We often hear discussions on inequality. It seems that in the past decade it has become one of the most important political issues. However, before talking about inequality, it is necessary to understand that there are many types of inequalities and that some people argue that not every of them matters. The discourse on inequality can be separated to inequality of outcomes which is measured by wealth, income or expenditure, and inequality of opportunities which refers to things which are not in control of the individual such as gender, ethnicity, location of birth, or family background (Dabla-Norris, Kochhar, Suphaphiphat, Ricka and Tsounta, 2015).

In this blog, I want to write about inequality of income, because it seems that it is getting worse globally. Statistics show that since 1980 up to 2010 inequality gap of outcomes has increased, rich became richer and global wealth is getting more concentrated (Dabla-Norris, Kochhar, Suphaphiphat, Ricka and Tsounta, 2015). Now almost half of the global wealth is owned by only 1% of world’s population (Treanor, 2015). Therefore, I will try to answer the questions: does it matter? and whose issue is it?

Many leftists portrait any degree of income inequality as a terrible thing. But is it necessarily evil? Dabla-Norris, Kochhar, Suphaphiphat, Ricka and Tsounta (2015) argue that no! Because, according to them, low degree of inequality may provide incentives for people to compete, save or invest to move ahead in life. However, authors do not have in mind today’s degree of inequality in the world. Nevertheless, for some people, high degree of inequality seems tolerable and they even argue that inequality is a good thing and that we should not bother about it because all that matters is that we have equal opportunity! Their argument is almost the same as a former for low degree inequality – inequality provides incentives for effort and risk-taking which stimulate productivity and efficiency from which poor people benefit. Also, they believe that there is trade-off between efficiency and equality and that we should cherish it and for that reason economists should concentrate on efficiency (Ravenhill, 2013).

However, there are many reasons why we cannot discredit inequality of income. As Dabla-Norris, Kochhar, Suphaphiphat, Ricka and Tsounta (2015) argue, income distribution matters for economic growth because income inequality affects economic growth and its sustainability negatively. As they argue “If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0,08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth”. Therefore, the argument that rich people with more money contribute more to economic growth than poor people with more money can be neglected.

Furthermore, some correlations with inequality show us as well that it really matters. Inequality of income correlates with higher unemployment, lower average health, higher crime, lower social mobility, weaker property rights, more social unrest, fragile democracies and higher poverty and a lower contribution of economy growth to poverty reduction. Although, correlation does not imply causation, the relation between inequality and social problems are obvious. For example, in the US or the UK, where top 20% earn seven or eight times more than bottom 20%, all measures that was mentioned here before are worse-off than in countries like Sweden or Japan, where top 20% and bottom 20% income differences are 2 or 3 times. (Ravenhill, 2013).

But, is it global or national issue? Who should take responsibility for it? Well, some people would say that it is national problem. The reason is that “1% of population owns half of world’s wealth” is just a number which do not have “addressee” because there is no global government and no global civil society (Milanovic, 2006). However, there are some other people who argue that inequality is a global issue. Their argument is that global inequality is the same ethical issue as poverty. As Singer (2004) argues, distributional justice within a nation and in the world as a whole is the same thing from ethical perspective. Also, thinking about all the crimes, instabilities and all that terrible things that are caused due to inequality, it’s not hard to imagine how one’s country problems would affect another’s one in such connected world.

All in all, even you would be an efficiency believer, an argument for trade-off between efficiency and equality is simply empirically wrong as the study of Dabla-Norris, Kochhar, Suphaphiphat, Ricka and Tsounta shows. Also, it is not a coincidence that in countries where inequality of income is higher, crimes, social unrest, poverty and all other negative indicators are higher than in countries where inequality of income is low. And finally, inequality of income matters for everyone, no matter where you are, because in this increasingly connected world is not hard to imagine how one’s country issues affect yours.

Renatas Makarovas

Dabla-Norris, E., Kochhar, K., Suphaphiphat, N., Ricka, F. and Tsounta, E. (2015) Causes and consequences of income inequality: a global perspective. International Monetary Fund. [Online] Available from: https://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf

Milanovic, B. (2006) Global income inequality: what it is and why it matters? United Nations. [Online] Available from: http://www.un.org/esa/desa/papers/2006/wp26_2006.pdf

Ravenhill, J.  (2013)  Global Political Economy. 3rd edition. Oxford University Press. p. 405-408

Singer, P. (2004) One world: the ethics of globalization. Yale university Press. p. 185-196

Treanor, J. (2015) Half of world’s wealth now in hands of 1% of population – report. The Guardian. [Online] Available from: http://www.theguardian.com/money/2015/oct/13/half-world-wealth-in-hands-population-inequality-report

 

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