Inequity is a controversial economic issue. It seems like that there exists an optimal point for inequality. A complete equal society (if we consider it as an impossible assumption) would kill all the motivation for growth and progress. On the other hand, too much inequality destabilizes the economy at least through three different mechanisms. It discourages mass consumption. It rewards political corruption and it fuels the political resentment against wealth creation.
Rich people tend to spend a smaller proportion of their income. That is because there is a limit on the amount people can eat or buy clothes, furniture and stuff. The poor and middle class families tend to spend more of their income. This would boost the aggregate demand of the economy. The rich have a lower “marginal propensity to consume!”
Wealth inequality both reflects and encourages capital misallocation, as the political elite and steer the public funds to their favorite clones. Diverting the funds from most efficient and necessary projects.
Finally, too much inequality would result in growing public tension and political revolt and lead to an anti-growth attitude in the economy. This anti-growth agenda has hit many countries from Robert Mugabe of Zimbabwe to Zulfikar Ali Butto of Pakistan. Different results from different countries confirm that this redistributional attempt was even worse than the previous course of the economy.
Mr. Ruchir Sharma in his book named “10 rules of successful nations” addresses the issue in an unique and straightforward way. Some countries that are considered unequal are progressing and others who are Mr. Sharma says that the measurements of inequality are somewhat of a question mark. The Gini coefficients are calculated at irregular intervals. They are also prone to errors and official manipulation. Therefore it is not an optimal way to measure inequality and its consciences.
In “10 rules of successful nations” we read about good and bad billionaires. The author points out that this measure is a better and more updated and reliable way to measure inequality. Bad billionaires -mostly- emerges from “rent seeking industries” such as construction, real estate, mining and oil, steel and aluminum and gambling. The more shares a bad billionaire is, the more economic inefficiency and political unrest ahead. For example only 13 percent of Swedish billionaire wealth originates through rent seeking industries whereas in Russia this is more than 70 percent. On the other hand, a country like Vietnam is flourishing despite fast growing inequality. That is because in Vietnam, a more proportion of their billionaires are emerging through Tech and electronic industries and not rent-seeking industries.
Source: “10 rules of successful nations”
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