Economic Policy Reform and Income Distribution

Economic policy reforms have ensured significant growth for developing economies especially since the 1970s. Along with growth, another factor that plays a crucial role in defining the development of an economy is the income distribution factor.
The third world countries have registered fast growth rates in terms of GDP (Gross Domestic Product) and per capita income levels after implementing economic reforms. The effect of these economic reforms on distribution of income has been debated by economists. In the long run, with proper structural adjustments, economic policy reforms are expected to weed out disparities in income distribution.

The relationship between economic policy reforms and income distribution can depends on certain key socio-economic factors.

These are –
Balanced regional growth.
Gender issues.
Skill and education of the work force.
Contraction of public sector.

Balanced Regional Growth
A key factor to the success of economic reforms in bringing down the level of income disparities in the economy is balanced regional growth in reforming economies. If there is a striking imbalance in the economic growth among different regions within a country, there is a high possibility of differences in employment and income opportunities. Often, in the case of third world countries, there is an evident urban-rural divide in terms of economic growth. Specific, well planned adjustment programs are to be adopted to spread the benefits of economic reforms as uniformly as possible across different regions to bring down disparities in income distribution.
Gender is another area of income disparity in the wake of economic reforms. In many third world countries, several socio-economic issues prevent the benefits of economic reforms from being equally enjoyed by men and women especially in rural areas. Women are at the receiving end of such disparities. Thus there is an income disparity between genders. However in recent times, many third world countries have taken initiatives to ensure that women get equal benefits out of economic reforms.
Skill and Education of Labor Force
Access to education has not been uniform in the third world countries. Economic reforms introduced widespread privatization and liberalization. Stiff competition in the job market ensued which led to lowering of pay, or in many cases unemployment of unskilled workers. In a controlled economy, regulations pertaining to wages, often does not take into account the skill and efficiency factors. While this provides income security to the unskilled, it is de-motivating and often unfair to the skilled and efficient workers thus leading to a fall in overall productivity in the economy. Economic reforms ensure wages on the basis of productivity and efficiency. To overcome income disparities due to skill and efficiency under reforms, education and skill development programs are to be undertaken. As the gap in skill level of workers narrows down, so will the disparity in their income levels.
Contraction of Public Sector
Economic reforms enhance the privatization of public sector units. This often causes retrenchment of some employees or reduction in their wages. This might cause income disparities in the initial stages, between employees who retain their income and those who loose it or have to forego a part of it. The way to overcome income disparities in the initial stages of reforms due to privatization is to encourage relocation to the private sector. Relocating to the rapidly growing private sector with proper training and development would enable the workers to regain their incomes, thus addressing the problem of disparities in income distribution.

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Last Updated on : 26th June 2013

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