As the name implies, it is evident from first glance that income inequality is nowhere close to being preferred. When not adequately attended to by both economists and governments, income inequality can lead to not just extreme poverty or hinder economic growth; it can also give rise to higher crime rates and decrease the overall health of any given society. In this article, we will address the issue of income inequality in Liberia by describing how a country can measure its income inequality then evaluating the effects of income inequality on the Liberian economy. To help combat income inequality, the article also recommends ways the Liberian government can reduce income inequality.
How a country can measure its income inequality
Income inequality is defined as the uneven distribution of income within a given society, country, or economy. Income inequality is pernicious to any economy, especially economies that need assistance to regain their economic stance due to civil or financial crises. Liberia is a perfect example. The two most common measures economists use to measure income inequality is the Lorenz Curve and the Gini coefficient. A Lorenz curve shows the cumulative percentage of income received by a given percentage of households whose incomes are arranged from lowest to highest (Amacher et al., 2019). One can picture the Lorenz curve as a more visual representation of any given economy's income inequality. The Lorenz curve compares the actual distribution of income of a given country when compared to the line of perfect equality. The closer the curve is to the line of perfect equality, the more equally income is distributed. Vice versa, the further the curve is from the line of perfect equality, the more unequally income is distributed.
On the other hand, the Gini coefficient is a mathematical indicator used to determine income inequality. The Gini coefficient takes the visual interpretation from the Lorenz curve and assigns a mathematical value to it. It does this by determining the distance of the Lorenz curve from the line of perfect inequality compared to the total distance beneath the line of perfect inequality. The mathematical formula's outcome produces a number that ranges from 0 to 1 (or 0 to 100), with zero representing perfect equality and one representing perfect inequality.
In the instance of a zero Gini coefficient, that would mean that there is no distance between the line of perfect equality and the Lorenz curve, i.e., income is perfectly distributed. However, neither the zero nor one Gini coefficient exists in any real economy. Take Liberia, for example; its Gini coefficient in 2016 was 35.3 on a scale of zero to one hundred. Amongst its immediate West African counterparts, "In 2016, Benin had the greatest amount of income inequality in the region with a score of 47.8, and most recently, Nigeria reporting the greatest income equality with a score of 35.1 in 2018" (World Bank, 2020).
The effect of income inequality on the Liberian economy
In his article "The Size Distribution of Income in Liberia," Akpa describes the Liberian economy stating that "in spite of past satisfactory growth performance, a high level of income inequality persists" (Akpa, 1981). Keep in mind that the article accounted for an economy that is over five decades old. Compared to today, that level of income inequality doesn't just persist, but it does to an even greater extent. Undoubtedly, equal income distribution is a pedestal for economic growth. Besides stalling economic growth, income inequality also has other negative consequences like influencing an incohesive society due to its ability to increase poverty, which can have a drastic effect on people's health and overall welfare. In simpler terms, it's the idea that a particular group of people makes more than another group due to factors like corruption. "In 1977, for instance, a mere 2 percent of the people accounted for some 33 percent of nation‐wide wage income" (Akpa, 1981).
However, other factors cause the disparity of income. For example, income disparity in many countries worldwide is caused by things like sexism, racism, profession, etc. In Liberia, however, the two most common are factors are geographic location and corruption. The disproportionate number of residents living in the capital Monrovia, or Montserrado, is mostly the reason for the geographical income disparity. As more and more people move to the capital, economic development is only concentrated in Montserrado, which inherently stalls, or even hinders, the desperately needed economic growth in rural areas.
Among other options, investment in the agricultural sector will enable economic growth in other counties, creating a great need for employment outside Montserrado. With those counties not being able to provide the labor force, residents from Montserrado will eventually relocate to the rural areas to obtain more sustainable jobs in Agriculture. The Comprehensive Africa Agriculture Development Programme, or CAAD, recommends that the nations grow their farming capabilities by at least six percent annually. However, year in a year out, the Liberian government continues to ignore the necessity of producing our food and directs both government and donor funds to other sectors.
As for corruption, the Corruption Perceptions Index or CPI, reported in 2019 that Liberia scored a 28 out of 100 in its level of corruption in the public sector, raking it 137 out of 180 countries. Keep in mind that a low CPI ranking indicates a higher level of corruption. The index measures the level of corruption in the public sector, accounting for things like bribery, the diversion of public funds, effective prosecution of corruption cases, legal protection for whistleblowers and journal lists, etc. Predictably, corruption doesn't only increase income inequality; it also reduces economic growth. "Government officials may use their authority for private gain in designing and implementing public policies. This phenomenon- defined broadly as corruption (Tanzi, 1997a)- may result in enriching these officials as well as private individuals who obtain a larger share of public benefits or bear a lower share of public costs."
A considerable part of the government's role or responsibility is to assist in the fair distribution of income or the nation's wealth. However, when government officials, moved by self-interests, propose or pass laws that return private gains, their ability to serve as national advocates becomes distorted. These practices can be seen in their biased tax laws that favor only the rich and those who are well-connected to the government, which as a result, returns lower social spending, little to no investment in the education sector, or investments targeted at improving the welfare of the poor.
Nevertheless, corruption and its effects can be mitigated by the government when national resources are intently managed. Doing so will help increase the labor force, i.e., help reduce unemployment by a significant amount. It will also create opportunities to invest in equal and quality education and health services to all Liberians and will provide more social services targeted at bettering the poor man's lives.
Resources: