The scale of global inequality in income and wealth can be described as huge or extraordinary. According to the case study, Individuals with a high spending capacity don’t spend as much of their income as the low-income individuals. This inequality leads to constricted demand. Fundamental changes brought on by the government by applying the predistributive policies and redistribution measures, can be looked for as a solution to this problem. So Yes, I think that the execution of global policies might actually help in reducing inequality in income and increase demand.
Predistribution involves establishing equality from the start. The policies under predistribution focus on making the poor stronger from the start by training them for better jobs, increasing education etc. While under redistribution, progressive taxing seems to be a solution. Under predistribution the policies are made to work at the beginning and bring in equality eventually. Redistribution is a mid way solution for an already inequal society. (wood, 2014)
Policies under redistribution work in a way where an income is generated from the taxes levied by the government and these are used by them to help people and companies who need financial help. Furthermore, this creates an environment where the middle income generating people get bitter towards those of lower income as the benefits are being transferred to them while huge taxes are being paid by middle and high income generating individuals. (wood, 2014)
Predistribution focuses on making market reforms that create an equal distribution of wealth from the start. This is an even more effective measure as compared to redistribution. A better result from the starting unlike redistribution where measures are put into action when there is an unequal market. Instances of predistribution and the way the work can be described as follows:
• Empowering trade unions: Empowering trade unions and giving them rights helps the government where it boosts the earnings of the wage earners. The lower and middle-income wage increases and causes the gap between wage distribution to decrease. (wood, 2014)
• Lowering unemployment rates: The larger the number of people would be, larger would be the income generation. Labour market is directly related to growth in wage rates. If unemployment decreases so would the inequal distribution of income. (wood, 2014)
• Another way is the increased investment by government in policies that are supposed to help the poor from the beginning. Increasing the quality of education, schemes where training is provided by them for better jobs, an overall reduction in human capital inequality would lead to better paying jobs for the lower wage earners. (wood, 2014)
Redistribution along with implementing higher minimum wage and providing employment increases the chances of global economy where trade becomes easier and the economic policies are similar throughout. The policies put into place can lead to equal distribution of wealth and income which would lead to more spending and an increase in the aggregate demand.
Ques4: Should these policies include extensive foreign aid to emerging market economies?
The current monetary system doesn’t necessarily meet the requirements necessary for the emerging market economies. The availability of liquid funds to countries in times of need, rules and policies that are made for overseeing the exchange rates, movement of capital reserves etc. Rules and policies made under are enforced and seen upon by the IMF (International monetary fund). (Lagarde, 2016)
Emerging market economies no longer just affect themselves when economic distress arises. These spills also affect other countries. In this century of global trade, every business activity is not limited to just one country so with global policies being put into practice. Certain causes of economic growth slow downs in a country can be controlled by having a mutual set of policies. The US recession affected the whole world. Now, if a similar situation were to be started in China, one of the fastest and most crucial emerging economies, businesses and other corporations will see a major slow down in their growth as well. Having an extensive foreign aid would not only be just in the favor of these emerging market economies but the world trade and other developed nations too.
Safer capital flows and global safety net are two such monetary systems that can be useful. The IMF recommends that a more equity based and long term capital flow would be beneficial. On the other hand, global financial safety net would allow access to financial funds in times of need. Safety net includes the foreign exchange reserves, currency swap between the central banks of nations and the IMF. (Lagarde, 2016)
The role of IMF has reflects the dynamics of today’s global trade and economy as a whole. This includes the growth in emerging markets. Advances market economies which include developed nations like US, and other emerging economies are getting closer to create a growing economy. (Lagarde, 2016)
Lagarde, C. (2016, Feb). Retrieved from IMF: https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp020416
wood. (2014, june). Retrieved from word press: https://economicquackery.wordpress.com/3-government-policies/a-the-policies-available-to-influence-the-distribution-of-income-and-wealth/