Geopolitics Magazine September - October 2014 | Page 31

Geopolitics & Daily News Magazine
Germany (Harzt). Furthermore the cost of money has increased rapidly for the periphery, increasing
the gap between the north and south. The premium of USA to establish their national currency as an
international accepted currency, is a factor that magnifies the inequality across the globe. It is wellknown the international currency has the second highest ranking value in currency hierarchy while any
other country in order to exchange to international currency needs to pay additional fees( in terms of
exchange rate plus fees (Mehrling 2012)
But beyond the Gini index, the infant
mortality rate, Share of
income/consumption of the poorest
x% which targeting specific the 10 or
20% of the poorest within a society.
Since is vital for a country to reduce
the extreme poverty, it is very
important to have a clear picture on
what is the income of the poorest
parts of the population. The decline of
the dispersion ratio, is another index
in which the income of wealthiest 10
%, is divided by the income of the poorest 10%, This is also a very useful tool since it gives an idea of
what is the distance between the superrich and super-poor (Bank 2011). Still we are not really aware
about the wealth that has been accumulated by the 1% of the super-rich of the world. Recently, Nobel
holder Paul Krugman, states the danger that superrich power constitute against on policies that may
restore some balance within economies and income distribution (P.KRUGMAN 2013). So inequality after
a period of shrinking is now rebounding but inequality is still not on a good rating level, which is not
good either for people nor for growth as noted in a recent discussion paper by IMF staff.
“Inequality may be harmful for growth because it deprives the poor of the ability to stay healthy and
accumulate human capital (Perotti, 1996; Galor and Moav, 2004; Aghion, Caroli, and Garcia-Penalosa,
1999); generates political and economic instability that reduces investment (Alesina and Perotti,
1996); and impedes the social consensus required to adjust to shocks and sustain growth (Rodrik,
1999). Relationship between inequality and growth may be nonlinear, as in the theoretical model of
Benhabib (2003), in which increases in inequality from low levels provides growth-enhancing
incentives, while increases past some point encourage rent-seeking and lower growth.”
Few paragraphs bellow the Funds concludes that 1 GINI point increment “is associated with a 6
percentage point higher risk that the spell (of growth) will end the next year”(Ostry, Berg et al. 2014)
As a summary of the adverse effects of income inequality that induce demand failure and spending out
of income, we must realize that:
1) Marginal propensity to spend of higher incomes and wealth is lower than the marginal propensity to
spend of lower incomes and wealth.
2) Concentration of capital/wealth reduces its return per unit of capital or the marginal efficiency of
capital and this induces investment spending to fall. Furthermore, if tax rates are shifted in favor of
rent income, there is a substitution towards financial speculation and capital markets trade that raise
equity value and its return that concentrates wealth but has limited effect on productive investment
and income.
We must also notice the effect by increases in debt ratios and interest cost of the poor and middle
income cohorts, induced by their income losses from the above, that reduces thei ȁ