ECON30002 Development Economics For the Market Failure

Explain What you think is going on,as on economist. For example,you might asksome of the following questions:

What is the motivation of people for acting the way they are?

Answer:

Introduction

A market is a place where producers and consumers exchange goods and services either through barter trade or exchange for money. A market failure is a situation whereby the allocation of goods and services in a certain economy is not efficient. This task will look at a certain market failure in developing countries example Kenya (Solt, 2016). The task will also describe and analyse the causes of that market failure and lastly look at the major consequences of the market failure.

Market failure

Market economies in less developed countries face a problem of inequality whereby the income and wealth are not well distributed (Helpman & Reddings, 2013). Income is the money which is allocated to the factors of production while wealth is the asset’s value that is currently owned by an individual or the community as a whole. Examples of incomes include the salaries earned from jobs by people, saving’s interests and rental incomes from properties. Examples of wealth include the shares in businesses, savings and pension schemes.

 If a market has unequal distribution of these resources, it is said to have failed. This inequality mostly affects the poor people because they may fail to receive any income when it is distributed (Ostry, 2011). Incomes vary where some people receive high incomes, others moderate incomes and others low incomes. Some people may also end up not receiving any income at all hence being unable to purchase the basic goods and services they need. This brings about the problem of income and wealth inequality in less developed countries. People likely to receive less income include the unemployed, the underemployed, the sick and the disabled, the old people and workers of unofficial labor markets. Example of this country is Kenya which is among the unequal countries in the world where the gap between the rich and the poor is large.

 According to the report by the United Nations Development Programme, 60% of Kenyans live in poverty conditions where they are unable to receive quality health services and education. Among the 169 countries in Africa, Kenya is ranked 103 country in the inequality list hence making it the 66^th unequal country in the world. The quality life of Kenyans has been diluted in the last five years according to the report by HDI (Corak, 2013). Even though the country has a poor ranking, it finished ahead of the other EAC member states. Uganda finished in position 143, Tanzania finished in position 148 and Rwanda finished in position 152. One of the major challenge that Kenya has been facing is the distribution of benefits of economic growth. In 2005 the economy of the country was 1.17 trillion which expanded to 1.39 trillion last years. The problem is that 38% of the wealth remains in the hands of 10% of the whole population hence 90% of the population being left to share the rest. This problem of income inequality in Kenya has pushed 86% of people to live in poor conditions hence being unable to access health and education facilities. This is the evidence of the widening gap between the rich and the poor in the country (Kaplinsky, 2013). The problem is due to high unemployment rates, corruption, lack of government intervention.

Policy interventions have either failed or not yet implemented example the youth empowerment programmes and land reforms that may increase growth in agricultural sector. Due to corruption and poor execution, the government has spent about 3.8 billion shillings on small and medium sized firms.  The problem of high unemployment rates has led to the widening gap of income to increase. in this case, the youths are the most affected and hence suffer a 21% unemployment rate excluding the college students. Tiberius Baraza of Institute of Policy Analysis and Research says that high rates of unemployed youths mean more poverty while the employed continue earning more income year after year. Baraza continues to say that even though reducing this unemployment rate is a challenge, the governments may use the tax system to be able to stimulate job creation.

Many analysts see the only hope of reducing inequality as the renewed fight against graft according to the new constitution (Kumhof, 2015)This constitution has provided a momentum to fight against graft hence it has promised to reduce the theft of a lot of money which is to be used for development.

Causes

There are several factors which lead to the inequality of income and wealth as a market failure in developing countries (Hurst, 2016). As these less developed countries industrialize, the move from a manufacturing economy to a service-based economy. These causes are discussed below;

Gender

In some developing countries example Kenya, gender is a major cause of inequality in wealth and income distribution. This is mainly in education where there is gender inequality definitely income inequality is evident (Corak, 2013).

Age

Age factor is also a cause of inequality in income and wealth whereby the young people are more are more able to source for income than the old people in the society.

Skills

This occurs when one person has more technical skills to do a certain job than another person. This leads to that more skilled person to be more advantaged to earn more income than the less skilled. It creates a widening gap in the income and wealth distribution.

Technology growth

As the developing countries experience the advancement in technology, many jobs are becoming automated hence leading to more unemployment in the countries (Helpman & Muendler , 2017). Many people lose jobs in this case hence making the working class citizens to have more income than the jobless citizens.

Personal factors

Some people belief that having large volumes of income is against their beliefs hence this makes them to hold less income (Western & Pettit, 2015)This cause inequality in income and wealth distribution among the societies due to some beliefs of people.

Implications

The issue of inequality in income and wealth distribution has many consequences in developing countries (Brueckner, 2015). These consequences are discussed below;

Class-conflict

Due to income and wealth inequality the societies now have two sections of the have’s and have not’s. these two sections are always fighting hence leading to political and social tensions.

Exploitation

The inequality in income and wealth lead to the rich exploiting the poor in the society. This leads to the political revolution and awakening hence political and social instability (Solt, 2016).

Political domination

This occurs when the rich people in the society dominate the political machinery hence using it for their own interests. This brings about corruption, social injustice and grafts (Helpman & Muendler , 2017).

Suppression of talent

It is difficult for a poor person to make it in life even if the person is brilliant. In this case, talent of the brainy poor people is suppressed because they are not able to contribute to social welfare.

Undemocratic

When the gap between the poor and rich is large, democracy is affected hence without economic equality, there is no political equality (Corak, 2013).

Creation of monopolies

Unequal income and wealth distribution leads to creation of monopolies which combine and charge more prices to the consumers. This affects the small producers who are dissolved by the large producers.

Moral degradation

 Due to lack of economic strength, the poor end up being demoralized by the rich hence degrading the poor (Western & Rosenfeld, 2011). The rich are corrupt and become more dominant in the economies hence human dignity is lost.

Promotes capital formation

Inequalities on the other hand may be beneficial because it leads to savings because if the income was to be equally distributed among the citizens, it will be thinly distributed over the whole population (Lusardi, 2017). When income is evenly distributed, those with more income will increase their savings. These people who save turn their savings into capital hence promoting capital formation in the country.

Conclusion

A market failure is a situation whereby the allocation of goods and services in a certain economy is not efficient. Inequality in income and wealth distribution is a major market failure in developing countries. In our case we have looked at example of Kenya as a developing country. The inequality is due to age, gender, technology and also personal factors. This inequality leads to creation of monopolies, exploitation, capital formation, moral degradation, political dominion and suppression of talents among others.

References

Brueckner, M. D. (2015). "National income and its distribution,. Journal of Economic growth 20, 149-175.

Corak, M. (2013). Income inequality of opportunity,nd intergenerational mobility. Journal of Economic Perspectives,27(3),, 79-102.

Helpman, E. a. (2010). Inequality and unemplyment in a global economy. Econometrica,78(4),, 1239-1283.

Helpman, E. a. (2017). Trade and inequality:From theory to estimation. The review of Economic studies,84(1),, 357-405.

Hurst, C. a. (2016). Social inequality:Forms,causes and consequences. Routledge.

Kaplinsky, R. (2013). Globalization,poverty and inequality:Between a rock and a hard place. John Wiley & sons.

Kumhof, M. a. (2015). Inequality, leverage and crises. American Economic Review,105(3),, 1217-45.

Lusardi, A. M. (2017). Optimal financial knowledge and wealth inequality. Journal of Political Economy,125(2),, 431-477.

Ostry, J. a. (2011). Inequality and sustainable growth. Inequality and sustainable growth:Two sides of the same coin?,11(08)., 1-20.

Solt, F. (2016). The standardized world income inequality database. Social science quartely,97(5),, 1267-1281.

Western, B. a. (2010). Incarceration & social inequality. Daedalus,139(3),, 8-19.

Western, b. a. (2011). Unions,norms and the rise in US wage inequality. American Sociological Review, 76(4),, 513-537.