Should We Care About Inequality?

Since World Bank economist Branko Milanovic published his book The Haves and the Have-Nots in early 2011, the discussion over inequality has heated up around the globe. The focus on disparities in income and opportunity comes as the United States and Europe continue to struggle with an economic downturn that appears to be widening the gap between rich and poor. Inequality is getting more attention in some developing nations such as China and India. A growing body of research indicates that growth and decreasing poverty rates in regions such as East Asia are coinciding with rising inequality which, then leads to social tensions.

Globally, inequality may be shrinking as economic power shifts and new markets emerge. Within many nations, just the opposite trend is at work: The gap between rich and poor is widening. So where are we on inequality and why does it matter?

Source: https://www.wikiimpact.com

Some studies show that high inequality encourages poor people to choose very high tax rates on the rich, which reduces investments and growth rates. Another is that the social stability and the social fabric of a society are torn apart if there are very large income differences. It reduces investments and discourages economic activity.

In Europe with the large cuts in social programs, there are very high rates of unemployment, particularly among the young. On the other hand, you still see huge incomes in the financial services sector. Some of these high incomes are no longer seen as legitimate. 

Brazil and China are interesting examples, and for two opposite reasons. China has had a very high growth rate for more than 30 years and incomes have increased by probably a factor of five. China has also had a huge increase in inequality.

China’s “Gini” – the scale economists use to measure inequality – was 42.5 in 2005, up from 29.1 in 1981, according to World Bank estimates. The higher the number, the more unequal the country is. China’s Gini is now approaching that of many Latin Americans countries. Since growth in China has been so outstanding, the overall poverty reduction has been very substantial – despite the rise in inequality.

Brazil represents a different trend. Brazil still remains one of the countries with the highest inequality in the world. But the level of inequality was reduced over the last 10 years. High growth rates and a reduction in inequality helped reduce poverty – although Brazil is more unequal as a nation than China. Brazil’s Gini was 54.7 in 2009, down from a high of 63.3 in 1989. 

As far as inequality between nations is concerned, there isn’t much people or nations can do because we don’t have a global government that can address this.

If people in rich countries really want to make a difference they could, for example, look at their country’s policies on migration. If you believe that there is a certain injustice in large global income gaps, you might want to work to promote freer migration.

Studies have shown that if the foreign-born labor force in developed countries rose to represent 3 percent of the domestic labor force, this would reduce global poverty by more than all the aid and development programs do. The doors to prosperity would be opened for many poor migrants, and the world as a whole would be better off. That doesn’t mean that individual countries would all benefit, or that individual groups of people would. Migration is a political issue and an issue with tradeoffs.

And most times migration is not because of economic reasons but political. If you bomb Afghanistan, Libya, Iraq and Syria, shouldn’t you expect displaced people to migrate to a more stable nation? So, the developed world has to realise that “boat” people are not just because of syndicates or gangs but due to political upheaval in affected countries left by the Western world. Sort that and we have a more just world.

Reference:

Why we should care about inequality, The World Bank, 30 March 2012