Researchers from Oxford and the United Nations found out that over the last 4 decades global income inequality significantly decreased in the "relative" terms but skyrocketed in the "absolute".
The most extensive study on the global income inequality to date was published this week in the Review of Income and Wealth by the researchers from Oxford University and the United Nations University World Institute for Development Economics Research. They compared the levels of global income inequality around the world using the Gini coefficient that shows how economically unequal the society is as compared to "the most equal society" marked as 0 and "the most unequal society" which is 1.
On a global level, the Gini coefficient showed a considerable decline from 0.739 in 1975 to 0.631 in 2010. This is supposed to mean that in the last 40 or so years we were getting closer to living in an economically equal society. But is it the case? One of the researchers, Finn Tarp, explains:
"Take the case of two people in Vietnam in 1986. One person had an income of US$1 a day and the other person had an income of US$10 a day. With the kind of economic growth that Vietnam has seen over the past 30 years, the first person would have now in 2016 US$8 a day while the second person, US$80 a day. So if we focus on “absolute” differences, inequality has gone up, but if you focus on “relative” differences, inequality between these two people would have remained the same."
That is why the Gini coefficient shows that the world is on the road to the economic equality, yet the actual situation in the society has only worsened as the difference between the income levels skyrocketed. However, the researchers say that the decline in the Gini coefficient in the past decades was primarily driven by the rapid development of such densely populated countries as India and China. The economic growth in these countries has indeed contributed to lowering the world's economic inequality, yet it only aggravated the inequality within the countries.
This controversy is exactly what the researchers want us to pay attention to as within these crucial differences between the absolute and relative inequality, lies the problem of the rising incomes but aggravating economic inequality around the world.
Now, let's look closer at what happened to the inequality levels in different parts of the world between 1975 and 2010. It turns out that there are major differences among the world's regions. Both absolute and relative inequality significantly increased in the North America and Europe, indicating that the society got richer as a whole while the gap between the rich and the poor only worsened. The same trend was observed in Central and South Asia as well as in sub-Saharan Africa. The regions that have shown the growth of absolute inequality and a decrease in relative inequality are Latin America, East Asia and the Pacific region.
These are the main trends, the researchers say, but there are national variations within the larger regions that include multiple countries. For example, there were major differences in the European Region where the United Kingdom showed a 38% increase in relative inequality whereas France experienced a 16% decline in the same parameter. The same goes for Latin America with Argentina seeing an increase of 25% while Brazil experienced a 10% decline. A full list of countries can be viewed in the original research.
What does it mean for the economy's future?
Even though the global inequality has only got worse in the absolute terms, the researchers still see some positive outcomes that came together with it. Increase of the absolute inequality is not a purely negative trend, says Laurence Roope of Oxford University. While it indicates the aggravation of the inequality gap, the rise of the income levels in such densely populated countries as China and India allowed to pull over 1 billion people out of poverty. Therefore, the growth of absolute inequality allowed a lot of people in the developing economies to lead a better life. The researcher says that elevated absolute inequality is an "inevitable by-product of economic progress" and the policymakers should think of finding ways to make the economic growth in their countries as well as globally more inclusive for the disadvantaged groups.
However the increase of absolute inequality is only one part of the equation.
"Our analysis found that, although average incomes in large developing countries are now much closer proportionally to those in high-income countries, the absolute gaps in income between countries are so high that even if domestic inequality was completely eliminated in all countries (which is obviously impossible) absolute inequality today would still be much higher than it was 40 years ago," said a researcher Miguel Niño-Zarazúa in the interview with Science Bulletin.
This research provides a very valuable insight into the real changes in the world's inequality level over the last decades and asks the difficult questions about this hugely avoided economic topic.
On the 2013 World Economic Forum in Switzerland, global inequality was named one of the biggest threats to the world's economy by the leading politicians. They discussed the possible ways of solving the global inequality (or at least trying to) and addressed economic inequalities between the countries as the main catalyst of the problem.
The Guardian says that one of the main reasons behind the existing inequality within the countries is unbalanced control over their assets, such as natural resources and financials, and increasingly high concentration of these assets in the hands of a small part of the society.
So what the global policymakers can do to tackle these issues is to revise the financial policies of their countries and work on making them more inclusive for the disadvantaged groups as well as position the national financial system as a stable intermediary in the financial matters for the society, says The Guardian.
Well, we should not expect a quick solution for such complex problem as global inequality, but at least it is gaining more attention from both policymakers and academia and is understood as a real economic threat. This could be a start.