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A Trade Off Between Equity And Efficiency Economics Essay

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Published: Mon, 5 Dec 2016

In any society at any point of time all the resources would be relatively scarce. We cannot have whatever we want. We need to decide our priorities and then distribute the resources. In such a situation we need to take into consideration goals of efficiency and equity (sense of fairness). If the distribution of resources or goods in an economy is fair between different members of the society, it indicates equity. Efficiency is making the best out of scarce resources at the best possible price. Efficiency refers to the size of economic resource and equity refers to how this economic resource is distributed. When the resources are distributed we will be faced with a trade-off between efficiency and equity. This trade off is a central principle in economics.

The best example of trade off between equity and efficiency can be explained with environmental policy of the government. Who gets the most out of exploiting the natural resources and what cost is a policy question that needs to be answered. The projects undertaken would have an adverse effect on the local people who might be living there from many generations. These become the victims of the project. But government programmes and projects would have multiple objectives in the larger interest of the nation. So there would have to be a trade off between the efficient use of resources in that area and the equity of resources distribution to the people of that area. In order to do that the people who are enjoying the benefits of the policy would have to pay for the victims of the policy and make them the stakeholders in the developmental works undertaken.

The hardest problems are those that involve trade-offs, especially between improving the efficiency of the market and promoting equity (Joseph E. Stieglitz, Carl E. Walsh, 2006, p.380). Many times government takes hard tradeoffs but sometimes efficiency and equity go hand in hand. Providing Educational opportunities and health infrastructure to the poor will be both equitable and efficient at the same time. It provides for fair distribution of the resources for the well being of the people which in turn increases the efficiency of the economy because more number of people will be productive. We can observe these kinds of policies more in developing countries where the state would undertake land reforms, tax concessions, and welfare programmes etc., for the people. Here the government concentrates on the inefficacy of the market and inequalities it produces and tries to counter them through a slew of measures.

Economy alone cannot decide on the best way to balance equity and efficiency. This issue involves the social and political factors also. Let us look at the Tax system in India for our case. India in the early years after independence used to have a progressive system of taxation in which the rich people had to pay higher amount of taxes depending on the their income in that particular year. But the after liberalisation our economic and political agenda differed on the views on equity and efficiency. It was argued that high tax rates reduce economic efficiency and also incentive to work. So tax reforms were brought and now there are only three slabs are present for income tax. Even the highest earner would pay not more than 30% of his income as tax. We can see that there is a constant trade off between equity and efficiency in this case.

We can conclude that there is often a trade-off between equity and efficiency but that might not apply to all the cases. Most of the social welfare measures that we undertake can be aimed at both equity and efficiency. In some cases efficiency may be compromised for equity and in other cases equity may be compromised for efficiency. But all these kind of decisions would be taken under a guided and well informed policy making environment so that it works for the overall wellbeing of the society concerned.

References:

Joseph E. Stieglitz, Carl E. Walsh (2006): “Economics”, 4th Edition.

Mankiw N.G. (2012),”Principles of Economics”, 6th Edition.

2. Discuss the concept of human development. Is it a new development paradigm and why? (15 marks, 1000 words)

“Ideas change history”. The idea of money and trade changed the course of human activities completely. One such idea to change our thinking process is human development which is different from previous approaches of development like basic needs approach, economic growth, and capital formation etc., Economists started realising that higher rate of economic growth and higher income does not necessarily improve human well being in other areas. The evolution of concept of human development comes from the experience of countries which had higher growth but which in turn did not lead to more human choices but led to higher inequalities and increasing deprivation which resulted in the weakening of social relations and adverse environmental effects.

“In judging economic development, it is not adequate to look only at the growth of GNP or some other indicators of over-all economic expansion. We have to look also at the impact of democracy and political freedoms on the lives and capabilities of the citizens” (Sen,1999, p.150). The concentration has changed from economic development to human development basing on the ideas of human freedom and capabilities expansion. The first Human Development Report (HDR) defines human development as denoting “both the process of widening people’s choices and the level of their achieved well being” (United Nations Development Programme, 1990, p. 9). It is a process of enlarging people’s choices and freedoms. It believes that when people have freedom to choose and opportunity to decide they will have a chance to better their lives. The philosophical foundation for this idea has been founded by Amartya sen’s work on capability approach. This idea was converted to Human development approach through Human development reports by Mahbub ul Haq to assess the world progress differently.

Policies

Choices

Freedom

People

Capability Expansion

People as the centre of development Process

The first Human Development Report was brought out in 1990 which mentions that the most critical elements of the process of Human Development are

to live a long and healthy life,

to be educated,

to have access to the resources needed for a decent standard of living.

These three choices are the basic key elements required to live a happy life. HDR also advocates having a community life with dignity and respect. It also includes all the aspects of society such as economic, political, social and cultural freedoms, which are all human rights. People are regarded not as passive beneficiaries of development interventions, but as active agents of change.

Human Development can be said to have two sides. One is Formation of the human capabilities and the other is to make use of the acquired capabilities. It recognises that people are the means and ends to development and human beings are the ultimate end of development process. The essential components of human development can be summarised under equity, sustainability, productivity and empowerment.

The rediscovery of human development is not a new invention. The idea of human development was even present in the ancient civilisations like Greece, Mesopotamia and Indus valley civilisation. All the Early political philosophers like Aristotle, Plato to the modern economists like Adam smith, JS Mill, Ricardo were concerned with the holistic form of human development even when they had strong concern for economic development. When Adam smith speaks about the free enterprise and private property he also says that development should enable a person to freely mix “without being ashamed to appear in Public”. This shows that he was referring to not only economic development but also the way it should impact the human good in the society.

We can consider that we have moved from basic needs approach to the capability approach and also propose human development as an alternative development paradigm. There are certain advantages in moving these approaches as it tries to add up and assess country’s progress and also sets political agenda. But after lately discovering the concept of human development in the past decades it is necessary to refine, redefine and make it efficient in such a way that it captures all the aspects of human development in a holistic way.

But TN Srinivasan argues that income was never the only criteria in economists or policy makers mind. This he tries to prove by quoting a few people and also asks for a more clear and better picture of the framework that is put up for human development. He also points out to many of the weakness that exist in the HDR as of now and that says that there is no evidence that countries had rethink about their policies due to this concept of human development. It does not affect any of the political or sociological processes that are happening in the developing countries. The hue and cry when the HDR’s are released are only limited to the bureaucratic and academic spaces in the developing world. Little is being influenced in the real life scenario. Military expenditures top the government spending in most of the countries than on human development.

With all the weakness and limitation it might be having the concept of human development is definitely a wonderful idea and needs to be strengthened further by adding much more research and adaptable to the local conditions of every country. At least we have a formal start and recognition of human development now rather than any other concern as in the past. So, human development even though not a new paradigm needs to be looked at in a fresh and innovative way for its success.

References:

Human Development training material by “oxford University” (http://hdr.undp.org/en/nhdr/training/)

Jose S (2012), Human Development. [Class Lecture, TISS. 11 October 2012]

Sen, Amartya(1999), Development as Freedom. Oxford: Oxford University Press. 1999.

Srinivasan, T. N. (1994). Human Development: A New Paradigm or Reinvention of the Wheel? The American Economic Review, Vol. 84, No. 2, May 1994, 238-243

3. Are economic growth and human development approaches contradictory or complementary to each other? Explain with examples. (15 marks, 1000 words)

Economic growth can be defined as the increase in national income or an increase in the nation’s per capita income. This economic growth will be the fundamental for development which advances the idea of human good. United nations define Human development as “both the process of widening people’s choices and the level of their achieved well being” (United Nations Development Programme, 1990, p. 9). Economic growth may not directly lead to human development in terms of health, education, welfare etc., and conversely they might not necessarily be dependent on economic growth. So we need to have a close look at the interrelations between economic growth and human development in order to determine whether they are contradictory or complementary.

We will now consider how growth will have its impact on human development. “Income growth clearly strikes one as the main contributor to directly increasing the capabilities of individuals and consequently the human development of a nation since it encapsulates the economy’s command over resources” (Sen, 2000). Let us take the example of India; after we have started achieving higher rates of economic growth we could start many anti-poverty programmes, self employment schemes etc., to promote the capabilities of the vulnerable and weaker sections of the society. Even then they are not able to enjoy all the better conditions of life at least their basic needs are being taken care of by the government. This demonstrates the importance of GDP to provide wide range of capabilities or choices to the people. So, higher incomes facilitate other crucial development objectives and so are indirectly promoting the human development of the people.

GDP will also have a strong effect on health and literary rates through government programmes and policies it adapts. But the impact of economic growth also depends on the conditions of the society like the distribution of income, equity, cultural and social values etc., the effect of these systems can be felt only when we have better targeting, delivery and executing mechanisms in place. So, just by having greater economic growth would definitely have a positive impact on human development but only when the social and political environment is capable of doing so.

Now let us come to the case of where human development impacts growth in return. Education will have a large impact on the productivity and future of the nation. Higher levels of education will lead to faster adaptation of technology which eventually will lead to the high growth of the sectors of the economy. Health and nutrition has a direct relation to the productivity, incomes and well being of the nation. So if education and health are given primary importance all the people especially the backward classes will be able to seek out better employment opportunities. It also results in the equal distribution of incomes which would be ideal for both political and social reasons.

This can be proved by taking the classic case of information technology revolution that happened in Andhra Pradesh a decade back. Education was a priority for the government in 1990’s which led to building up of large talent pool of engineers. They have adapted technology very fast and due to the digital revolution and government policies on outsourcing they were absorbing to the workforce very fast. So this led to It revolution in Andhra Pradesh. If we review the whole process of growth this was possible only because of education.

If a nation has high growth rates it can also achieve higher gains in terms of human development and vice versa. But in India we are seeing the lopsided economic growth in which there are very less gains in terms of human development. The reasons for this might be corruption, inequalities, and social problems. But this form of economic growth is unsustainable since the well being of the man power to sustain such a growth process is being looked down. But if we concentrate on the improvement of human development now even at the cost of economic growth, that can pay long term dividends in the improvement of quality of the nation.

From this we can come to a conclusion that Human development is a necessary condition for long term growth. Investments in schools, hospitals and other social infrastructure will reap rich dividends in the development now and to the growth of economy in the long term. So the two way relation between economic growth and human development suggests that both are complementary.


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