from Development Channel

Question of the Week: Inequality

January 16, 2013

Clothes are seen hanging outside a bus which has been converted into a dwelling for Lu Changshan and his wife, near newly-constructed residential buildings in Hefei, Anhui province on November 12, 2012 (Jianan Lu/Courtesy Reuters).
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Where is global income inequality headed?  

Question of the Week posts review important questions and controversies in global development by providing background information and links to a full spectrum of analysis and opinion. Today’s post discusses global trends in income inequality.

Income inequality is an increasing concern for political leaders around the world. China has 128 million people living on less than $1 a day. Some 1.5 million Chinese, meanwhile, are millionaires in dollar terms. Black South Africans make, on average, around one-sixth the income of white South Africans. In the United States, people in the top 0.01 percent of the income distribution control around 5 percent of national income, up from about 1 percent just 30 years ago.

While the effects of inequality are the subject of ongoing academic debate, many scholars believe that high inequality correlates with many negative social and health outcomes. Some argue that it can threaten economic growth, stymie poverty reduction, and contribute to social unrest. Moreover, inequality appears to have adverse effects on sustainable, long-term growth. In many cases, inequality also means that the income level into which a child is born plays a significant role in determining his or her future prospects.

Global inequality trends are mixed. Developing countries have grown more quickly than developed countries in recent decades. Consequently, income inequality between rich and poor countries across the world—as measured by the average citizen’s income—has declined. However, income inequality within many countries has increased as the benefits of economic growth accrue unduly to their richest citizens.

Trends in income inequality vary by continent, country, and sometimes by a country’s regions:

  • Latin America retains its historically high inequality, but the region has made impressive progress: the Gini coefficient, a quantitative measure of inequality, “declined in 13 of 17 Latin American countries” from 2000 and 2010, according to a recent working paper from the Center for Global Development. In Brazil, for instance, the reduction in inequality is partly attributed to the success of the conditional cash transfer program Bolsa Familia, which is known for its widespread coverage. Some 17 percent of Brazilian families were enrolled by 2007, as the working paper notes.
  • In China, which has achieved significant poverty reduction, income inequality—especially between urban and rural Chinese—is substantial, although the numbers vary. A 2008 estimate from the Boston Consulting Group suggests that the top 1 percent of Chinese households control over 70 percent of the country’s private financial wealth (the top 1 percent hold 40 percent of the wealth around the world).
  • In India, analysts disagree about the extent to which the benefits of India’s globalization and economic development have accrued to the poor. But according to the OECD, income inequality has doubled over the past twenty years. Although extreme poverty has fallen significantly, some scholars believe that inequality has limited the poverty-reducing effects of India’s economic growth.
  • In Africa, 60.8 percent of the population lives on less than $2 a day, making up 36.5 percent of the continent’s income; on the other hand, 4.8 percent of the population lives on $20 a day or above, holding 18.8 percent of income. While the continent is home to some of the world’s fastest growing economies, income inequality in Africa has not declined in recent years, and six of the world’s ten most unequal countries were located in sub-Saharan Africa as of 2010, according to the African Development Bank.

While economic growth is sometimes viewed as a panacea for poverty, these global inequality trends present a more nuanced picture and arguably demonstrate the need for antipoverty solutions that focus on pro-poor growth and growth with equity instead of growth overall. In forthcoming Question of the Week posts, the Development Channel will continue to explore the global scope of inequality, its socioeconomic effects in major developing countries, and the ways in which those countries have worked to mitigate it.

What do you think?

What is the future of global inequality? Which countries or regions are most at risk for the negative effects of inequality? What can governments do to prevent or combat these effects? Let us know your thoughts in the comments section below, and stay tuned for future Question of the Week posts.