Najerah Zacaria

BSA 2C – Economic Development

“Contemporary Models of Development and Underdevelopment”

Why might high levels of inequality lead to lower rates of growth and development? Why
might it be difficult for countries to get out of this kind of trap?

For various reasons, high inequality can lead to lower rates of development and progress.
One of the key causes is that imbalance can result in social instability and political turmoil,
both of which can impede the expansion and advancement of the economy. Inequality
can cause social discontent, political instability, and a lack of trust in institutions. Thus
nations with high levels of inequality typically have poorer and less consistent economic
growth, finds a study by the International Monetary Fund.

High levels of inequality may also prevent people from accumulating as much human
capital since they may find it challenging to obtain opportunities for education, healthcare,
and other necessities. According to a World Bank report, an imbalance can result in a
"vicious cycle of poverty," Children from low-income families are more likely to drop out
of school, have worse health outcomes, and earn less as adults.
Additionally, high levels of inequality can lead to lower levels of innovation and
entrepreneurship. According to a study by the Organization for Economic Cooperation
and Development, an imbalance can lead to a concentration of wealth and power in the
hands of a few, limiting the diversity of ideas and perspectives in the economy and leading
to a lack of innovation and entrepreneurship.

Getting out of the trap of high inequality can be challenging for countries for several
reasons. One reason is that inequality can be self-reinforcing, as individuals from lower-
income households may not have access to the resources and opportunities needed to
improve their economic outcomes. According to a report by the United Nations, high
levels of inequality can create a "poverty trap," where individuals from poor households
may not escape poverty due to a lack of access to education, health care, and other
opportunities.

Therefore, escaping the high inequality trap may require considerable policy adjustments
and reforms. According to a report by the International Labour Organization, combating
inequality calls for a multidimensional strategy that includes encouraging job creation,
widening access to education and training, and offering social security and safety nets for
disadvantaged groups.

In summary, excessive levels of inequality can reduce growth and development rates by
undermining social and political stability, limiting human capital accumulation, and
impeding entrepreneurship and innovation. Yet, escaping the snare of excessive
inequality can be difficult and calls for considerable policy adjustments and reforms.

Why is the government sometimes a part of the problem of coordination failure rather than
the solution? Does this make the problem hopeless? What could be done in this case?

There are several reasons why the government sometimes makes coordination problems
worse rather than better. For instance, the government can need more information or the
appropriate incentives to coordinate many parties properly. Particular interests or
lobbyists may impact the government in a few cases, resulting in policies that favor some
groups over others. Government action may also have unexpected repercussions, such
as market distortions that could worsen coordination failure.

One example of government failure is the tragedy of the commons, where the government
may need help to regulate and coordinate the use of shared resources effectively. Elinor
Ostrom, a Nobel Prize-winning economist, argued that local communities might be better
equipped to solve coordination problems because they better understand the help and
have a greater sense of responsibility towards it. In contrast, top-down government
regulation may be less effective because it is often based on a one-size-fits-all approach
that does not consider the specific needs of different communities.
Notwithstanding these difficulties, it's crucial to understand that, in some circumstances,
government action can still be helpful. For instance, the government may need to step in
to provide the necessary coordination when there are significant externalities or public
goods that need to be given by the market. Additionally, there are strategies to lessen the
risks of poor government performance, such as ensuring accountability, transparency,
and stakeholder involvement in decision-making. In the end, the problem of coordination
failure might require a combination of government and non-governmental measures, each
of which would contribute to the solution differently.