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1.

Executive Summary
Income inequality has become a popular topic that people like to debate in the modern world.
It is believed that with the development of globalization, income gaps are becoming larger
and larger. Income inequality also grows larger. A lot of people urge that poor people are the
only victims of income inequality and the rich people are always favoured. However, Robert
Peston argues in his news article Why extreme inequality hurts the rich that the inequality
hurts the rich too. This assignment is going to continue with Roberts opinion in income
inequality. Previous research opinions are presented to support the statement that income
inequality hurts poor only. However, opposite opinions are argued and provided to attempt to
show this assignments agreed opinion that income inequality is bad for the rich too.

2. Introduction
Globalisation has become a way to describe changes in international economy and in world
politics. It is defined as the free movement of goods, services, labour and capital across
borders. Globalisation is a result of reduced transportation and communication costs, lower
trade barriers, faster communication, rising capital flows, increased competition,
standardization, and migration to mention a few key causal factors. In recent years, researcher
find out that globalisation leads to unfavourable side effects in income inequality. Widening
income inequality is the defining challenge of our time. In advanced economies, the gap
between the rich and poor is at its highest level in decades. Inequality trends have been more
mixed in emerging markets and developing countries (EMDCs), with some countries
experiencing declining inequality, but pervasive inequities in access to education, health care,
and finance remain. Not surprisingly then, the extent of inequality, its drivers, and what to do
about it have become some of the most hotly debated issues by policymakers and researchers
alike. Different opinions exist in the current world by researchers, economists, governments
and normal people. Some believe that income inequality is bad for the poor only, some
believe that income inequality is bad for all. There are also people agree on income inequality
may not be a bad thing. In this assignment, whether income inequality is bad for the poor or
all will be examined. The arguments attempts to show that income inequality is bad for the
rich too.

3. Context
Before the assessment, it is important to understand the context of income inequality. The
discourse on inequality often makes a distinction between inequality of outcomes (as
measured by income, wealth, or expenditure) and inequality of opportunitiesattributed to
differences in circumstances beyond the individuals control, such as gender, ethnicity,
location of birth, or family background. Inequality of outcomes arises from a combination of
differences in opportunities and individuals efforts and talent. At the same time, it is not easy
to separate effort from opportunity, especially in an intergenerational context. For instance,
parental income, resulting from their own effort, determines the opportunity of their children
to obtain an education. It is in this spirit that Rawls argued that the distribution of
opportunities and of outcomes is equally important and informative to understand the nature
and extent of inequality around the world.

4. Income Inequality is bad for the poor and favour for the rich
4.1 Growth rate of the poor is held back by income inequality
Researchers claim that the income inequality holds back the growth of the poor. Experiment
and surveys conducted in the US can be used to support this statement. In van der Weide and
Molanovic, large US micro-censuses that sample 1% (and more recently 5%) of households
in each state is used, conducted every ten years since 1960, to answer the following question:
How does state-level inequality among the poor and the rich in a given year affect state-wide
growth rates of disposable income of the poor, middle class and the rich over the next ten
years? The half-century (1960-2010) which the data cover has been a period of substantial
transformation of Americas economy and society. During the period, labour participation
rates among women half of those of men in 1960 became almost equal by 2010. The
demographic structure changed. Non-Hispanic whites who accounted for 85% of the
population in 1960 were only 65% in 2010. Education levels increased. The percentage of
adults with bachelor or higher degree increased from 10% to 33%. When researchers look at
how state-level inequality is correlated with future growth rates at different percentiles of the
income distribution across 49 states (leaving Alaska and DC, clear outliers, out of the
analysis), they find a strong negative effect on the growth rate of the poor and an almost
equally strong positive effect on the growth rate of the rich. It is found that overall inequality

has almost no effect on the growth rate of the middle deciles a finding which resonates with
Palmas argument that in both equal and unequal countries, the shares of the middle deciles
(in Palmas case, deciles five through nine) are almost the same. Unpack inequality into
inequality among the poor (bottom inequality) and inequality among the rich (top inequality,
researchers find that it is mostly top inequality that is holding back growth at the bottom.
Bottom inequality (when significant) also tends to lower growth among the poor, while it
tends to help the growth rate of the rich.
4.2 Inequality causes poverty
Small changes in income distribution can have a large effect on poverty. A simple
arithmetical example can help visualise this. Imagine a country where the share of national
income that goes to the poorest 20% of the population increases from 6% to 6.25%. A change
in income distribution of one quarter of one percent would barely affect the Gini coefficient,
but for the poor this represents a 4% increase in their total income. Such a small
redistribution would have the same effect on poverty as doubling the annual growth of
national income from 4%, which is the projected growth rate of many African countries, to
8%, which is necessary to achieve the income poverty Millenium Development Goal (MDG)
example from White and Anderson. Changes in income distribution have even larger effects
on measures of the depth and severity of poverty, as confirmed by evidence from Cote
d'Ivoire and Bangladesh.

5. Income Inequality is bad for everyone, including the rich people


Opposite opinions in against the statement that income inequality is bad for the poor only are
attempted to show in this assignment. There are also many researchers have performed
extensive researches and surveys in arguing that income inequality is bad for the rich too. The
fundamental basis for such arguments is to view and think the people as a whole society, not
separate groups according to their income level. As talked about in the BBC news article
Why extreme inequality hurts the rich, Robert Peston emphasizes that income inequality is
bad for the rich too because very often both the poor and rich have the same interests in
fighting Ebola, however because the business world does not realise this and do not want to
serve the poor due to income inequality, Ebola vaccines were not developed in advance and
the disease became a global threat. His article assesses the impact of income inequality to the

rich from a healthcare perspective. Similarly in the following section, the arguments can be
carried out from several aspects. For example, the negative impacts of inequality on the
overall economy growth, financial recessions, global imbalances and so on.
5.1 Inequality affects growth drivers.
Widening of income disparities affect a countrys economic and overall growth and this
causes negative impacts on the rich people too. Higher inequality lowers growth by
depriving the ability of lower-income households to stay healthy and accumulate physical and
human capital For instance, it can lead to underinvestment in education as poor children end
up in lower-quality schools and are less able to go on to college. As a result, labour
productivity could be lower than it would have been in a more equitable world. In the same
vein, Corak finds that countries with higher levels of income inequality tend to have lower
levels of mobility between generations, with parents earnings being a more important
determinant of childrens earnings. Increasing concentration of incomes could also reduce
aggregate demand and undermine growth, because the wealthy spend a lower fraction of their
incomes than middle- and lower-income groups. Inequality dampens investment, and hence
growth, by fueling economic, financial, and political instability. When the overall growth in
the macro scale in a country is hindered by the inequality, the rich people are affected too.
Their wealth normally come from high salary if they are the high management level in big
companies, or from investments in business activities. When the growth of the nation slows
down and labour productivity drops, the rich people businesses are also impacted greatly and
earned profits decline too. Thus, the rich people will also be earning less as a result of
inequality.
5.2 Financial recessions and crises. A growing body of evidence suggests that rising
influence of the rich and stagnant incomes of the poor and middle class have a causal effect
on crises, and thus directly hurt short- and long-term growth. In particular, studies have
argued that a prolonged period of higher inequality in advanced economies was associated
with the global financial crisis by intensifying leverage , overextension of credit, and a
relaxation in mortgage-underwriting standards and allowing lobbyists to push for financial
deregulation . During recessions, the biggest party that is affected is not the poor, but rather
the rich. This is because they possess the majority of wealth in the market and once financial
crises happen, their asset values sunk the most. Many large companies can even go bankrupt
when hit by the crises.

5.3 Global imbalances. Higher top income shares coupled with financial liberalization,
which itself could be a policy response to rising income inequality, are associated with
substantially larger external deficits. Such large global imbalances can be challenging for
macroeconomic and/or financial stability, and thus growth and affect the rich people.

5.4 Conflicts. Extreme inequality may damage trust and social cohesion and thus is also
associated with conflicts, which discourage investment. Conflicts are particularly prevalent in
the management of common resources where, for example, inequality makes resolving
disputes more difficult. More broadly, inequality affects the economics of conflict, as it may
intensify the grievances felt by certain groups or can reduce the opportunity costs of initiating
and joining a violent conflict. The conflicts may affect the rich in various ways. For example,
the poor or lower income people will easily form a hatred attitude towards the rich because
they are wealthy. As a result, the business that the rich is holding may be affected in sales
performance. Safety of the rich people may be threatened too because there will be more
arrows pointing to them and dangerous attacks or kidnaps may happen on them.

6. Is inequality a necessary evil?


Some degree of inequality may not be a problem insofar as it provides the incentives for
people to excel, compete, save, and invest to move ahead in life. For example, returns to
education and differentiation in labour earnings can spur human capital accumulation and
economic growth, despite being associated with higher income inequality.
Inequality can also influence growth positively by providing incentives for innovation and
entrepreneurship and, perhaps especially relevant for developing countries, by allowing at
least a few individuals to accumulate the minimum needed to start businesses and get a good
education

7. Conclusion
In conclusion, it is agreed as discussed that income inequality brings unavoidable negative
impacts on both the poor and the rich. Despite many researches on proving the inequality is

bad only for the poor, the opposite opinion that the inequality is bad for the rich too is
presented when the society is assessed as a whole. However, there are still different voices in
viewing the income inequality and think that the inequality may not be a bad thing for
everyone because it can influence growth positively too.

References
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