Income Inequality Within Countries

We’re interested in economic development. We measure that in shorthand as the gross domestic product per person. But we’ve noted that the variation in incomes across households within a country across individuals within a country can be very large. So we have to take into account not only the average level income, but the inequality of income within a country. You all know the famous quip of the man whose feet are on fire, whose head is on ice, and he’s asked how’s the temperature? He says on average it’s fine. But of course it’s devastating with the inequality of fire, and ice. And societies can be like that also.

On average income can be just fine. But if income is just fine because a few people are, fantastically rich, and the rest of the country is excruciatingly poor. It’s not so fine, after all. And so in addition to measuring, the average level of development as the gross domestic product. Per person, we want to find ways to measure the inequality of income within the country.

There are several indicators that are used. We can look at the ratio of incomes of those at the top of the income distribution. To those at the bottom, sometimes we look at the, income of the top 20% of the population compared to the income average of those in the bottom 20% the poorest 20% of the population. Another measure that is quite useful a little bit fancier. Is a measure called the GINI coefficient, it’s a measure that varies between 0 and 1, 0 meaning complete equality, everybody has the same income and 1 is exactly the case of one person in the country having everything.

You know the king, the potentate, he owns everything and everybody else is completely impoverished. They have nothing. They would be a GINI coefficient of one. Of course, real societies aren’t at 0 or 1, they’re somewhere in between. Societies that we would regard as. Rather equal with the broad middle class. A lot of countries in Scandinavia, for example, have a GINI coefficient around 0.25. Whereas countries that are much less equal. Where there really is a lot of wealth at the top but then a lot of poverty alongside it, might have a GINI coefficient not of one, the pure inequality, but a GINI coefficient around 0.5 or 0.6, and so that’s the variation.

 

It’s an extremely useful measure. We can put it on a map, and have a look at where inequality tends to be high, and when inequality tends to be relatively low. The lowest inequality tends to be in. Western Europe and especially in Scandinavia I mentioned. Countries like Sweden, Norway, Denmark, tend to have relatively equal income distribution, a broad middle class. Not so many super rich and basically no super poor. And you see on the map the, the light shading of those countries indicates a quite low GINI coefficient. Canada is similar.

The United States, if you look at just south of Canada. That’s shaded in red. The US is quite unequal in income distribution compared with Canada or Western Europe, and especially compared with the countries in Scandinavia. In the United States we have a lot of super-rich, more billionaires than in any other part of the world, and we have a lot of very poor people, maybe not as excruciatingly poor as one would find in the least developed countries, but relative to the billionaires, poor people in the United States really don’t have very much at all. You can see looking at this map a very interesting phenomenon that most of the Americas, with the exception of Canada. It is shaded in red and quite unequal. The Americas as a whole, both North America and South America are relatively unequal societies. Africa for the countries where we have the data. Also, rather unequal and in comparison, for example, with the India or other parts of South East Asia. Africa tends to rank relatively high in inequality.

China was quite equal. In its poverty 50 years ago but with a lot of economic development with a widening of the gap between those living in the urban areas doing rather well and those living in the rural areas remaining still rather poor. The inequalities in China have risen to levels similar to those of the United States and that means on an International comparative bases, a relatively high degree of inequality.

Now, it’s interesting to look in a little bit more refined way at this GINI coefficient among the high income countries. Because it shows us that there are different pathways to economic development. Getting richer doesn’t mean necessarily becoming more unequal, nor does it guarantee becoming less an inequality, or more equal.

There are different pathways for development. Northern Europe has chosen a pathway of becoming wealthier with a lot of social equality. Whereas the United States has been on a path of rising incomes alongside rising inequality. If you look at the Gini coefficient across the high income countries in this bar chart, you see countries like Denmark and Norway, Sweden, with the lowest Gini coefficients and it.

Those with the highest Gini coefficients it, countries eh, like the United Kingdom, Israel, United States, Turkey, Mexico and Chile. Countries with big gaps between the rich and the poor. How do we explain these gaps?

Well, this is a very complicated challenge and it is of course contentious issue, as well. There are many reasons for inequality that we want to direct attention to, to make sure that we don’t treat such a complicated challenging device of topic.

In a simplistic manner, because history plays a big role, geography plays a big role. Government policy plays a big role. Let me mention a few of the causes of inequality or reduced inequality across countries. Traditionally, the size of land holdings made a big difference. Some countries especially in the America’s had huge farms. Huge haciendas often taken by the European settlers who came to the America’s, and they often displaced indigenous populations. They often brought in slaves actually to work those large farms And so while there were some with huge land holdings, there were others that were landless, or, so displaced from the land. And in traditional societies were agriculture’s so important, the size of land holdings is a crucially important dimension. Of inequality. Variations in education levels are a very important source of inequality. Those young people who are lucky enough by dent of their own hard work or their family’s support. Usually a combination of the two, to be able to get higher education. That higher education will translate in the modern economy into higher income levels as well. Whereas kids that are unlucky growing up in very poor families, very poor communities and aren’t able to make it through to higher levels of training. May get stuck with the very low income levels, so in, their employment. So education, can become an equalizer if everybody has the opportunity, but it can also become a source of inequality as well.

I mentioned earlier that the world urban divide is key. Families that move to urban areas often find better employment prospects and higher incomes. Those left in villages as small holder farmers often eek out survival in a lot of poverty.

Discrimination matters tremendously of course, still in this world. Women all over the world are not given the same chance as men in the labor market. They don’t earn the same incomes, even when they’re doing the same job or better. They face a discrimination that is deeply entrenched even though fortunately it is, being reduced in, in many places. racial, minorities ethnic groups that are minorities, the religious groups that are minorities often face terrible conditions in the labor market. Not able to get education, not able to get the kind of employment that they would deserve. If they were treated fairly.

Government policies make a huge difference. Corrupt governments that collect big,rents on, oil holdings or diamond holdings or other mineral deposits in the country and then use that income for a very small class of insiders. And maybe for those in power, the royal family, the the politicians, the political class, can create a huge amount of inequality. Often countries that live off of a few mining resources, oil, gold, diamonds, are very unequal because of the ways that That, that government revenue is allocated. At the same time, governments can be great equalizers. If governments collect revenues and then ensure that the poor can go to school, that poor people can get access to health care, that everybody has a chance, that poor families are given some income support as they are in Scandinavia. To ensure that their children will have a good chance, then governments can narrow the income inequality as well.

Let me turn back to why the Americas are relatively unequal. Well, they were settled by conquest. European settlers took the large landholdings. European settlers brought in slaves. European settlers displaced. Indigenous populations. Over time, those forces turned into different forces. The descendants of Europeans today tend to have better educational opportunities. But, as democracy has come to the Americas, there’s also a very powerful trend Of equalization taking place in at least some countries. More kids able to go to school, governments leaning towards social inclusion rather than away from it as was historically the case. In sustainable development, not only do we try to understand inequality. But we hold it as one of the goals, that there should be social inclusion in economic development, and yet at the same time the forces of politics, the forces of market change, the forces of trade and globalization often favor the rich who are able to use those forces to their advantage.

So that the rich tend to get rich and the poor even poorer. That’s our battle and that’s our challenge. Understand the inequalities of income within societies, find ways as those impressive societies in Scandanavia have done to ensure. A big middle class, and a chance even for a child born into a relatively poor family, and that can become the path to social inclusion, one of the pillars of sustainable development.