A Solution To Inequality And Poverty: Effects Of Innovation And Government Policy On Global Economy

Gunter & Van der Hoeven (2004) state that there is a general agreement that in the case of economic growth, the advantages thereof mainly depend on the sharing of the income generated by it. Furthermore, they say there is “some general agreement today that growth and equity need not be contradictory goals. Most economists also agree that there is no automatic link between economic growth and equitable human development” (p. 21). By applying a sound political policy, however, these two goals can be achieved simultaneously.

As another reason for a rising inequality, Jaumotte, Lall, & Papageorgiou (2013) mention innovation. This literature review will look further into the causes of economic growth, inequality, and poverty, trying to determine how these phenomena affect each other. It states that innovation has a large and but not always positive effect on global economic growth, therefore, political policy is necessary to share economic growth and counter poverty and inequality. It starts with a short summary of the current global economy and the definitions used in this review. Next, it will look into how economic growth, innovation, and globalization relate. In continues on how political policies can influence this relationship, and finishes with a conclusion.

Current Global Economy

The global economy is growing. Between 1985 and 2002, the world trade increased by 200% to US$7,800 billion (Gunter & Van der Hoeven, 2004). Simultaneously the global gross domestic product (GDP) increased 150% to $32,100 billion (Gunter & Van der Hoeven, 2004). It is worth mentioning that the difference in growth rate of fifty percent point indicates an increase mainly due to the China and former Soviet countries entering the global market (Jaumotte, Lall & Papageorgiou, 2013). The benefits of this economic growth and integration have, however, not been equally distributed around the world (Jaumotte et al., 2013).

Income equality, for example, has risen in most countries, both developing and developed (Jaumotte et al., 2013). Half of the world’s population is still living on less than $2 per day, the number the World Bank has set as a standard for absolute poverty (Cozzens & Kaplinsky, 2009). Moreover, inequality is still growing today. Since half of the world has absolute poverty, this basically means wealth is being accumulated among a small group of people and companies (Cozzens & Kaplinsky, 2009). Defining poverty and inequalityIf one was to discuss poverty and inequality, first it has to be defined unambiguously. In this paper the definitions from Cozzens & Kaplinsky (2009 p. 78-79) will be used:

  • Innovation = produced with new or adapted equipment and in new or adapted forms of organisation, and utilises new or adapted organisational procedures.
  • Vertical inequality = unequal distribution of a valued goods among a whole population, e. g. , overall income distribution for a nation.
  • Horizontal inequality = unequal distribution of a valued good among culturally defined sub-groups of a population like genders, ethnicities, and religions, e. g., lower average income among women. In light of these definitions, a few comments should be made.

First of all, if one was to measure inequality using a mean income per household as a scale, this could indicate a decrease in poverty, whilst inequality is still growing (Cozzens & Kaplinsky, 2009). This can be especially true countries with a large number of household. If poor households stayed on the same level, and richer households got richer, this would result in an increase in mean income, but a larger inequality. If one was to compare all the households in the world (not the means) this would indicate an extremely unequal distribution, up to the point where there is “no world middle class” (Milanovic 2002, as cited in Cozzens & Kaplinsky, 2009).

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Economic growth, innovation & globalization

Globalization and technology have caused a large growth in the global economy in the last two decades (Jaumotte et al., 2013). They state that one can: “think of technological progress as the development and spread of new ideas and methods that enhance productivity and efficiency, and globalization as a catalyst of technology that facilitates the diffusion of ideas and methods around the world through, for example, openness to trade and FDI” (p, 272). These two factors reinforce one another. Innovation in processes has caused movement of production processes to countries with the lowest wages where it can still be done well (Cozzens & Kaplinsky, 2009). This causes a decrease in low-wage jobs in developed countries, and polarizes income distributions.

The low-wage countries, on the other hand, receive many new jobs in the middle of the wage scale, and sometimes in the upper end. At first sight, this may look good for developing countries, but according to Cozzens and Kaplinsky (2009) countries with low wages and highly skilled workers tend to grow faster and leave other countries at the bottom of the global economy scale. Simultaneously high-wage jobs are retained to developed countries, to which also much of the profit goes (Gunter & Van der Hoeven, 2004). This situation increases inequality between countries. In this way, even though global economy grows, and so do some national economies seem to, inequality is still increasing. To quote Cozzens and Kaplinsky (2009): “In short, in conventional economic terms, globalization has been stimulated by technological change (that is, functional innovation in the global value chain), but had uneven effects on inequality” (p. 81).

Still, growth is necessary to decrease absolute poverty.

As can be read above and is also stated by Ravallion (2004), it does not do this on its own necessarily (as cited in: Cozzens & Kaplinsky, 2009). This problem has created complications in countries, such as social unrest. Moreover, this can even lead to complications expanding abroad. Highly skilled, low wage countries can benefit from globalization, but this leads to less skilled, low wage countries not being able to exploit their economic or geographic assets and not being able to reach its economy’s growth potential (Jaumotte et al. , 2013). Therefore both developed and developing countries should put policies in place to counter this effect. It is important that these policies are put in place as soon as possible, because Gunter & Van der Hoeven (2004) state that globalization has the effect on countries, that governments are less able to influence economy. As a result, countries should focus more on social matters, before inequality worsens and social instability increases. As stated above, globalization has effects both inside a country as well as across international borders. Therefore, social unrest can disrupt economic growth both inside a country and abroad. This is not helping the problem of inequality, because economic growth is necessary as stated above. Social and economic government policies The previous chapter made it clear that economic growth can have a positive, but also an adverse effect on inequality. Innovation can have a positive effect on growth, but still increase equality. Nevertheless, growth is necessary to increase economy (Cozzens & Kaplinsky, 2009). The question, however, is how to make sure growth does have a positive effect.

This paper will continue to assess how government policy can influence economic inequality. Cozzens & Kaplinsky (2009) have found little direct evidence of the effect of policy changes in the relation to innovation, poverty, and inequality, but they did find a “pattern of connections” (p. 111), that suggest policy changes are more like to have a decreasing effect on inequality, than a negative one. They split policies interventions between Northern and Southern countries, arguing that the North is more dominant in global economy, and the South often just has to handle the consequences (Cozzens & Kaplinsky, 2009). Cozzens & Kaplinsky go on that the global South should invest in infrastructure and buildings, starting with individuals and households, to give them a fair chance to start businesses and attract investors. Furthermore, high quality education should be available for all. Southern countries should be working a attain a position in global value chains, by example in niche markets by extensive marketing and branding. It is important to keep in mind foreign direct investment can help, but caveats causing inequality that were previously encountered should be avoided (Cozzens & Kaplinsky, 2009). Northern countries should realize that their own actions have an effect on other countries. A world where the economy is as polarized as now, cannot be sustained (Cozzens & Kaplinsky, 2009). For them to grow, the global economy must grow.

The only sustainable way is the grow as a global economy in total, not on average (Cozzens & Kaplinsky, 2009). The North should set the rules for fair, sustainable and equal world trade, in both their own, as the South’s interest (Cozzens & Kaplinsky, 2009). Gunter & Van der Hoeven analysed many reports. Most of them state that the responsibility lies with the country’s governments, and name possible policies to put in place by governments to counter inequality. Gunter & Van der Hoeven go on stating that: “countries are at different stages of development and have different institutions and priorities, [therefore] national policy responses will vary from country to country” (p. 31, 2004). Some policies are, however, considered applicable to all countries and were also touched upon in other reports (Gunter & Van der Hoeven, 2004. The first and foremost is education. Developing countries should be focussing on (free) basic education. Not only for children, but also for example for the unemployed who never received any education (Gunter & Van der Hoeven, 2004). Adoption of core labour standards is important, and highly effective in decreasing inequality, but a nation’s definition of what this states should be respected (Gunter & Van der Hoeven, 2004).

Social protection is generally perceived as effective, especially in the view of globalization, which has had some negative effect on social issues (Gunter & Van der Hoeven, 2004). Another problem in this light, is that there is much debate on what an effective social policy should look like, and who would pay for it. Lastly, Gunter and Van der Hoeven argue that also the inequality between countries national income should be decreased, because poverty elasticity is higher in egalitarian societies. Gunter & Van der Hoeven focus much more on social policies, rather than national economic policies on which Cozzens & Kaplinsky focus. However, there is also some overlap, most clear in education. Cozzens and Kaplinsky also argue the North should take the lead. This can overlap with Gunter & Van der Hoeven last argument that the inequality between national incomes of countries should be decreased. It is improbable developing countries can reach this on their own. Therefore developed countries should feel their responsibilities (Cozzens & Kaplinsky, 2009). One could argue that the prime objective should be to raise income and reduce poverty in the South. However, to make this solution sustainable, the North should impose new trade rules that result in more fair trade and higher incomes for southern countries (Cozzens & Kaplinsky, 2009).

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In the introduction was stated that innovation has a large and often positive effect on global economic growth (Gunter & Van der Hoeven, 2004; Jaumotte et al. , 2013), but political policy is necessary to share growth and counter poverty (Gunter & Van der Hoeven, 2004; Cozzens & Kaplinsky, 2009). Concluded can be that there is no obvious reason to assume innovation has an often positive effect on global economic growth (Jaumotte et al., 2013).

However, the large effect on it was confirmed. Innovation often has a positive effect on the global economic growth, but a detrimental effect on equality (Cozzens & Kaplinsky, 2009). Therefore policies must be imposed in both developing and developed countries (Gunter & Van der Hoeven, 2004; Cozzens & Kaplinsky, 2009). The developed countries should take their responsibilities and take the lead in setting up new trade rules that lead to a fairer economy (Gunter & Van der Hoeven, 2004). Developing countries should focus on their own economies and make sure their social problems are handled and individuals get a chance to set up their own business (Gunter & Van der Hoeven, 2004). Globalization has made it possible to conduct trade all across the globe. It is now up to the government to open the doors for small business to export their products and share in the wealth of the global economy.

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