high level of
nation debts and natural disaster are its causes. It impacts economic development in an
adverse manner as increasing the poverty results in lowering the income levels of the citizens.
Thus, poor people are not able to meet their basic needs such as food, cloth and shelter. Large
number of people are living scarcely due to lack of funds.
Nowadays, income inequality is the reason for increasing poverty. Therefore, it is
very necessary for the country to decrease poverty and make economic growth., . Therefore,
policy makers need to focus on decrease in income inequality. The present essay will identify
the policies available for making economic development through reducing income
inequalities.
Agree or disagree with the statement: In current economic situation, poverty
reduction is one of the major goals of the countries. Reduction in income inequality plays a
significant role in it, as a major cause of poverty. In present era, a large number of people are
suffering from extreme poverty due to low income level (Perkins and et. al., 2012). Poverty
can be measured through detecting the percentage of population who are spending their lives
below specified consumption standards.
Income inequality: Increase in income disparity is a major challenge faced by
government of different countries. It refers to the salary gap between rich and poor citizens
(Matthews, 2012). Unequal distribution of pay among the population is known as income
inequality. It is arising at an exponential rate in emerging markets and developing countries
(EMDCs).
In UK, Organization for commercial and economic development (OECD) found that
10% of the richest person’s income are almost 10 times greater than 10% of poor person. In
value terms, the average of 10% of the deprived class pay is 8468£ comparatively very lower
than average of 10% earning of the privileged class, amounted to 79042£. Moreover, the
difference between original and net income is also very high in UK. 10% of underprivileged
class’s original salary is 3738£ while top richest 10% people have an actual pay of 102366£.
Hence, it is approximately 27 times greater. Thus, it can be said that income is distributed in
an uneven manner among the UK population. Further, imbalanced spread of earning across
1 | P a g e

the regions also results in enlarging poverty. In context to UK, London is having higher
income as compare to North east. In addition to it, wealth distribution is also unequal as only
the 10% of the richest society have more than 45% of wealth contribution. On the basis of
above, it can be said that income disparity is a great reason for increasing poverty and it
affects economic growth in a negative direction. Thus, by eliminating or reducing the uneven
pay distribution, UK will be able to combat poverty consequences. Another, impact of
income inequality is reducing economic growth. It is because savings are greatly depended
upon the earning level hence, lower the income lead to lesser savings and vice versa results in
lowering the economic development (Leigh and Blakely, 2013). Further, providing incentives
on the basis of skills also results in income differentiation and increase inequality.and affect
growth adversely. Moreover, high lending rates than interest will impact country's growth
negatively. Higher wage payment to skilled employees than unskilled turn out to enhance
disparity and distract economic development.
Henceforth, I am completely agree with the statement that to combat poverty and
increase growth is the necessary requirement of the countries. In order to reduce the poverty,
policy makers need to focus on decreasing world income inequality. Rise in the income of
poor persons help to reduce poverty.
Measurement of income inequality: Measuring the income distribution helps to
determine the level of earning disparity in a great manner. For instance, two economy A and
B having income structure of {50, 50} and {0, 100} than it can be said that economy B has
high level of inequality. According to Anonymity principle, income inequality measure
dissimilarity in the income distribution in society. It can be represented as {y1, y2,
y3,......yn) in which y1<y2<y3......<yn. For instance, y1 income is 100, y2 is 200 and y3 is
300 then it can be said that pay is distributed in an unequal manner hence, represent as
{300<200<100}. Thus, it became clear that this principle indicate that one person have higher
income than other persons in the society.
Population principle measures the proportion of two resident earning which are
having different income levels (Hanley and Douglass, 2014). The principle says that
comparing the salary distribution of n population with the population of 2n people having the
same income pattern hence, there is no difference existed in disparity between the pay
distributions of both the population. It can be represented as {100, 200, and 300} = {100,
100, 200, 200, 300, and 300}.
Relative income principle says that income distribution is not unequal in the situation
where the pays are {100, 200, and 300} and {200, 400, 600}. The reason behind the decisions
2 | P a g e

is that inequality should not be measure in absolute terms. It is a relative term hence, income
variations in {100, 200, 300} is same as to the earning inequalities in {200, 400, 600}.
Dalton principle measure discrimination through transfer the money of poor people to
rich. For instance, measuring inequality between income distribution of {100, 200, 300} and
{90, 200, 310}. Transfer of funds from poor to rich people is known as regressive transfer
indicates higher variation.
Lorenz curve: It helps to measure inequality level of income distribution. According
to the curve, dissimilarity can be measured through plotting economy's earning distribution
on a graph (Lewis, 2013). The curve says that perfect equality is existed at 45º line while
moving further away with the curve line from the level of 45º will indicate inequality. The
diagram is presented here:
According to the curve, if Lorenz consistent is below than the level of 45% for all the
pay levels then it indicates that income is distributed in an uneven manner (Herndon, Ash and
Pollin, 2014). Henceforth, the curve can be applied for all the anonymity, population, relative
proceeds and Dalton principle. Moreover, comparison between two curves also provide better
understanding of inequalities.
3 | P a g e

The graph indicates that L2 is more unequal than L1 as it is greater far away from 45º
line. Although the curve has certain limitations as it could not make clear comparison
between Lorenz curve of two countries. For instance, in case whereone country's Lorenz
curve is below than another curve up to a certain income level and after that level, it moves in
upward direction than other curve than it can not be said that one country's income
distribution is more unequal than another country.
Gini coefficient: It is an appropriate inequality measurement and satisfies all the four
principle efficiently. It measure the ratio of Lorenz curve area at 45º line and below 45º as a
whole hence, it is a good measurement compare to others such as Range, Mean deviation and
variance.
4 | P a g e

Policies are available to policy maker to combat poverty and increase growth: As per
the statement, it is necessary for the policy makersto address the situation of income
difference and identify the consequences for making necessary strategies. Following policies
may be implemented to reduce earning inequality described here as under:
Fiscal policy: The policy plays a vital role in ensuring financial stability in the
country as it minimizes the monetary crisis. Changing the tax rates will affect the availability
of disposable money to the population (Dosi and et. al., 2015). There are two types of taxes
that are direct and indirect. Income tax comes under direct tax as it has to be borne by
imposed party called assessed. Lower level of income group does not require paying taxes as
their pays do not come under the taxable income classification. In UK, the progressive tax
structure has been applied. In this taxation policy, poor people have no obligations to pay tax
up to a certain limit. However, people who earn more than presecribed income limit and does
not exceeed tha maximum incomes have to pay tax at basic rate of 20%. Hpwever, richest
people whose earnings are very high obliged to pay high tax rate of 40% or 45%. Hence,
high income tariff rates impose higher liabilities to rich people as they have to pay great
amount of money. It results in lowering the disposable money and helps to decline income
inequality (Hull, 2009).
On contrary, indirect tax rates are maintained at a regressive proportion as it has a
large impact on poor society. Thus, reducing tax reliefs, evasion, avoidance, progressive
direct tax structure and regressive indirect tax effects are key components to reduce
inequality and make economic growth (Hansen, 2013). Further, redistribution in terms of
wealth and property taxes also makes possible to reduce inequality through declining rich
5 | P a g e

people incomes. Privileged class incomes can be reduce through receiving high taxes from
them. Another way of reducing disparity and improving growth is changing the government
spending levels. High government expenditure on education, health and other kind of public
services will help to enhance growth rate. Thus, it can be concluded that fiscal policy gains
significant importance in order to income inequality reduction and moving towards economic
development and growth.
Education policy: In the present age of competition, technological innovations has
taken place at a faster rate lead to enhance mechanizing jobs in a great manner. Unskilled and
uneducated people are not able to understand new technology in a quick manner. Therefore,
their wages rates are comparatively lower than skilled labour force wages results in income
inequality (Gilder, 2012). Education policy is a way of improving educational quality and
boost people skills. It helps to enhance the earnings of future generation as they will be
highly skilled and able to handle new and innovative technology. In developing countries, it
can be done at primary school levels. Moreover, higher the governmental spending on public
education also helps to promote education and reduce inequality. However, in advanced
economy, the apprenticeship programs and high educational policies will promote people
ability, skills and their knowledge. Thus, wage rate discrimination can be reduced results in
lowering the earning disparity and enhance economic growth.
Labour policies: Another policy to reduce unequal distribution of income making
labour policies. It helps to support and provide assistance to lower or middle income levels.
In national minimum wages policy, government can set minimum labour wages for all the
industries. Therefore, wage rate differentiation can be reduced between skilled and unskilled
labours (Deakin and Morris, 2012). It directly helps to remove the consequences of poverty
pay. Low labour pay can arise due to lack of accessing labour market, individuals bargaining
power and lack of skills. Further, high wage rate will reduce workers demand. This in turn,
they have to accept lower wages rates and generate lower the incomes results in failure of
labour market. Thus, nation minimum wages policy provides assistance to overcome such
problems. Moreover, the policy helps to eliminate dualism in terms of permanent and
temporary workers. Another benefit of the labour policy is that it eliminates excessive labour
regulations on the workers (Fukuda-Parr and Lopes, 2013). In addition to it, sectoral re-
training schemes also helps to provide assistance and proper guidance to the workers and
improve their skills. Reducing power of trade unions, employment subsidies and improve
labour market flexibility will results in ensure success of labour market. This in turn, income
inequality can be declined resulted in improving economic growth in a great extent.
6 | P a g e

Monetary policy: Changing the interest rate is the part of monetary policy. Altering
these rates tend to change the exchange charges as they are closely related. In context to UK,
the policy is designed by the Monetary Policy Committee (MPC) of Bank of England. Under
the official money market rate, MPC set repo rate to reduce inflationary pressure. It is the rate
which is charged by Bank of England on provided short term loans to other financial
institutions. The other interest rates on loans, mortgages and credit cards are changes
accordingly to it. For instance, increasing the repo rate will lead to increase these charges on
loans (Connolly, 2013). This in turn, the loans became much expensive as borrower need to
pay high interest charges to the bank. Therefore, disposable income of people who borrowed
higher funds can be declined. The reason behind that is people have less availability of cash
after serving their debts. On contrary, it is ineffective for poor or middle class society as they
will be unable to borrow the funds for their requirement. However, falling in these can make
the loans less costly thus, it encourage people spending and investment. This in turn, income
inequality can be reduced. Moreover, it affect the savings as rising interest rates will results
in decreasing disposable income and customer savings and vice versa (Herz and Hohberger,
2013). Another impact of interest rate can be seen on the exchange rates. Rising interest rates
contributes to incline the exchange rates results in increasing the export prices and declining
overseas demand and vice versa. Thus, it can be said that monetary policy helps to make
effective control on nation's money supply and maintain liquidity.
Job creation schemes: Government can create more number of the jobs through
designing work creation schemes. It is an effective way to increase the number of
occupations within the country and increase the incomes of the people. It provides assistance
to the government to reduce the number of individuals who are spending their lives below
poverty line. Tackling the scarcity consequences makes government able to decline income
inequality (Roemer and Stern, 2014). Jobs can be created through making larger the
investment in the economy. Higher spending, lower interest rates, higher infrastructural
investment and higher tax rates will helps to reduce unemployment and decrease poverty.
This in turn, unequal distribution of income can be eliminated and helps to ensure economic
growth.
Most Appropriate policy to reduce economic inequality and improve economic
growth: On the basis of above identified strategies, it can be concluded that fiscal policy is a
best approach to combat poverty through decreasing income inequality and moving towards
economic growth. The reason is both the governmental incomes and spending levels is
altered in that policy helps to decline income inequality (Dosi and et. al., 2015).
7 | P a g e

Under the fiscal policy, progressive direct tax structure and regressive effects of
indirect taxes will tends to reduce the earning level of rich people and move towards to
income equity. According to the policy, higher income generating people are obliged to pay
high percentage of duties while tax rates for middle class people are comparatively low
(Fulcher, 2015). Another, poor persons do not oblige to pay any tax. Thus, it became clear
that the policy will help to reduce disposable income of upper class society and do not impact
lower level groups. Another, regressive structure of indirect tax is retained in order to reduce
adverse impact to the poorer. . Moreover, larger income tax will help to spend more on public
services and provide benefit to poor people in a great extent. Large governmental spending
on health, education, hospitality, roads and other important public sector services provide
assistance to unprivileged groups (Fosu, 2013). In context to UK, spending on National
Health Services and education are administrated by local authorities. Thus, it can be said that
the policy majorly contribute towards reducing income inequalities without affecting the
earnings of poor people.
Impacts of lower income inequality: The essay concluded that as a result of decrease
in earning inequality tends to enhance Gross Domestic Product and per capital income. It is a
sign of improving economic growth and reduction in the negative consequences of income
disparity. Therefore, economy can be developed. Thus, it bring advantages for the poor to
improve their incomes (Prasanna, 2016). Further, it bring benefits of employment
enhancement and helps to comply the aim of poverty reduction.As a result, decline in poverty
will results in development of the country. Thus, poor people will able to spend better quality
of life due to increase in income and helps to improve their living standards. The reason
behind that is high salary will contribute to enhancing the purchasing power of poorclass.
Moreover, it increases the customer demand; improve living standards, industrial production
and their revenues. Henceforth, the aims of building economic development and growth can
be achieved.
8 | P a g e

REFERENCES
Books and Journals
Connolly, R., 2013. Economic Growth and Strategies for Economic Development in Russia.
Russian Analytical Digest. pp. 5-9.
Deakin, S.F. and Morris, G.S., 2012. Labour law. Hart publishing.
Dosi, G. and et. al., 2015. Fiscal and monetary policies in complex evolving economies.
Journal of Economic Dynamics and Control. 52. pp.166-189.
Fosu, A.K. ed., 2013. Achieving development success: Strategies and lessons from the
developing world. OUP Oxford.
Fukuda-Parr, S. and Lopes, C., 2013. Capacity for development: new solutions to old
problems. Routledge.
Fulcher, G., 2015. Disabling policies?: A comparative approach to education policy and
disability. Routledge.
Gilder, G., 2012. Wealth and poverty: A new edition for the twenty-first century. Regnery
Publishing.
Hanley, C. and Douglass, M.T., 2014. High road, low road, or off road? Economic
development strategies in the American states. Economic Development Quarterly.
28(3). pp. 220-229.
Hansen, A.H., 2013. Fiscal Policy & Business Cycles. Routledge.
Herndon, T., Ash, M. and Pollin, R., 2014. Does high public debt consistently stifle
economic growth? A critique of Reinhart and Rogoff. Cambridge journal of economics.
38(2). pp. 257-279.
Herz, B. and Hohberger, S., 2013. Fiscal policy, monetary regimes and current account
dynamics. Review of International Economics. 21(1). pp. 118-136.
Leigh, N.G. and Blakely, E.J., 2013. Planning local economic development: Theory and
practice. SAGE Publications, Incorporated.
Lewis, W.A., 2013. Theory of economic growth. Routledge.
Perkins, D.H. And et. al., 2012. Economics of development.
Prasanna, K., 2016. Inclusive Growth-Poverty Reduction Programmes in India. Imperial
Journal of Interdisciplinary Research. 2(3). pp. 17-21.
Roemer, M. and Stern, J.J., 2014. Cases in economic development: projects, policies and
strategies. Butterworth-Heinemann.
Online
9 | P a g e

Hull, K., 2009. Understanding the relationship between economic growth, employment and
poverty reduction. [Pdf]. Available through:
<http://www.oecd.org/dac/povertyreduction/43280288.pdf>. [Accessed on 3rd February,
2016].
Matthews, D., 2012. Ten Ways to reduce inequality without raising tax rates. [Online].
Available through: <https://www.washingtonpost.com/news/wonk/wp/2012/12/06/ten-
ways-to-reduce-inequality-without-raising-tax-rates/>. [Accessed on 3rd Februray,
2016].
10 | P a g e