Chapter 14 and 15

Why does inequality of income act as barrier for economic growth m?

High income inequality can hinder economic growth for several reasons. It often leads to unequal
access to education and healthcare, limiting the development of human capital. Additionally,
when a significant portion of the population has limited purchasing power, it can dampen overall
demand for goods and services, affecting economic expansion. Furthermore, unequal
distribution of resources may result in social and political unrest, creating an unstable
environment that is unfavorable for sustained economic growth.

Why poor infrastructures cause inequality of income

Poor infrastructure can contribute to income inequality in various ways. Insufficient

infrastructure, such as inadequate transportation, limited access to education, and poor
healthcare facilities, can hinder economic opportunities for individuals with lower incomes.

1. **Limited Job Opportunities:** In regions with poor infrastructure, there may be fewer job
opportunities or limited access to markets, making it challenging for people to find well-paying
employment.

2. **Reduced Access to Education:** Inadequate infrastructure, like a lack of schools or

transportation, can restrict access to education. This limits the skill development and job
prospects for individuals, perpetuating income disparities.

3. **Healthcare Disparities:** Poor healthcare infrastructure can lead to health issues that affect
productivity and income-earning potential. Without access to proper medical facilities,
individuals may face challenges in maintaining good health.

4. **Barriers to Entrepreneurship:** Weak infrastructure can impede the growth of businesses,

making it difficult for entrepreneurs to establish and expand their enterprises. This
disproportionately affects those with fewer resources to overcome these challenges.

Addressing infrastructure deficiencies is crucial for promoting economic equality, as it creates an

environment where individuals can access education, healthcare, and job opportunities more
equitably.

Why lack if formal employment opportunities cause inequality

The lack of formal employment opportunities can contribute to income inequality for several
reasons:

1. **Informal Sector Vulnerability:** People who engage in informal employment often face
unstable income, lack of job security, and limited access to social benefits. This vulnerability can
perpetuate poverty and widen the income gap.

2. **Limited Income and Benefits:** Informal jobs typically offer lower wages and fewer, if any,
benefits compared to formal employment. This disparity in compensation contributes to unequal
income distribution.

3. **Lack of Legal Protections:** Informal workers often lack legal protections that formal
employees enjoy, such as minimum wage regulations, overtime pay, and workplace safety
standards. This absence of safeguards can lead to exploitation and lower income levels.

4. **Reduced Skill Development:** Informal jobs may not provide opportunities for skill
development or career advancement. This limitation can hinder individuals from acquiring the
skills needed for higher-paying formal employment.

5. **Exclusion from Social Security Nets:** Informal workers may not have access to social
security nets, including healthcare, retirement benefits, and unemployment insurance. This
exclusion further deepens economic disparities.

Addressing the lack of formal employment opportunities is crucial for reducing income inequality.
Policies that promote the formalization of jobs, improve labor market conditions, and provide
social protections can help create a more equitable economic landscape.

How low rate of savings hold back public sector investment

A low rate of savings can constrain public sector investment in several ways:

1. **Limited Fiscal Space:** When the government has a low savings rate, it has limited fiscal
space to allocate funds for public investments. Insufficient savings may restrict the
government's ability to finance large-scale infrastructure projects, education, healthcare, and
other critical sectors.

2. **Higher Borrowing Costs:** A low savings rate can lead to increased reliance on borrowing to
fund public investments. This heightened demand for borrowing may drive up interest rates,
making it more expensive for the government to finance projects, and potentially leading to a
higher debt burden.

3. **Risk of Fiscal Imbalances:** Depending heavily on borrowing without a corresponding

increase in savings can lead to fiscal imbalances. High levels of debt without adequate savings
or revenue streams can jeopardize a country's fiscal stability and limit its capacity for sustained
public sector investment.

4. **Reduced Investment in Human Capital:** Inadequate savings may limit the government's
ability to invest in education and healthcare, impacting human capital development. This, in turn,
can hinder long-term economic growth and productivity.

5. **Vulnerability to External Shocks:** Countries with low savings rates may be more vulnerable
to external economic shocks. In the absence of substantial savings, governments may struggle
to respond effectively to economic downturns or crises.

Increasing the rate of savings can provide governments with more financial resources to invest in
crucial public projects and services, fostering economic development and stability. It is an
essential element for sustaining public sector investment over the long term.