Income inequality refers to the extent to which income is distributed in an uneven manner among a population. Income inequality affects people’s quality of life leading to higher incidences of poverty and so impeding progress in health and education and contributing to crime.
High income inequality has the potential to threaten a country’s political stability because the more people are dissatisfied with their economic status the more it is hard to reach political consensus among population groups with higher and lower incomes. Political instability also increases the risks of investing in a country which in turn undermines a country’s development potential [Achankeng, 2003].
Furthermore, high income inequality limits the use of important market instruments suchas changes in prices and fines. For instance higher rates for electricity and hot water might promote energy efficiency although increasing inequality because a government introducing higher rates on electricity might cause extreme deprivation among the poorest citizens.
High inequality also discourages certain basic norms of behaviour among economic agents (individuals or enterprises) such as trust and commitment. Higher business risks and higher costs of contract enforcement impede economic growth by slowing down all economic transactions. These are among the reasons some international experts recommend decreasing income inequality in developing countries to help accelerate economic and human development.[Aldred,2013].
The rich and the poor have long lived side by side, but the current radical levels of economic inequality experienced in many high-, middle- and low-income countries endanger economic development, stability and societal progress. The expiry of Millennium Development Goals (MDGs) in 2015 and discussions regarding new goals has provided an opportunity to use the growing concern about economic disparities to legitimately place inequality on the development agenda and demand action.