Literature Review
Income inequality is defined as a measure by which different economic experts and countries around the world establish the gap that exists between the poor and the rich. Income inequality depicts to us how the income in different countries is shared amongst its citizens. Income inequality can be measured using different methods. Some of these measures are more preferred than others (Agnello & Sousa, 2012). Gini index is one of the most common methods of measuring the income inequality of a specific country.
Gini index is defined as a number that is between 0 and 1 which represents to us how income is distributed in a specific country. If everyone in a particular country the same exact income, then the country has a Gini index of 0 while on the other hand if one individual is the only one receiving the income in a particular then the country has a Gini index of 1 (Atkinson & Piketty, 2010). It is important to note that there are many types of inequality i.e. ethnicity, gender, sexuality and many more others (Atkinson & Leigh, 2008). However, in this paper, we are specifically going to focus on inequality of wealth and income in New Zealand. We will look at the causes of inequality and finally look at how the problem can be effectively solved through implementation of different policies.
Other economic experts also refer to income inequality as resource inequality or economic inequality. The main reason for this is because these economists believe that wealth and income are both produced by the economy of a particular country. The amount that we usually earn from our investments, work or even support from welfares each year is what is referred to as Income (Berg & Veenhoven, 2010). While on the other hand, all the things that we own like money in our investments or banks, houses and possessions is what we refer to as Wealth.
There is no doubt that individual who get higher wages are able to purchase more assets like houses or investments and May also find easier to save hence such individuals will be able to get some income from their investments. This simply tells us that the wealth gaps are increased due to the large income gaps. According to reports, New Zealand’s wealth inequality is estimated to be double as high as its income inequality (Cingano, 2014). Many people in New Zealand find it very difficult to save their money and most of the times find themselves in huge debts due to the lower incomes that they get. The lower income individuals unlike the ones that get higher income do not usually engage in activities of building their wealth to help them after their retirement (Coady & Gupta, 2012). Such people do not usually have anything to rely on whenever things get out of hand.
The Impacts of Inequality in New Zealand
It is important to note that wealth and income are not actually the only things that we need to enable us pursue our dreams and also participate in our society. However, wealth and income has a very great impact on the type of lives we live in. The nature of a society may drastically change if there is an imbalance in terms of wealth and income meaning how the wealth and income is shared really matters (Corak, 2013). According to research, wealth and income in New Zealand from the 1950s up until the 1980s used to be shared out in a more evenly manner. However, after the 1980s, the biggest increase in income inequality was witnessed in the developed countries.
Since inequality connects to both poverty and wealth spectrum it is important that they be looked at together as one. The fundamental matter when looking at this spectrum being the equal distribution of resources. New Zealand should ask itself how its society and economy has been structured and should also know where these structures deliver their rewards. To put it in a simple way, poverty cannot exist in isolation (Davies, Sandstrom, Shorrocks, & Wolff, 2011). Many people in New Zealand have become poor due to the mass direction of resources to the people who are already doing well economically.
A good example is when much of the income in a company goes to the shareholders and the senior managers while the ordinary staffs in the same company are paid very low wages. There is no doubt that poverty and wealth are inseparable as they are strongly connected to each in various ways. Latest polling’s in New Zealand have been rating inequality for a long time as one of the major biggest issue that has been facing it from the year 2014 (Delhey & Kohler, 2011). About 80 % of the New Zealand citizens are deeply concerned about the imbalances being witnessed in terms of wealth and income. The OECD, World Bank and the IMF are some of the major world bodies that all agree that inequality is a big problem that must be fixed through all means to reduce the suffering of other people.
Inequality is viewed by many people as a fundamental unfair thing. There must be something wrong with an economic system that gives different rewards to people who do their work. There exist various practical reasons that call us to be concerned about inequality. Inequality in New Zealand has made the society to be less health, less functional and less cohesive unlike other societies around the world that are equal (Fuentes-Nieva & Galasso, 2014). The damage of inequality has fallen under five headings namely: cohesion and trust; open politics; the economy; and opportunities.
Looking at cohesion and trust, we find that many people in New Zealand have lost touch with how their other halfs leave due to the existence of the unequal society. The growth of imbalances in income has led to distrust between the people in New Zealand (Gunasekara, Carter, Liu, Richardson, & Blakely, 2012). This has weakened ability of people to tackle different problems; it has weakened the bonds between people and also weakened the sense of everyone’s life. Looking at health, we realize that more unequal societies in New Zealand have become more hierarchical, more stressful and materially competitive hence leading to high rates of the stress-related diseases.
Opportunities for many people in New Zealand have also been damaged: the opportunities of many people have been limited due to the existence of inequality. These opportunities are mostly limited because of who their parents were in the past (Humpage, 2008). Just like in New Zealand, half of a person’s income can be predicted in the United States by looking at the earnings that their parents had. This is due to the fact that a huge gap of inequality is what leads to these different starts for the poor and the rich children. The disadvantages and advantages of income inequality are usually passed from one generation to the next one.
In contrast to New Zealand and United States of America, Denmark is praised for being one of the best societies in the world due to its equal distribution of resources among its citizens. According to research, most of the parents in Denmark are able to manage their homes properly and also buy even computers for their school going children due to the enough income that they get (Humpage, 2011). Unlike New Zealand, Denmark has established a very strong public service that helps those individuals who might face some struggles in future. It is very important for people to make their own life without the influence of their parents’ status. Most of the time in New Zealand, people are usually looked at in terms of their family background especially when it comes to getting any opportunities (Jen, Jones, & Johnstone, 2009). With the way things are, New Zealand is probably becoming more and more like the United States as days pass.
Inequality has led to bad politics in New Zealand in that many politicians are usually influenced by the wealthy individuals. These politicians always heed to such immense influence and in return get their campaign funding from these wealthy people. This goes against the democratic ideals of the citizens of New Zealand as only a few people can get access to what rightfully belong to them (Joumard, Pisu, & Bloch, 2012). Most of these wealthy people have been blamed for oppressing the poor through their various businesses that they run in New Zealand. Recent IMF and OECD researches all concur that many unequal nations around the world have no clear economic frameworks. The main reason for this is because many talented children have been deprived of their life and future due to the unequal income. The New Zealand economy has become prone to instability and asset bubbles (Le, Gibson, & Stillman, 2010).
There are many things that lead to income inequality in different countries around the world. Global trade agreements have always played a great role in causing economic inequality in New Zealand. Through some global trade agreements between New Zealand and other countries some manufacturing and many more other jobs have been shifted to other with very low wages hence contributing to the increase in income inequality (Leigh, 2009). However, it is important to note that most of these causes of income inequality in New Zealand are mostly domestic meaning the government has not put in place effective policies to counter the economic inequality. Taxes in New Zealand used to be cut for all the top earners in the 1980s and 1990s while at the same there was a reduction of up to 30 per cent benefits for the poor families.
This type of policy led to mass loss of jobs as many companies laid off their workers and moved out of New Zealand and settled in different countries. The traditional trade unions which used to push for the rights of workers got reduced to 20 percent from 70 percent. According to research there is also inequality even in the household types; there are more single parent families in New Zealand unlike before and most of them are very poor even though these factors are not that important as compared to the ones that have been mentioned above (McCall & Percheski, 2010). According to research, even though most saving can help to accumulate wealth it is very difficult for the poor to save due to low income unlike the ones who have a large income.
Income inequality can be calculated by basing it on the after-tax income (what people spend) and also by basing it on the household due to the fact that many people tend to spend their money on their family. Another method that can be used to calculate the income inequality of a country is the use of the Gini coefficient method. This method works by taking all the income gaps in a particular country (Ortiz & Cummins, 2011). This entails how the income can be distributed in a perfectly even society and all the gaps that exist between how the income is distributed to the people and finally adding them together. According to the graph provided below, we notice that the Gini coefficient of New Zealand in the 1980s and 1990s rose very rapidly.
The Gini coefficient later came to fall in the 2000s, due to the higher minimum wage and the working for families policies. However, it started to rise again due to the global financial crisis. When it comes wealth inequality, it is most of the time measured individually or sometimes the net worth (the assets that an individual owns).
Recommended policies to tackle inequality in New Zealand
For the last thirty years, erratic growth, rising inequalities and uneven development have developed into permanent features of the global economy. This development is now becoming more and more known to many. The development has not only raised concern of an economic nature but also of a political and social nature in the lives of many people especially in New Zealand (Pickett & Wilkinson, 2015). These trends have the potential not only to threaten the social contract on which capitalism is based upon, but additionally, it is also a threat to New Zealand’s democracy. Therefore, the central challenge that New Zealand is currently facing is how to deal with the economic inequality.
To be specific, there is a belief that there are some unavoidable trade-off that exists between growth and efficiency which has been strongly shaken. Its cruder extension known as the trickle-down theory has also been proved wrong. The truth is that most of the current research together with the economic trends and growth in inequality for both the developed and the developing nations, all point to the opposite conclusion which is; high inequality rate has a huge negative impact to the growth of a nation’s economy (Rashbrooke, 2013). The high inequality in New Zealand has also had some adverse effects both on the political and social stability. Many scholars have recently concurred that most equal societies are usually more economically sustainable, democratic, inclusive and stable. Several Scandavian and Asian countries have strongly demonstrated how equality can be compatible with the presence of strong economic performance. Most of these Asian and Scandavian economies have recorded relatively equal distribution of wealth and income. It is important to note that the channels that usually link growth and inequality are complex and many.
It is important for New Zealand to abolish all the policies that were introduced during the 1980s especially the ones which led to the increased inequality. There is no harm in doing away with these policies if it is truly evident that they failed to alleviate economic inequality problem. Reduction of economic inequality must be legitimate objectives of the public policies if at all the benefits to the society are being outweighed by the costs of inequality (Roine, Vlachos, & Waldenstrom, 2009). It is important for the fiscal policies of New Zealand to acquire a central position if it wants to have a policy framework that has the main objective of linking the development of its production capacity with creation of employment opportunities.
New Zealand should make taxation and public spending the major key instruments to help it shape the distribution of its purchasing power in the economy. This will enable the country to strengthen capital accumulation process hence increasing the employment opportunities for many people in New Zealand. This will in turn contribute to the growth of economy. Taxation and public spending policies are very effective instruments that will help New Zealand to establish links between rest of the economy and the enterprises that exist in the modern sectors (Strathdee, 2011). This will make the process of structural change in New Zealand to be more turned in the right direction and dynamic. These policies can also help New Zealand to develop strategic important sectors to promote national development in terms of diversification of economic activities.
For New Zealand to widen the current available fiscal space it needs to diversify the public sector financing sources and also strengthen its resources mobilization strategies. The New Zealand government can achieve this by widening the tax base, making the tax system to be more progressive and finally making some improvements on the collection system. The government should also try very hard to eliminate or reduce loopholes and exemptions while at the same try to woo more businesses to come and establish themselves in the formal sector (Wilkinson & Pickett, 2011). This will probably help the country to a long way in terms of widening the tax base.
New Zealand should learn the recent lessons especially from the developing countries concerning the effect of financialization of the economy. It is paramount that New Zealand avoids such activities that involve financialization of its economy. On top of also avoiding its economic financialization, the country should also try to mobilize more of its domestic resources and also try very hard to limit its foreign indebtedness (Cingano, 2014). New Zealand should try as much as possible to be sustainable and selective towards the foreign sources with the main objective to avoid any high foreign debts which may its policy space very strongly. New Zealand should now start financing its capital accumulation through mobilization of its domestic resources. It can achieve this by developing of banking networks that are well-regulated. This simply means that New Zealand will have to assign greater roles to the developing banks that will in turn help in the provision of credit to different sectors that are strategic to the country’s economy and also behave counter cyclically.
New Zealand must also try as much as possible to avoid the large inflows of speculative foreign funding as it may end up damaging its national economy. Such an incident may lead to New Zealand’s local currency to get overvalued. This will then lead to the incentivization of imports and at the same time penalization of various exports. Large inflows will also have a lot of negative impact on the available local assets as they will appreciate so fast therefore resulting into creation of bubbles that will later burst (Corak, 2013). Such a bust and a boom that is influenced by the outflow and inflow of the foreign capital can be very damaging to the economy of New Zealand hence must be avoided at all costs. Such patterns will definitely directly increase the rate of economic inequality in the country as the patterns will prolong the economic recessions of New Zealand hence having some detrimental lasting consequences to the poor families and individuals. To restrict the harmful effects of the large outflows and inflows of the speculative capital, New Zealand must apply different types of capital controls.
In parallel to the capital controls, New Zealand as one of the developing countries ought to choose its intermediate exchange-rate regimes to reduce the risk of currency crises. These regimes will help New Zealand to target a competitive and stable exchange rate which is a key-starting growth, keeping of the economic inequality within a range that is reasonable and also the diversification of the economy (Davies, Sandstrom, Shorrocks, & Wolff, 2011). New Zealand should also come up with good monetary policies that will help in the reduction of the economic inequalities by ensuring that the main objective of these monetary policies aim not only to lower inflation but will also at increasing the full employment of resources (Fuentes-Nieva & Galasso, 2014). New Zealand can also use macroeconomic strategy as an alternative to the monetary policy which is only fixated at reducing the rate of inflation unlike macroeconomic strategy which will help it to target the real variables that will be very important to its economy.
Conclusion
To summarize this paper, there is no doubt that sustainable and inclusive development will only be achieved when countries start integrating their policy frameworks with job-generating and growth-promoting developmental industrial and macroeconomic policies as the main pillars. There is need for New Zealand to have coherent industrial, social, trade and environmental policies that will help it reinforce each other. Implementations of these coherent policies will help New Zealand to catch up with the already developed nations in the world. This policy coherence at the national level will have to be complementary to the ones at the international level to enable countries to have a good space of implementing their national policies.
References
Agnello, L., & Sousa, R. M. (2012). How do banking crises impact on income inequality?. Applied Economics Letters, 19(15), 1425-1429.
Atkinson, A. B., & Leigh, A. (2008). Top incomes in New Zealand 1921–2005: Understanding the effects of marginal tax rates, migration threat, and the macroeconomy. Review of Income and Wealth, 54(2), 149-165.
Atkinson, A. B., & Piketty, T. (2010). Top incomes: A global perspective. Oxford University Press.
Berg, M., & Veenhoven, R. (2010). Income inequality and happiness in 119 nations.
Cingano, F. (2014). Trends in income inequality and its impact on economic growth.
Coady, D., & Gupta, M. S. (2012). Income inequality and fiscal policy. International Monetary Fund.
Corak, M. (2013). Income inequality, equality of opportunity, and intergenerational mobility. The Journal of Economic Perspectives, 27(3), 79-102.
Davies, J. B., Sandström, S., Shorrocks, A., & Wolff, E. N. (2011). The level and distribution of global household wealth. The Economic Journal, 121(551), 223-254.
Delhey, J., & Kohler, U. (2011). Is happiness inequality immune to income inequality? New evidence through instrument-effect-corrected standard deviations. Social Science Research, 40(3), 742-756.
Fuentes-Nieva, R., & Galasso, N. (2014). Working for the Few: Political capture and economic inequality (Vol. 178). Oxfam.
Gunasekara, F. I., Carter, K. N., Liu, I., Richardson, K., & Blakely, T. (2012). The relationship between income and health using longitudinal data from New Zealand. J Epidemiol Community Health, 66(6), e12-e12.
Humpage, L. (2008). Radical change or more of the same? Public attitudes towards social citizenship in New Zealand since neoliberal reform. Australian journal of social issues, 43(2), 215.
Humpage, L. (2011). Neo-liberal reform and attitudes towards social citizenship: a review of New Zealand public opinion data 1987-2005. Social policy journal of New Zealand, 37, 83-96.
Jen, M. H., Jones, K., & Johnston, R. (2009). Global variations in health: evaluating Wilkinson’s income inequality hypothesis using the World Values Survey. Social science & medicine, 68(4), 643-653.
Joumard, I., Pisu, M., & Bloch, D. (2012). Tackling income inequality: The role of taxes and transfers. OECD Journal. Economic Studies, 2012(1), 37.
Le, T. V. T., Gibson, J. K., & Stillman, S. (2010). Household wealth and saving in New Zealand: Evidence from the longitudinal Survey of Family, Income and Employment. Motu.
Leigh, A. (2009). Top incomes. The Oxford Handbook of Economic Inequality, 150-176.
McCall, L., & Percheski, C. (2010). Income inequality: New trends and research directions. Annual review of sociology, 36, 329-347.
Ortiz, I., & Cummins, M. (2011). Global Inequality: Beyond the bottom billion–A rapid review of income distribution in 141 countries.
Pickett, K. E., & Wilkinson, R. G. (2015). Income inequality and health: a causal review. Social Science & Medicine, 128, 316-326.
Rashbrooke, M. (Ed.). (2013). Inequality: A New Zealand Crisis. Bridget Williams Books.
Roine, J., Vlachos, J., & Waldenström, D. (2009). The long-run determinants of inequality: What can we learn from top income data?. Journal of Public Economics, 93(7), 974-988.
Strathdee, R. (2011). Educational reform, inequality and the structure of higher education in New Zealand. Journal of Education and Work, 24(1-2), 27-48.
Wilkinson, R., & Pickett, K. (2011). The spirit level: Why greater equality makes societies stronger. Bloomsbury Publishing USA.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
