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Income Inequality and Human Development

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Human development has been a sought after goal all over the world, particularly in the developing nations. The world has made significant strides in human development. One particular issue in the modern world is the increasing level of income inequality all over the world, in both developed and developing countries. Income inequality has impact on human development and the increasing income inequality may have deleterious effect on human development.

Income inequality decreases human development in almost all types of countries identified in terms of human development index. Countries that are rated as having very high human development index (HDI) are usually countries that have high per capita incomes. An increase in income inequality in these countries may lead to a decrease in HDI.

An increase in income inequality may mean that some people in the lower-income group cannot allocate sufficient resources to health and education. This would decrease the HDI of these people and the overall HDI in these countries. Therefore, income inequality may lead to a decrease in HDI in very high HDI countries.

The same negative relationship is observed among high HDI and medium HDI countries. Countries that are usually higher middle income and middle income can be classified as high HDI and medium HDI countries respectively. An increase in income inequality may lead to a decrease in human development in the high HDI and medium HDI countries.

An increase in income inequality may lead to an improvement in HDI in low HDI countries. These are countries which have very low per capita income and may be classified as least developed countries. Citizens of these countries can spend very little on education and health. When there is economic growth, some people attain a higher income that allows them to spend more on education and health.

Income inequality in the society increases but there is also an improvement in HDI in the country. Therefore, in low HDI countries, an increase in income inequality may lead to an improvement in HDI. However, when income inequality is severe in a low HDI country, it can lead to a decrease in human development. For example, suppose a low HDI country has three citizens, A, B and C and their income is very low at $1 per citizen. Income inequality in the country is low but, people's income is also low so that they can spend less on education and health. This leads to a low HDI. Then, economic growth takes place which increases C's income to $10 while the other two has the same income as before. Now, C can spend more on education and health leading to an improvement in HDI in the country. Even though income inequality has increased, there has been an improvement in HDI in the country. But, if C's income increases to $1,000, there is severe income inequality in the country. While C can spend significantly more on education and health, A and B are just surviving leading to an overall low HDI score. In this situation, the increase in income inequality has led to a decrease in HDI.

A decrease in income inequality may lead to an improvement in HDI in all types of countries. As Figures 1 and 2 show, a decrease in income inequality leads to an improvement in human development index for both very high HDI countries (that includes the United States and Canada) as well as low HDI countries. When there is a policy to reduce income inequality and facilitate the lower-income group through subsidies, coupons, etc., it may lead to an improvement in access and quality of education and health of the lower-income group. This may lead to an improvement in HDI in the country. Therefore, policies that reduce income inequality and lead to an improvement in the lives of the lower-income group may lead to an improvement in HDI in the overall society.

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Source: Human Development Report 2013, UNDP.

2014-03-06-Figure2.jpg
Source: Human Development Report 2013, UNDP.

Income inequality plays a negative role on human development in any country irrespective of its HDI level. The increasing income inequality that is happening all over the world, including the developed countries, may lead to deterioration in human development. A decrease in income inequality that improves the standard of living of the lower-income group may increase human development in a country.

The article is based on the author's research paper, 'The Ninety-nine Percent and the One Percent'.