3.4 Economics of inequality and poverty Questionbank

Nepal is a landlocked country in South Asia with an estimated population of 29 million. Agriculture remains central to the economy, accounting for about 27% of gross domestic product (GDP) and employing a sizeable proportion of the workforce. However, the country also relies heavily on tourism and remittances from migrant workers abroad, which make up more than 25% of Nepal’s total GDP. Nepal has been seeking to diversify its economy through foreign direct investment (FDI) in energy, infrastructure, and services.

In 2020, Nepal’s GDP stood at US$29.3 billion. By 2021, it had increased to US$30.5 billion, partly due to post-pandemic economic recovery and continued growth in the tourism sector. Official unemployment figures in Nepal are relatively low, but underemployment remains a major issue, especially in rural areas. The country’s Gini coefficient is estimated at 0.32, indicating moderate income inequality, though rural–urban disparities still persist. Nepal’s tax system includes both direct and indirect taxes; the highest marginal rate for personal income tax is approximately 30%.

The tourism sector is vital. Trekking permits, especially for the Annapurna, Everest, and Langtang regions, represent a key source of government revenue. Due to recent changes in permit fees and fluctuations in tourism numbers, local businesses have experienced varying levels of income from trekking-related services.

Table 1: Labour market data in Nepal (2021)

Table 2: Trekking permit data for Nepal

Guatemala is a Central American country with an estimated population of 17.9 million (2022). According to World Bank data, real GDP was approximately US$85 billion in 2022. Agriculture, particularly coffee, sugar, and bananas, makes up a significant portion of Guatemala’s exports (around 28% of total exports). While the tourism sector has been expanding, recent global events caused slowdowns. The country experiences persistent inequality, with a Gini coefficient estimated at about 0.48 in 2021. Poverty remains a major concern, especially in rural areas.

Guatemala’s tax system includes both direct and indirect taxes, although collection remains challenging. Personal income tax rates are progressive, with a top rate of 31%, while the corporate income tax rate is 25%. A value-added tax (VAT) of 12% applies to most goods. Government spending has focused on infrastructure and social programs to reduce poverty and increase potential long-term growth.

Table 1: Macroeconomic Indicators of Guatemala (2019–2022)

Table 2: Income Distribution in Guatemala (2021)

Table 3: Market for Guatemalan Coffee in the US (price per 50 kg bag)

Table 4: Tax Rates in Guatemala

Figure 1 (not drawn here) shows that, when government spending in Guatemala increases by US$1 billion, real GDP rises by an estimated US$2.5 billion. This suggests a government spending multiplier of 2.5.

CASE STUDY: Economic Developments and Challenges in Azerbaijan

1. Azerbaijan, situated at the crossroads of Eastern Europe and Western Asia, has experienced significant economic reforms over the past decade. Historically reliant on hydrocarbons-mainly oil and natural gas—for export revenues, the country has sought to diversify its production base through agriculture, tourism, and technology sectors. In 2019, oil and gas accounted for about 85% of Azerbaijan's total exports, providing substantial government revenue but leaving the country vulnerable to global commodity price fluctuations.

2. In recent years, policymakers have introduced multiple initiatives to modernize infrastructure and reduce dependence on hydrocarbons. Between 2019 and 2022, the government invested over US$3 billion in roads, railways, and energy transmission lines, aiming to expand the country's capacity to produce and transport goods. According to the State Statistical Committee, Azerbaijan's real GDP grew by 2.2% in 2020 and rebounded to 4.6% in 2022, partly due to a recovery in global oil prices. However, structural unemployment persists, especially in rural areas, where older agricultural practices lag behind modern production techniques.

3. Inflation, driven by rising global commodity costs, reached 8.4% in 2022, up from 2.6% in 2019. The Central Bank of Azerbaijan responded with conservative monetary policies that have stabilized the exchange rate of the Azerbaijani manat. Meanwhile, the government introduced tariffs on certain imported agricultural goods in 2021, aiming to protect local farmers from competition and stimulate domestic production. Critics argue that these tariffs lead to higher prices for consumers, while supporters believe they create incentives for farmers to modernize and invest in capital-intensive farming techniques.

4. Foreign direct investment (FDI) centered on the energy sector remains strong, although officials are eager to attract in manufacturing and services. Improvements in transport connectivity-facilitated by ongoing infrastructure projects-have encouraged discussions about further liberalizing trade regulations to boost exports of textiles, food products, and tech services. Yet logistical barriers at border checkpoints persist, contributing to delays and raising costs for exporters looking to access regional markets.

5. Socially, Azerbaijan has implemented targeted measures to address income inequality, including subsidies for utilities and food staples. Observers note that the impact of these subsidies can be uneven; while they help low-income households cope with rising prices, they can also create fiscal pressure if oil revenues decline. The government has recently introduced pilot programs that tie subsidies to specific income thresholds, with the objective of reducing misuse of public funds.

6. Despite ambitious diversification plans, the oil sector continues to dominate. Economic analysts warn that reliance on hydrocarbons could impede sustainable growth, especially if global oil prices weaken or external demand slows. As part of its long-term development strategy, the government is promoting investment in green energy, incentivizing solar and wind power projects in the hope of creating new export opportunities for electricity.

7. Nonetheless, concerns about structural unemployment remain. Skill mismatches persist between job seekers and the needs of modern industries, particularly in the technology sector. Rural-urban migration has become more common, pressuring housing and public services in Baku, while leaving some villages with labor shortages. Recognizing these challenges, the Ministry of Education has partnered with private companies to revamp vocational education programs, aiming to align training with rapidly evolving market demands.

Table 1: Selected Macroeconomic Indicators for Azerbaijan (2019-2022)

Table 2: Trade and Social Indicators

QUESTIONS

Case Study: Germany’s Economy and Energy Transition in the Early 2020s

Germany, as Europe’s largest economy, has historically relied on its robust industrial sector, strong exports of machinery and automobiles, and high-value-added manufacturing. During the early 2020s, it faced a combination of opportunities and challenges. On the one hand, demand for German exports remained high in global markets, supported by a reputation for quality engineering. On the other hand, supply chain disruptions in semiconductors and rising energy prices, partly triggered by shifts in international energy markets and global uncertainties, weighed on industrial output.

In 2022, Germany recorded a nominal GDP of US$4.4 trillion, with real GDP growth at 1.8% a deceleration from the 2.5% reported in 2021. Average inflation rose to 7.5% in 2022, up from 3.2% the previous year. Some macroeconomists attributed this spike in inflation to a combination of higher global commodity prices, labor shortages, and an expansionary fiscal stance aimed at countering pandemic-related slowdowns. The government’s budget deficit reached 3.8% of GDP in 2022, spurred by increased health expenditures and targeted subsidies for certain industries, especially those transitioning to greener production methods.

A core focus of German policy has been the energy transition (“Energiewende”), which aims to phase out nuclear power while boosting renewable energy sources such as wind and solar. The government introduced new subsidies for households installing solar panels and for firms adopting more energy-efficient processes. Although these measures have helped reduce emissions, critics argue they impose higher short-term production costs on businesses. In 2022, approximately 46% of Germany’s electricity came from renewables, illustrating a notable increase compared to 35% five years earlier. Nevertheless, some economists worry about energy security, cautioning that reliance on imported natural gas may expose the economy to price volatility.

In microeconomic terms, the government has also promoted a minimum wage policy to address income inequality and stimulate productivity within the service sector. In 2021, the minimum wage was increased by almost 10%, affecting over 4 million workers. Critics claim that small businesses may struggle with higher labor costs, while proponents emphasize that increased household income boosts consumption. Moreover, with Germany’s aging population, policymakers have launched campaigns to attract high-skilled migrant labor to fill gaps in advanced manufacturing and technological innovation.

Internationally, Germany’s trade relationships with European Union partners remain pivotal. Its exporters benefit from lower intra-EU trade barriers, and the euro acts as a common currency among 20 member states. However, some German manufacturers report that demand is influenced by exchange rate fluctuations with non-eurozone trading partners, particularly the United States and China. Before 2022, the euro experienced periods of depreciation against the U.S. dollar, making German exports more competitive globally.

With sustainability goals on the horizon, Germany has advanced plans to tax carbon-intensive production and invest in green infrastructure. Early results suggest an uptick in purchases of electric vehicles (EVs). A government-backed EV subsidy, set at €4,500 per vehicle, significantly lowered the price for consumers and led to a 30% increase in EV registrations from 2021 to 2022. Automotive firms quickly adapted supply chains to meet demand, though rising lithium and battery costs introduced uncertainties. In parallel, the government occasionally intervenes in energy markets to stabilize electricity prices and support households facing higher utility bills.

Many German economists expect moderate growth prospects in the coming years but emphasize caution due to potential external shocks such as geopolitical tensions and global financial volatility. The labor market, historically strong with an unemployment rate around 5.3% in 2022, could see pressure if foreign demand weakens. Nevertheless, policymakers remain focused on balancing green initiatives, fiscal prudence, and social welfare reforms. Their strategy includes maintaining Germany’s status as a leading export-driven economy, advancing climate objectives, and sustaining social protections.

Table 1: Germany’s Selected Macroeconomic Indicators

Table 2: Germany’s Energy and EV Transition Indicators

ECONOMIC REALITIES AND POLICIES IN BANGLADESH

Bangladesh is a rapidly developing country in South Asia, recognized for its thriving ready-made garment (RMG) industry, which accounts for over 80% of export earnings. Government reforms since the early 2000s, aimed at boosting export competitiveness, have led to steady gains in real GDP. For instance, between 2019 and 2022, Bangladesh’s real GDP growth averaged 5.2% annually. However, persistent challenges such as high rural poverty rates (officially at 20.1%, with extreme poverty at 10.5%) and vulnerability to climate risks continue to threaten inclusive growth.

Remittances form a major pillar of the economy, totaling over US$24 billion in 2021. Inflows from the Bangladeshi diaspora support household consumption and reduce external vulnerabilities, contributing to the country’s foreign currency reserves. Even so, the government has been concerned about maintaining exchange rate stability, especially in light of global inflationary pressures and supply chain disruptions, which have driven up the cost of essential imports like fuel and machinery. To cope with rising expenditures on food and energy, the government raised tariffs on luxury goods while restricting administrative barriers for essential commodity imports.

On the microeconomic front, the government recently introduced a consumption tax on sweetened beverages to curb rapidly rising obesity rates. Local bottlers initially protested the policy, arguing it would reduce their profits and force layoffs in urban factories. Yet public health advocates insist that the potential long-term social benefits reduced health-care costs and a healthier workforce outweigh the short-term economic costs. Meanwhile, targeted subsidies on fertilizers aim to support agricultural productivity; farmers in the northern regions have long claimed that lack of affordable inputs restricts their ability to increase crop yields and incomes.

Bangladesh’s push for infrastructure improvements particularly in roads, ports, and energy has attracted modest but growing foreign direct investment (FDI), totaling around US$2.8 billion in 2022. Corporate tax incentives are given to firms that establish manufacturing plants in special economic zones, spurring output in electronics and pharmaceuticals. Yet the domestic labor force often lacks specialized skills, leading to high underemployment. The government’s Skills for Employment Initiative, launched in 2020, aims to address these gaps by providing technical training and apprenticeships to youths aged 18–30.

Concurrently, there are ongoing debates on reducing import tariffs further to encourage greater participation in regional trade blocs. Economists highlight that a more liberalized trade environment can improve access to cheaper raw materials for local industries. Critics, however, worry that swiftly removing tariffs might destabilize nascent domestic firms already grappling with competition from established foreign producers.

Bangladesh faces significant environmental and developmental hurdles. Climate change-related floods frequently destroy crops, thereby exacerbating rural poverty. Government officials have begun working with international donors to finance climate-resilient infrastructure elevated roads and flood barriers while also supporting microfinance programs targeted at poor households. These policies seek to break the vicious cycle of poverty, whereby low incomes lead to low investments in education and productivity, perpetuating underdevelopment. Early signs suggest that expanded access to small loans, particularly for female entrepreneurs, is reducing extreme poverty in several flood-prone districts.

Despite these efforts, inequalities persist. In urban areas, the Gini coefficient remains relatively high, reflecting income gaps within the service sector. Doctors and engineers earn significantly above the national average, boosting demand for private education that many poor households cannot afford. The government has tried to bridge this inequality by directing additional funds to public schools, focusing on science and technology curricula.

The prospects for Bangladesh hinge on effective policy coordination. Balancing short-term macroeconomic stability such as keeping inflation below 8% with long-term structural reforms in education, infrastructure, and trade policy remains a central challenge. The government’s ability to manage environmental risks, attract investment, and provide social protection will greatly influence whether Bangladesh can transition from a lower-middle-income to a higher-income country in the coming decades.

Table 1: Selected Macroeconomic Indicators for Bangladesh (2019–2022)

Table 2: Development and Social Indicators for Bangladesh

Estonia is a small Baltic nation of approximately 1.3 million people and a member of the European Union (EU). Its economy is characterized by a highly developed digital infrastructure, a strong commitment to innovation, and comparatively low public debt. The country has seen notable growth in service sectors such as tourism and information technology (IT). Estonia is also known for its relatively low level of corruption and ease of doing business.

In recent years, Estonia’s GDP growth has fluctuated. Between 2018 and 2019, real GDP grew steadily due to robust exports of IT services and growth in inbound tourism. However, the global economic slowdown in 2020 led to lower tourism revenues, affecting the country’s overall economic performance. Income inequality has been an area of focus for policymakers, given Estonia’s Gini coefficient has been moderate but slowly increasing. The government maintains several forms of taxation (including VAT, personal income tax, and corporate taxation), each contributing differently to government revenue.

Tourism is an important source of income, especially from visitors from Finland, Russia, and other EU countries. Average spending per tourist has tended to rise, but so have accommodation and transportation costs. The price elasticity of demand for inbound tourism is not negligible, as changes in travel costs and exchange rates influence tourist flows.

Estonia’s taxation system includes a flat personal income tax rate of 20%, although there are discussions about introducing progressive elements. VAT rates vary depending on the product category. Meanwhile, the government has contemplated expansionary fiscal measures to offset slower growth periods. Policymakers also debate the efficacy of supply-side policies (such as reducing labor taxes and encouraging business start-ups) to maintain Estonia’s competitiveness in the global digital economy.

Table 1: Selected Macroeconomic Indicators for Estonia (2018–2021)

Table 2: Estimated Demand for Inbound Tourism (annual)

Table 3: Government Tax Data (2021)

Table 4: Consumption and Multiplier Data (2021)

Economic and Social Developments in Hong Kong

Hong Kong is an international financial center located on the southern coast of China. Renowned for its open trading environment and large foreign exchange reserves, Hong Kong has historically pursued free-market policies to spur economic growth. However, recent challenges, including sluggish global demand and ongoing demographic shifts, have contributed to concerns about rising income inequality and persistent poverty. The government reports that 15.8% of the population (over 1.1 million people) live below the official poverty line, which is defined relative to median household income. In addition, Hong Kong’s Gini coefficient remains among the highest in developed economies, at around 0.539 in 2021.

Hong Kong’s role as an entrepôt for Chinese exports and as a major financial hub has driven its economic growth over several decades. Services make up close to 93% of GDP, while manufacturing accounts for only 1% of GDP. The region’s unemployment rate has typically been low, hovering around 2.9% in normal times. However, certain sectors particularly tourism and hospitality experienced a downturn due to global movements in travel restrictions and changing consumer behavior. This contributed to a slight pick-up in the overall unemployment rate to 4.7% by 2021.

The government maintains a near-balanced budget, attributable in part to revenue sources such as profits tax, stamp duties on real estate transactions, and land lease sales. Nevertheless, there is growing debate on whether Hong Kong’s minimal social welfare spending is sufficient to address structural poverty. Some argue that targeted subsidies and cash transfers are needed to prevent low-income households, especially the elderly, from slipping into deeper poverty. Indeed, the government launched a pilot scheme in 2020 offering housing vouchers to households below 60% of median income, claiming initial success in reducing homelessness by 15%.

Hong Kong also faces macroeconomic challenges. Real GDP growth decelerated from 3.0% in 2018 to -1.2% in 2019, before contracting again in 2020 due to global economic disruptions. By 2021, real GDP marked a modest recovery of 2.5%. Inflation remained relatively low, averaging 1.6% in 2021, owing partly to subdued consumer demand. At the same time, the Hong Kong Monetary Authority (HKMA) employs a currency board system pegging the Hong Kong dollar to the US dollar, which limits the use of independent monetary policy instruments.

In response to developmental concerns, the government has initiated programs focused on skill enhancement and vocational training to prevent the formation of a “poverty cycle,” where poor access to education and health-care perpetuates low wages and limited economic mobility. A new Child Development Fund aims to provide means-tested asset-building accounts for underserved youth, while strong emphasis is also being placed on technology upskilling and English language proficiency to enhance employability in service-oriented sectors.

Despite these measures, Hong Kong’s open economy leaves it exposed to global trade fluctuations. Exporters face falling demand from some of Hong Kong’s key markets, even as rising regional competition for port and logistics services puts additional pressure on trade revenues. On the other hand, foreign direct investment (FDI) inflows rose to HKD 1.1 trillion in 2021, reflecting sustained investor confidence in Hong Kong’s legal framework and financial markets. Policymakers must navigate a tight balance between preserving Hong Kong’s “small government, big market” tradition and addressing socioeconomic gaps that threaten long-term development.

Below are selected data illustrating the economy’s performance and its social challenges.

Table 1: Hong Kong’s Selected Macroeconomic Indicators (2018–2021)

Table 2: Poverty and Development Indicators for Hong Kong

Denmark is a highly developed economy in Northern Europe with a population of about 5.9 million. It boasts one of the highest standards of living in the world, supported by a broad-based welfare system and progressive taxation. The service sector, advanced manufacturing, and renewable-energy technology form key parts of its economy. Denmark’s central bank has maintained low interest rates, helping to foster economic stability. However, challenges such as ensuring long-term sustainability of the welfare system and addressing potential future energy shortfalls remain.

Exports are crucial for Denmark’s economic success, with wind turbines, pharmaceuticals, and meat products contributing significantly to export revenues. Wind turbine manufacturers in Denmark have become global leaders, but recent shifts in global demand and competition from Asian producers have tested the capacity of local firms. Meanwhile, a high rate of personal and corporate income tax has provided funds for extensive public expenditure, including education, healthcare, and infrastructure.

Table 1: Selected Macroeconomic Indicators for Denmark (2022–2023)

Table 2: Market for Wind Turbines Produced in Denmark

Table 3: Income Distribution in Denmark (2022)

Table 4: Overview of Tax Rates in Denmark

In 2023, an energy-infrastructure firm in Denmark is planning a major investment worth 1.2 billion DKK, and claims it could significantly boost the economy by generating additional consumption expenditures.

Wind Turbine Exports
Denmark exported 70 units of wind turbines at an average price of 11,000,000 DKK per unit to other European countries in 2022. Owing to rising demand for renewable energy worldwide, the price of wind turbines exported from Denmark is expected to rise from 11,000,000 DKK to 12,000,000 DKK per unit in 2023. However, global competition from producers in Asia might cause changes in the quantity demanded.

Fiji is an archipelago located in the South Pacific, known for its thriving tourism industry and longstanding sugar sector. Tourism directly and indirectly accounts for nearly 38% of Fiji’s gross domestic product (GDP), making it one of the country’s main sources of foreign exchange. The island nation receives over 800 000 international visitors in a normal (non-pandemic) year, with most tourists arriving from Australia and New Zealand. However, dependence on tourism also makes Fiji vulnerable to external shocks such as global economic downturns or natural disasters.

The sugar industry is the second-largest contributor to Fiji’s export earnings, employing workers in growing, harvesting, and processing sugarcane. Due to changing weather patterns and competition from other sugar-producing nations, sugar production in Fiji faces challenges in expanding supply. In an effort to diversify government revenue, Fiji applies a 9% value added tax (VAT) on domestic sugar sales.

In 2022, the Fijian government announced a 200 million FJD infrastructure investment program aimed at improving rural roads, upgrading port facilities, and modernizing sugar processing plants. Economists estimate Fiji’s marginal propensity to consume (MPC) at 0.75, suggesting a potentially significant boost to aggregate demand if the infrastructure spending is effectively implemented.

Table 1: Key Macroeconomic Indicators for Fiji (2019–2020)

Table 2: Sugar Market Data in Fiji

Additional Information

• Fiji’s VAT on sugar is 9%.
• The government’s total planned infrastructure investment in 2022 is 200 million FJD.
• Economists estimate Fiji’s MPC = 0.75.
• Corporate tax rate is 20%.
• Personal income tax is a progressive system up to 20%.

Estonia is a small, high-income European country with a population of around 1.33 million. The Estonian economy is highly open, with exports accounting for a large share of its GDP. In 2021, Estonia’s real GDP was approximately €34.5 billion, growing by 8.0%, while the 2022 figure rose to €36.4 billion, with real GDP growth of 3.5%. Over the same period, the unemployment rate declined from 6.2% to 5.6%.

Estonia is known for its advanced digital infrastructure, which has attracted investment in technology and services. However, inflation surged in 2022 due to global supply pressures and increased energy prices. Estonia has a relatively low level of income inequality compared to many countries, as measured by its Gini coefficient, which improved slightly from 0.31 in 2021 to around 0.30 in 2022.

Estonia’s tax system is characterized by a flat personal income tax rate of 20% and a 20% corporate tax on distributed profits. The government also raises revenue through value-added tax (VAT) at 20%, excise duties, and social security contributions of 33%. The timber industry plays a significant role in Estonian exports; higher prices for timber have contributed to fluctuations in export earnings.

Below are three tables presenting selected data for the Estonian economy:

Table 1: Selected Macroeconomic Indicators for Estonia (2021–2022)

Table 2: Timber Market Data in Estonia

Table 3: Tax Revenue in Estonia (2022)