Why We Should Care About Inequality

March 30, 2012


A woman in Brazil looks through a window.

The World Bank

  • World Bank economist Branko Milanovic wrote a ground-breaking book about inequality in 2011.
  • Inequality is a topic that affects everybody, he says.
  • Research indicates that growth and decreasing poverty rates can coincide with rising 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.

In the Western world, the focus on disparities in income and opportunity comes as the United States and Europe continue to struggle with a prolonged economic downturn that appears to be widening the gap between rich and poor. It has spurred street protests in Europe and become a lightning rod in the American presidential election.

At the same time, inequality is getting more attention in some developing nations such as China and India that seem to have sailed through the Great Recession relatively unscathed. A growing body of research indicates that growth and decreasing poverty rates in regions such as East Asia are coinciding with rising inequality which, in turn, leads to social tensions.

Globally, inequality may be shrinking as economic power shifts and new markets emerge, Milanovic’s most recent research suggests. 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?

Why should we care about inequality?

Some studies show that high inequality [encourages] poor people to choose very high tax rates on the rich, which reduces investments and growth rates. That’s one [reason we should care.]

Another thing we see very much nowadays 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.

We see that in Europe with the large cuts in social programs there. On one hand, there are very high rates of unemployment, particularly among the young. On the other hand, you still see huge incomes, for instance, in the financial services sector.

Clearly, some of these high incomes are no longer seen as legitimate. That’s true even in the United States, where only five years ago there would have been no questions raised about it.

Does economic growth reduce gaps in income and opportunity, or is the opposite true?

Brazil and China are interesting examples, and for two opposite reasons.

China, of course, 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.

[Editor’s note: 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.

The question that can be asked about China is [what will happen] if there is a deceleration of growth and the country continues to have really high inequality. Can social stability, what the Chinese call “harmonious development,” be maintained? It’s difficult to see how it would.

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. At the same time, the country has had a fairly good rate of economic growth.

So in the case of Brazil, high growth rates and a reduction in inequality helped reduce poverty – although Brazil is more unequal as a nation than China is.

[Editor’s note: Brazil’s Gini was 54.7 in 2009, down from a high of 63.3 in 1989. Only a handful more countries are ranked as more unequal.]

Clearly, some of these high incomes are no longer seen as legitimate. That’s true even in the United States, where only five years ago there would have been no questions raised about it.

How about global inequality – is it inherently unfair?

The richest 5 percent of Indians, as a group, still make less than what the lower middle class of Americans earn, just by virtue of the fact that they happen to have been born in India and not in America. That’s after the numbers have been adjusted to reflect price differences in the two countries.

So you have individuals with the same intelligence and drive, but because they were born in different countries their incomes will be entirely different.

As I mentioned earlier, if you come from a wealthy family, your nation will try – through taxation and public education – to limit the extent to which such transmission of wealth determines your prospects in life.

But we also have a transmission of collectively acquired wealth that nobody is discussing. That is when your children are born in, say, America and they inherit an income stream that is due to the fact that previous generations created factories, hospitals, infrastructure and capital that allow your kids to do well, too.

This is not something we tend to ask questions about, but it’s worth asking: Is equality of opportunity a concept that applies only to a nation? We may have good reasons for assuming so, but we still have to ask.

" The social stability and the social fabric of a society are torn apart if there are very large income differences. "

Branko Milanovic

Lead economist, World Bank

What can we do to even out these global differences?

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.

How does migration affect poverty and inequality?

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. It could even make some countries worse off if there’s a brain drain.

That’s why migration is a political issue, an issue with tradeoffs.

You said in the introduction to your book what you want to stimulate some “old-fashioned activism.” Is that happening today?

My goal when writing The Haves and the Have-Nots was to bring the issue of global inequality to greater public prominence. I also wanted people to become more concerned with inequality within nations.

Some of it has already happened with the Occupy Wall Street movement in the United States and Indignados in Spain and elsewhere in Europe.

It may seem ironic that the people who are protesting income gaps often belong to the wealthiest 1 percent of the world population. This illustrates the contrast between national inequalities – which are still foremost in people’s minds – and global inequality.

People who are part of the 99 percent in the United States and Europe may feel entitled to protesting against the share of income that accrues to the top 1 percent in their countries. But they forget, or don’t even know, that they themselves belong to the world’s richest.