The big question to answer is what is the right level of income inequality in a country? One way to define this level would be to assess at what level we see countries showing maximum economic growth. Professor Syed Yusuf Saadat, in his paper “The Optimum Level of Income Inequality: Evidence from Panel Data,” states that the relationship between economic growth and income inequality is non-linear. This means that at a lower level of income inequality, there is a positive relationship, but at a higher level of inequality, there is a negative correlation to growth. There is an optimum level of income inequality that maximizes growth. As per his study done using data for 25 countries over 50 years, the most efficient level of income inequality is a Gini coefficient of 0.3836. So it is not just the relationship between inequality and economic growth, it is important to focus on the level of inequality. This is an important guide for the governments to focus their policies to get to efficient levels of inequality.

Thomas Pike makes a very pertinent point that it’s not just natural economic forces that drive economic inequality. It is a lot of political measures that impact income inequality. It’s quite interesting to note that France, like other European countries like the UK saw significant income inequality despite the fact that the French revolution was meant to have changed the market to be egalitarian, and the spread of wealth should be quite different from autocratic Britain. Second, the entire world seemed to see inequality reduce after world war II as there were limited resources, and there was the nationalization of industries in many countries. But this trend changed in the 1980s when there was significant policy change by leaders like Reagan and Margaret Thatcher, and these policies benefited the few rich more, making the divide bigger.

While the sanctions on the surface seem to be intended to stop the Russian attack on Ukraine by choking them economically. However, the deeper impact and potential plan of the US is a political one to weaken the Russian power over a long period of time. With a weaker economy, domestic politics for Putin would be harder to gather support for. In addition, it will restrict Russia from producing and developing advanced military equipment. Limiting foreign technology transfer will cripple their efforts to stay a meaningful power in the world.

The watch out for the US and European leaders is to be cognizant of the trade-offs their own people need to pay for to hurt Russia in a big way. The current unprecedented inflation level in Europe is one such immediate impact.

While the article primarily focuses on the impact of the sanctions on Russia, it is important to note that the globalization of trade and the interdependencies could have a much bigger impact on the rest of the world. According to a report by the US Congressional Research Service, “Russia’s War on Ukraine: The Economic Impact of Sanctions,” the sanctions could affect the world in a significant way. One it could “fracture the global economy,” resulting in separate economic blocks which could undermine the economic order set up since World war 2. The other unintended consequence of freezing Russia's central bank could trigger the countries to reconsider their use of the US dollar as the reserve currency and the US’s role in controlling their economy. This de-dollarisation effort could gain traction and could very quickly dethrone the US from the global economic leadership role as well as its economy.

In an interesting study, “The impact of COVID-19 on international trade: Evidence from the first shock”(2021), Kazunobu Hayakawaa and Hiroshi Mukunokib ( professors of economics in Japan) used the gravity equation to compare the impact of COVID-19 on international trade. Their conclusion that Covid had a negative impact on trade of both importing and exporting countries makes logical sense. They stare exporters struggled as their workforce could not go to work under lockdowns while importer markets struggled due to reduced demand as many people were out of jobs. However, the other conclusions are a bit counterintuitive. They mentioned that most countries have got past the covid impact on trade in the second half of 2021 as they put the control measures like social distancing, masks, work from home as well as vaccination. Their third conclusion was that the impact on industries was heterogeneous, and industries that were more labor-intensive, like footwear industries, had a longer impact of covid.

Tough times are a true test of character. The Covid 19 crisis, unfortunately, showed all countries in poor light where they became excessively inward-looking. Similar to the mask case of China, where despite the opportunity to build bridges, they decided to close borders leaving other markets to scramble, India did the same thing with vaccines. So many countries were hoping to source their vaccine from India, but in the last minute, all orders were canceled or delayed.

It is an interesting economic and political dilemma for any country – should it choose to serve its own people, or should it support the global needs potentially at the cost of its people? If it chooses the former, while it gains political advantage, it does suffer from economic loss. This lost opportunity puts a strain on the coffers of the export market, making it hard to serve its people.

The geography theory postulates that prosperity and poverty of a country are caused by its geography especially tropical versus temperate climate which may influence the attitude of people, the diseases that can impact health, tropical soil which is not very conducive to agriculture as well as the flora/fauna of the place. I think there is another element of the geography theory that we can evaluate is the availability of broader natural resources. Logically the country with higher natural resources should be growing faster than those with lesser. However, in their paper, “Natural resource abundance and economic growth” (published in National Bureau of Economic Research, 1995 https://www.nber.org/system/files/working_papers/w5398/w5398.pdf), Jeffery Sachs and Andrew Warner from Harvard institute of international development, conclude that natural resource-rich countries tend to grow slower than those with scare resources in their study of 97 developing countries over two decades (1970-1989). The key hypothesis validated by them was that resource-rich countries tend to focus their labor on extracting natural resources thereby leaving few resources and investments into manufacturing and value-added industries. In addition, they practice protectionist state-led development policies which lead to lower investment and hence lower growth. So in many ways, riches by themselves become a curse versus a boon.

Intuitively, one would believe that the abundance of natural resources, good climate, and skilled human capital would be sufficient inputs to determine the success of a country's economic growth. However, this excerpt from the book “Why nations fail” is very thought-provoking. The question is not why nations succeed but why they fail. South Korea, Taiwan, and Hong Kong are excellent example of countires that have no meaningful natural resources, and have a small population base but are the most successful countries in terms of consistent economic growth.

The general understanding is that there are many conflicts of interest as mentioned above. One conflict is in the understanding of different people and political wings in the role of human activity in global warming, which makes it challenging to have a joined-up strategy. Similarly, there is a conflict in wages and pollution levels.

However, as per the paper “Inclusive Green Growth, The Pathway to Sustainable Development” by the world bank (2012), “Greening growth is necessary, efficient, and affordable.” Greening growth is defined as growth led by efficient use of natural resources, clean growth whereby negative impact on the environment is minimized, and is resilient whereby it accounts for various factors in avoiding natural disasters. This paper breaks the myth that the barrier to achieving green growth is not the cost but political will, behavioral issues, and unavailability of financing instruments. For example, the World bank financed a project around Lake Guarapiranga in Brazil to improve water quality and reduce pollution via slum upgradation as well as urban renewal in Sao Paolo. This comprehensive approach was environmentally, socially, and economically sustainable. Unlike China and many other Western countries, which chose to “get wealthy first and then go clean,” it emphasizes that the choices made should be right for the next five to ten years

Paper: https://openknowledge.worldbank.org/handle/10986/6058

There is an inherent conflict of interest between wages and pollution. The wages of the employees are based on the profit made by the company. The profits, in turn, are positively correlated to emissions as it is dependent on the production output. But the higher the toxic emissions, the more the employee will suffer. The choice for employees is to leave town and find employment elsewhere, and similarly, the bargaining power the company has is to shut down the business in this town and move to another place.

This is a very similar debate as we have recently witnessed during COVID-19. The conflict of interest between lives and livelihood. While it was critical for the government to ensure the safety of the maximum number of people by doing lockdowns. This, in turn, had the unintended consequence of the loss of jobs and wages, especially for migrant workers. The conflict for the workers was to have the job and wages but risk their health and potentially lives to covid. But if they stayed home to be healthy and safe, it impacted their livelihood and wages. For the government, the conflict was to pay for increased hospitalization due to Covid if they opened the countries too fast versus paying for social subsidies to workers who lost their jobs in covid but were kept safe with lockdowns. Each government had a different appetite for risk. For example, the UK opened the market in a short period of time, whereas China is still continuing with its zero covid policy till date.

Development professionals themselvesthink automatically, think socially, and think with mental models and, as a result, may misidentify the causes of behavior

It is interesting to note that the policymakers themselves are exposed to bias and human behavior which can lead to faulty or suboptimal schemes.

The power of experimentation and pilots to learn and pivot quickly before launching big plans. This is a great way to predict failures test the models and take quick corrective action in a do-learn-do models.

I am intrigued about the overlap of the second and third approach. Both seem to suggest the impact of the society, the beliefs, traditions and acceptable behaviour. Our decision making is highly influenced by our neighbours, our society trends and social norms. Our mental models are also influenced by the culture and stories we have grown up with. While we think we are making these decisions, our thinking is highly influenced by the stereotypes in the community.

Humans are inherently social. In making decisions, we are often affected by what others are thinking and doing and what they expect from us. Others can pull us toward certain frames and patterns of collective behavior.

The statements above and the articles below resonate so much with the consumerism in today’s world. It's all about “keeping up with Joneses” rather than what we actually need. As we studied in APUSH on the rise of American consumerism in the name of the American dream as well as the in the Great Gatsby in English, these trends have shaped the world since 1920s. This is the concern of capitalism where i can spend based on what i can or want to versus what i need to. It has caused a waste of resources, increase in debts and lower savings.

Links: https://www.bbc.com/future/article/20210120-how-the-world-became-consumerist https://www.vox.com/the-goods/22547185/consumerism-competition-history-interview