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Mind the Gap

Inequality is an increasing problem around the world. But there are cures.

BY PETER PASSELL | MARCH 1, 2012

Economic inequality seems to be Topic A for the global chattering classes. Even at the Davos World Economic Forum Meetings, where billionaires go to compare aircraft sizes, talk turned away from self-congratulation to sobering topics like where the next 600 million jobs will be coming from.

The big worry is that economic growth and inequality go together like doughnuts and heart attacks. And not just in rich countries, but across the developing world. That concern is surely justified: Developing economies that have outperformed the pack in recent decades have generally also experienced enormous increases in the gap between poor and rich. But this lock can be picked -- and has been in a few big countries. The question is whether governments have the political will.

Step back for a moment. It’s critical to distinguish inequality between countries from inequality within countries. The explosive growth of Asia, combined with tepid growth in Europe and North America, is almost certainly narrowing the difference in average incomes between nations. But with a few significant exceptions, inequality within developing countries has risen sharply since the 1980s. By one standard measure, the Gini Index, inequality has increased by about one-fifth in India and China. And extreme wealth has become ever more extreme. In 2002, India was home to four billionaires ($US); today the number is 55. In 2002, China claimed only one billionaire. Last time Forbes added up the numbers,  China clocked in with 115 -- more than Germany, France and Japan combined.Should you care? The answer isn’t as straightforward as you might expect. Rapid growth in emerging markets largely explains why at least a half-billion fewer people live in poverty today than in the 1980s. So if the leap to affluence can’t be sustained unless a disproportionate piece of the growth dividend goes to the rich -- and if the rising tide still more or less carries all boats -- glaring inequality is hardly the worst of possible worlds. Or to switch metaphors: Most people, one suspects, would prefer the crumbs from a very large pie to a thin slice from a small one. And that’s what they’re generally getting.

It’s one thing to say, though, that growing inequality hasn’t stopped advancement at the low end of the pecking order, and quite another to say it should be a minor concern in the context of rapid growth. Other things equal, most of us would rather live in a society that invests in upward mobility for those who are capable, and shares the bounty with those who aren’t. Besides, other things aren’t equal: In emerging market countries, even modest amounts redistributed from the haves would pay for a hefty increase in living standards for the have-nots.

It’s good news, then, that rapid growth has coexisted peacefully with declining inequality in one large, emerging market county. That country is Brazil, where in the years 2000-2008, the incomes of the bottom-fifth grew at an average annual rate of six percent, compared to two percent for the top-fifth.

ANTONIO SCORZA/AFP/Getty Images

 

Peter Passell, the Economics Editor of Democracy Lab, is a Senior Fellow at the Milken Institute.

LAVONIA CHOUDHARY

4:06 AM ET

March 29, 2012

Different developmentspeed betweeen countries

In my opinion, recently, China has developed faster than the others in the world. About economic growth and inequality between nations, There is a study by the World Institute for Development Economics Research at United Nations University reports that the richest 1% of adults alone owned 40% of global assets in the year 2000, and that the richest 10% of adults accounted for 85% of the world total. The bottom half of the world adult population owned barely 1% of global wealth. Extensive statistics, many indicating the growing world disparity, are included in the available report, press releases, Excel tables and Powerpoint slides. The major component of the world's income inequality (the global Gini coefficient) is comprised by two groups of countries (called the "twin peaks" by Quah [1997]). The first group has 13% of the world's population and receives 45% of the world's PPP income. This group includes the United States, Japan, Germany, the United Kingdom, France and Australia, and comprises 500 million people with an annual income level over 11,500 PPP$. The second group has 42% of the world's population and receives only 9% of the world PPP income. This group includes India, Indonesia and rural China, and comprises 2,100 million people with an income level under 1,000 PPP$. (See Milanovic 2001, p. 38). Economic inequality very closely matches log-normal distribution as one traverses the strata of national and world societies from top-to-bottom.
During the 20th century there was considerable divergence between the economic wealth of developed and developing countries. Richer countries like the United States and many European countries converged together towards a GDP per capita much greater than developing countries such as India and Ethiopia. The evolution of the income gap between poor and rich countries is related to convergence. Convergence can be defined as "the tendency for poorer countries to grow faster than richer ones and, hence, for their levels of income to converge" [2]. Convergence is a matter of current research and debate, but most studies have shown lack of evidence for absolute convergence based on comparisons among countries (with regard to this debate see for instance Cole and Newman (2003).