IB Economics HL 3.4.6 Impacts of inequality

[Maximum number: 8]

Study the extract and data below and answer the questions that follow.
Inequality in China

(1) As China's economy first began to use market-oriented policies in the 1970s, it was famously suggested that some citizens, particularly through hard work, "should be allowed to get rich before others". The government still plays a dominant role in the allocation of resources and benefits, keeping most of the gains for itself and its employees. Civil servants, who are assigned government housing, have benefited more and accumulated more wealth than the private sector employees.

(2) Income inequality is a politically sensitive issue in China and the government has not reported on it for 26 years. In 1988, the Gini coefficient was 0.38 and the next set of figures released in 2014 give a value of 0.47 .

(3) According to research by the China Reform Foundation (CRF), "hidden income" amounts to more than US$1.4 trillion, or the equivalent of Australia's annual gross domestic product (GDP). "Hidden incomes" refer to money gained from bribery or other corrupt behaviour, for example, bribes for officials or corrupt payments for doctors.

(4) Low-income households are stuck with an outdated tax system that fails to address the inequality issue. They carry the burden of tax payments while the rich and powerful operate largely outside the tax system. Low-income households also have difficulty accessing credit.

(5) Although the Chinese government expenditure is high, there tends to be inadequate spending on social protection programmes relating to health and old age. The lack of social protection has resulted in a high marginal propensity to save (MPS) amongst the low-income households as they put money away to provide for future health, education and retirement needs. The high savings result in a low marginal propensity to consume at 37 % of household income (compared to an average of more than 50 % of household income in more developed-market economies). The low marginal propensity to consume and the associated high savings rate have received significant attention in domestic and international policy circles and are viewed as a key barrier to China's continuing road to development. http://data.worldbank.org, accessed 2 August 2014; www.oecd-ilibrary.org, 17 January 2014; http://stats.oecd.org, accessed 3 August 2014, hdr.undp.org, accessed 3 August 2014 and www.imf.org, March 2010]
Figure 1: Selected economic data for China and very high human development countries
> Removed for copyright reasons

Using information from the text/data and your knowledge of economics, to what extent does unequal income distribution impact economic development in China?

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Marking guidance:

Do not award beyond Level 2 if the answer does not contain reference to the information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. ..... 0
1 Few relevant concepts are recognized. ..... 1-2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. ..... 3-5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. ..... 6-8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.

Command term

To what extent requires students to consider the merits or otherwise of an argument or concept. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.

Responses may include:
- definitions of economic development
- use of a Lorenz curve diagram, showing a rise in inequality.

Impact of unequal income distribution:
- unequal allocation of society's resources can lead to social unrest
- high income inequality results in small groups of powerful elites not interested in fairness or taxation as a redistributive mechanism (paragraph 3 and (4)
- low incomes reduce capacity for low-income households to borrow money (paragraph 4 difficulty accessing credit) reducing the capacity for low-income households to invest in technology or education to improve incomes in the long run
- low-income households carry the burden of tax payments further entrenching inequality (paragraph 4)
- poverty cycle
- "rich and powerful operate largely outside the tax system" contributing to low tax revenue as \% of GDP (paragraph © and Figure 1)
- low tax revenue as \% of GDP reduces government's capacity to provide development projects in health and education (Figure 1)
- income inequality causes low marginal propensity to consume and high marginal propensity to save for private health and education expenditure thus reducing consumption and hence AD, causing lower economic growth, low tax receipts and poor expenditure on development (paragraph (5).

Any reasonable discussion.

IB Economics HL 3.4.6 Impacts of inequality Question Bank

Exam points

3.4.6—Impacts of inequality question 1