IB Economics HLTopic 3 — Inequality and PovertyPaper 1 & 2Core idea~10 min read
What Causes Inequality and Poverty
Poverty is not one problem with one cause. It is a loop: being poor makes it harder to stop being poor. Once you can draw that loop, essay questions on causes, costs and policies all get much easier, because every policy is just an attempt to cut the loop somewhere.
📚 What you need to know
Poverty is usually a cycle: low income → little saving → little investment → poor health and schooling → few skills → low productivity → low income again.
Low wages sit where economic growth and human development meet, and are the biggest single cause of poverty.
Inequality has many causes: differences in human capital, unequal opportunity, unequal ownership of assets, discrimination, and differences in bargaining power.
Government tax and benefit systems can shrink inequality; weak ones let it grow.
Globalisation and new technology reward some workers a lot and leave others behind.
Costs of high inequality: slower growth, lower living standards and weaker social stability.
The poverty cycle
Imagine a household earning just enough to eat. There is nothing left over to save, so nothing to invest — not in tools, not in a bike to reach a better job, not in staying in school an extra two years. Without those things productivity stays low, and low productivity is exactly what keeps wages low. The household ends the year where it started.
Notice there is no single starting box. That is the point: the cycle can be entered anywhere, which is why one-off cash handouts rarely fix poverty on their own.
This diagram is worth memorising, because it doubles as a policy plan. Every policy in the next two pages — schools, clinics, minimum wages, transfers, progressive tax — is just an attempt to snap one of these arrows.
The main causes of poverty
Low wages. The biggest cause. Usually the result of unemployment, informal work with no contract, a shortage of skills, or an economy that leans heavily on the primary sector.
No access to education and healthcare. Both cost money. Miss them and human capital stays low, so people are ill more often, recover more slowly and produce less.
High dependency. A household supporting many children or elderly relatives on one wage has far less per person.
Weak or missing safety nets. Where there are no unemployment or disability payments, one accident or one bad harvest pushes a family straight under.
Fewer skills → lower productivity → firms will only pay low wages → nothing left to save → fewer skills next year
The main causes of inequality
Cause
What is going on
Differences in human capital
Higher skills earn higher pay. A weak or expensive education system widens the gap, because only richer families can buy their way past it.
Inequality of opportunity
Two children with the same ability get very different chances if one region has good schools and clinics and the other does not.
Unequal ownership of assets
Assets generate income by themselves. The more concentrated ownership of land, property and shares is, the more unequal incomes become.
Discrimination
Pay or hiring decisions based on gender, ethnicity, age or disability push whole groups onto lower incomes regardless of ability.
Unequal bargaining power
Where trade union membership is strong, workers negotiate a bigger share. Where it is weak, low pay is easier to impose.
Tax and benefit systems
Progressive taxes plus generous benefits pull the distribution together. Flat or regressive systems with thin benefits let it spread out.
Globalisation and technology
Both raise total output, but the rewards go to capital owners and skilled workers, while routine jobs get automated or moved abroad.
Market-based supply-side policies
Deregulation, privatisation and trade liberalisation can raise growth, but they often widen the gap — the buyers of a privatised asset gain, users may pay more.
Why does inequality matter?
A common student mistake is to argue that inequality is only a fairness issue. Examiners want the economic costs too.
Costs of high inequality
Slower growth. Talented people from poor households never get trained, so labour is used inefficiently and potential output is lost.
Worse public finances. More spending on benefits, less income tax collected.
Lower living standards. The gap in schooling and healthcare passes straight to the next generation.
Social instability. Very unequal societies tend to have more crime, more unrest and, at the extreme, political upheaval.
The case for some inequality
Incentives. If the pay is the same whatever you do, why train for seven years or start a risky business?
Signals. Higher wages in a shortage occupation pull workers towards where they are most needed.
Reward for risk. Entrepreneurs accept losses; profit is the payment for taking that chance.
So the goal is not zero inequality. It is keeping it low enough that opportunity stays open.
Use this line in evaluation. Inequality is a problem when it becomes inequality of opportunity. Unequal outcomes can motivate; unequal starting lines just waste talent.
Rich and poor countries are not the same problem
Developed economies have a large tax base, so they can afford transfers, schools and health systems. Their main problem is relative poverty. Many developing economies collect a much smaller share of GDP in tax, often because so much work is informal, and their main problem is absolute poverty. The same policy will not do the same job in both places, and saying so is a strong evaluation point.
💡 Exam tips
Learn the poverty cycle as a sequence you can write out in one line. It gets you analysis marks fast.
For “causes” questions, split your answer into causes of poverty and causes of inequality — they overlap but are not identical.
Always give at least one economic cost of inequality, not just a moral one.
Name the group who gains and the group who loses. Vague answers about “society” score badly.
Use a chain of reasoning with arrows in your own working, then write it out in full sentences.
Mention that some inequality is needed for incentives. It shows balance and earns evaluation credit.
⚠ Common mix-ups
Treating poverty and inequality as the same thing. A country can be poor and fairly equal, or rich and very unequal.
Blaming individuals. The cycle is structural — it explains why effort alone often is not enough.
Assuming globalisation only causes inequality. It has also lifted hundreds of millions out of absolute poverty. Say both.
Forgetting the incentive argument. An answer that treats all inequality as bad will lose evaluation marks.
Mixing up opportunity and outcome. Most economists worry more about unequal opportunity than unequal outcomes.
Ignoring wealth. Wealth inequality is usually far larger than income inequality and drives it over time.
Up next: Using Taxation to Redistribute Income — the single most powerful tool a government has for changing the shape of the Lorenz curve.
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