Economics in developing countries - 3300 Words

Economics in developing countries (Essay Sample) Content: EFFECT OF TECHNOLOGICAL CHANGE ON THE DISTRIBUTION OF INCOME IN DEVELOPING COUNTRIES Name Instructor Course Institution Date EFFECT OF TECHNOLOGICAL CHANGE ON THE DISTRIBUTION OF INCOME IN DEVELOPING COUNTRIES Introduction Income disparity is an important factor in realization of both political and economic stability. Inequality in income distribution leads to low domestic purchasing power, unused human capital, social unrest and political instability. During the past few decades, developing countries have experienced an increase in their economic activities, which have contributed to economic growth and development (Brenner, Hartmut & Thomas, 1991). While increase in technological progress has been regarded as a critical instrument in driving productivity and industrialization, many studies have found that technology has also increased income inequality in developing countries. The subject of technology and globalization has attracted a great deal of a ttention from economists. However, in order to explore more about this subject and put the matter into perspective, it is essential that we conduct a comprehensive analysis of the available literature on technology, globalization and income distribution. This research paper analyses the effects of technological change on the distribution of income in developing countries over the past few decades. In order to conduct this analysis, the research shall use various theoretical frameworks. However, a comprehensive reflection on Simon Kuznets hypothesis will be used with a critical focus on the derivation of Kuznets curve. According to Kuznets hypothesis, disparity in income distribution increases during industrialization and urbanization cycles, but then declines when this process exceeds a certain point. In expounding more on this hypothesis, other theories such as Arthur Lewis’ model will be used to explore contributions of dualism and labor supply. This model uses similar pri nciples as those of Kuznets but postulates that the further decline in income disparity begins much later. The research will also explore the importance of skills in technological development and its impacts on income distribution. Reflecting on the past few decades, this research shall put the case of India, which is developing country, into perspective. India has been found to confirm the importance of unlimited labor supply and institutions in technological advancement. Technological Change and Income Distribution Literature has shown that there are various ways through which technology affects income distribution. A change in technology, such as the introduction of newer and more efficient technologies, has a direct effect on income inequality. In most cases, it has been found that introduction of new technology widens the income inequality gap (Walliczek, 2008). Rich Capitalists Firstly, it has been established that the introduction of new technologies increases the profits of the rich capitalists in the society, and thus widening the gap between these capitalists and other low-income workers. This point of view can be analyzed using Kuznets theory on technological advancement and income distribution. In his paper â€Å"Economic Growth and Income Inequality†, Kuznets argues that an increase in income inequality during the periods of industrial revolution and further decline in the later phase of the period can be explained by two causes (Kuznets, 1955). Savings is the first cause, and it explains the concentration of income on the upper 5% of the high-income capitalists in the society. Savings is also a characteristic of this income bracket since the lower income members of the society have inadequate surplus income to set aside for saving and thus lower marginal propensity to save (Kuznets, 1955). An increase in technological development, such as introduction of more efficient production methods and machineries, causes an upsurge in productivity and consequently increasing interest rates. Since the low-income group has low marginal propensity to save (MPS) because of their low disposable household income, they are unable to accumulate capital and thus allowing their upper-income counterparts to increase their investments (Brenner, Hartmut & Thomas, 1991). This widens the income distribution gap. However, Kuznets cautions that savings cannot ensure a perpetual increase in income share for the rich capitalists because this group is faced with low fertility rates against higher birth rates and lower-death rates of poorer families, which scales down the share of descendants for rich capitalists. Kuznets also explains the decline in the long-run income disparity to legislative interventions such as government permitted inflations, inheritance taxes, and artificially induced low long-term interest rates. These factors cut off the unlimited wealth of capitalists (Kuznets, 1955). Secondly, the shift from agriculture to industrial ization and urbanization also contributed to the increase in income disparity between the rich and the not-so-rich. During the periods of industrialization, propelled by technology development, per capita of non-agriculture sector is often higher than the per capita of agricultural sectors (Brenner, Hartmut & Thomas, 1991). In addition, the total size of the agricultural sector declines rapidly than that of non-agricultural sector and thus, the inequality of income distribution in the former seems to be lesser than, rather than equal to that of the latter. Thus, with the rising of the non-agricultural sector propelled by increased technological developments, the amount of people with a higher income within this sector increases and so does the increase in income disparity. Exposure to Technology In most developing countries, it is established that only a small fraction of the working population is confronted with new advanced technologies especially during the initial periods of t echnology introduction. As such, the fraction of population that will be exposed to new technology often takes advantage and improves their economic statuses. This can be explained by the theory of skill-based technological change. Skill-based technological change is a major contributor to increasing wage disparity between the â€Å"white-collar workers† and â€Å"blue-collar workers†. The theory of skill-based technological change is postulated under an assumption that technological progress provides an advantage to skilled workers (white-collar) since they are well trained and better compatible with new machines (Weiss & Garloff, 2011). On the other hand, the unskilled â€Å"blue-collar† workers are deployed to execute simple processes that require higher labor intensity. Therefore, an increase in technological advancement would lead to a demand shift towards more skilled workers, which brings about an increased employment potential for this group of workers and thus raising their wages relative to those considered as unskilled (Weiss & Garloff, 2011). Conte and Vivarelli (2007) developed a framework by which the effects of technological change in low and middle income countries could be empirically analyzed. Through their research, the group found that the amount of capital allocated for research and technological development in developing countries were negligible. As such, most low and middle income countries have their technological development powered by the transfer of technology from high income countries. Therefore, the importation of new technologies from the developed nations could be taken as proxies to capture technological upgrading in developing countries (Conte & Vivarelli, 2007). It is important to note that only the rich or higher income members of the society in developing countries have the capacity to import these technologies and maximize their productivity. Since the lower income individuals cannot afford importin g new technologies, they will be forced to work for the rich at lower wage rates (this is done in order to recover the high costs of purchasing new technologies). The research conducted Conte and Vivarelli also found that there were high skill bias in developing countries due to introduction of new technologies. The wage rates in white collar employment sectors were rising against a decline in blue collar wage rates. This was not experienced in developing nations only, but was also widely experienced in developed countries. The research focused on sector- and country-specific impacts of wages, capital and value-added on employment of white collar and blue collar workers. According to these researchers, a general increase in wage has a negative effect and capital deepening has a positive effect for both the white collar and blue collar workers, although this is achieved at different levels due to the relative skill bias between these two groups (Conte & Vivarelli, 2007). However, th e increase in utilization of skill-enhancing imported technology in developing countries has different impacts: It raises the total employment level for white collar workers while at the same time diminishing employment opportunities for blue-collar workers in absolute terms, which is a perfect presentation of absolute skill bias (Conte & Vivarelli, 2007). This implies that technology transfer from high income countries increases income disparity in developing countries. However, the technological bias in favor of white-collar (skilled) workers is criticized by Acemoglu (2002). In questioning the applicability of technology bias in favor of skilled workers, Acemoglu presents the case during the 19th century industrial revolution when unskilled-based technological change replaced the skilled-based workers in factories. The author recalls this period when unskilled weavers were forced to work on machine operated weavers, replacing skilled weavers who initially used their hand-based te chniques in weaving. However, this criticism is based on ancient technologies, whi...