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Income Inequality And Development In Uganda Economics Essay

1.0 Introduction

The world has been witnessing a rise in income inequality over the years especially in developed countries. This rise in income inequality however is not only been experienced in developed nations, developing countries too especially emerging economies are also experiencing a growing rise in income disparities. Global income inequality is being seen as one of the greatest challenges the world is facing today which if not dealt with could have serious consequences. At the 2011 World Economic Forum in Davos, income inequality and corruption were singled out as the two most serious challenges facing the world. Zhu Min, a special adviser at the International Monetary Fund, told delegates that “the increase in inequality is the most serious challenge for the world. . . . I don’t think the world is paying enough attention.” Also Richard Freeman, professor of economics at Harvard University, in a recent keynote address to an OECD policy forum on income inequality, noted that; “the triumph of globalization and market capitalism has improved living standards for billions while concentrating billions among the few. It has lowered inequality worldwide but raised inequality within most countries.”

Income inequality within the majority of developing countries has been rising—in some cases, sharply over the years. “The last two decades have witnessed a widespread and symmetric rise in within-country inequality in developing countries” (Cornia 2004, Birdsall 2005, Van der Hoeven 2008). This persistence rise in income inequality in many developing economies has made it difficult to reduce poverty and promote economic development. Moreover, there is a growing consensus that excessive inequality can stunt growth itself (Birdsall 2005). High inequality can also have undesirable political and social consequences (Alesina and Perotti 1996). “Where the institutions of government are weak, inequality exacerbates the problem of creating and maintaining accountable government, increasing the probability of economic and social policies that inhibit growth, and poverty reduction and where social institutions are fragile, inequality further discourages the civic and social life that undergirds collective decision-making which is necessary to the functioning of healthy societies” (Birdsall 2005). Put differently, high inequality is associated with higher crime rates, lower life expectancy and conflicts. Also According to Alexis de Tocqueville ([1835-40] 1961, 302), “Almost all of the revolutions which have changed the aspect of nations have been made to consolidate or to destroy social inequality.”

Making generalizations about the causes of income inequality in developing countries must be done with care. The situation in each nation depends on country-specific circumstances and policy mixes. Yet, it is clear that there are some common factors behind the widespread surges in income inequality around the world. It has been noted that a worsening situation in the ‘traditional’ causes of inequality such as land concentration, urban bias and inequality in education has not caused the recent increases in inequality in developing countries, although these factors still do explain most of the variation in cross-country inequality (Cornia 1994). Rather, the evidence points to ‘new’ causes associated with neo-liberal policy reforms that have increasingly been adopted in transitional and developing countries (Cornia and Court 2001, Birdsall 2005, Van der Hoeven 2008, UNRISD 2010). The most important of such policy reforms are macro-economic reforms including, inter alia, financial and labour market liberalization, privatization, and reforms in the tax and transfer systems.

Uganda among other developing countries has been experiencing a gradual and sustained economic growth and poverty reduction over the years. Currently the country is growing at a rate of 6.4% (CIA 2011). The benefits of growth, however, are not being distributed equally. In all regions of the country, income and consumption are growing at a slower rate in rural areas than in their urban counterparts (Ssewanyana N. S. et al, 2009). Moreover, both rural and urban areas are experiencing growing inequality between the top and bottom income quintiles (Appleton & Ssewanyana, 2003). Despite the numerous studies on income inequality, the extent to which it affects development hasn’t yet been fully explored.

According to Valentine (1993), inequality increases as the incomes of the asset-rich rise at a faster rate than those of the asset-poor. Given that some policies such as privatisation and financial liberalization may contribute to concentrate the ownership of resources among the few hence affecting the distribution of present and future income which then might affect the development of a country. This study therefore will seek to analyse the causes of income inequality and establish the extent of their effects on development. Trends in income inequality in Uganda will also be analysed to establish clearly how its increase or decrease has affected the level of the country’s development. This study will also explore the consequences of income inequality to Uganda.

Empirical studies, such as Appleton (2001), and Appleton & Ssewanyana (2003), provide limited policy guidance on how to address the inequality problem in Uganda. The thesis will also look at policy options to curb the rising income inequality levels in Uganda hence fostering development.

1.1 Statement of the Problem

In order for Uganda whose economy is experiencing economic growth, to continue on a straight and consistent development path, one of the issues that have to be taken into great consideration is the growing disparity in income distribution. Currently the country is experiencing high levels of income inequality with most of the income being concentrated in the hands of the few. If this state of income inequality continues, the development of the country will be greatly affected. Also this disparity in income could lead to social injustices which have greater consequences on the economy.

1.2 Research Questions/Hypothesis

What are the major causes of income inequality in Uganda

Is there a relationship between income inequality and development?

What consequences does income inequality pose to Uganda?

1.3 Scope

The study will look at how income has been distributed in Uganda over the years and the country’s level of development in the same years. It will also look at levels of poverty and GDP as a measure of development. Human development will also be taken into consideration while comparing income distribution and improvements in human development of the country.

1.4 Methodology

The study will be based purely on secondary data. It will review journals and books on theories regarding income inequality and development. Statistics from international organisations’ and Government of Uganda’s’ websites will also be reviewed as part of the study.

A comparative analysis of income distribution and Uganda’s economic development will be done to assess the relationship between the two variables.

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