Why income inequality is dangerous for the global economy: research findings
11/01/2020
The problem of income inequality is growing in different countries of the world, as the gap between the rich and the poor is widening. The International Monetary Fund and the Organization for Economic Co-operation and Development (OECD) tried to analyze the causes of differences in the size of the state and their impact on the economic situation. The results of the analysis are not justified economically, but politically.
Thus, the authors of the OECD study came up with the following pattern: "If income inequality increases, the level of economic growth decreases." In conclusion of the study, the IMF expresses a similar idea: " If the income share of the top 20 percent (the rich) increases, in the medium term economic growth slows down."
OECD researchers estimate that over the past 25 years the damage caused by the widening gap between rich and poor has amounted to 8.5 percent of GDP. For Germany, according to the German Institute of Economic Research in Berlin (DIW), this meant a loss of 4 billion euros per year.
Gini coefficient
OECD calculates Gini coefficient which is based on the comparison of cumulative proportions of the population against cumulative proportions of income they receive, and according to OECD Gini coefficient ranges between 0 in the case of perfect equality and 1 in the case of perfect inequality. According to the chart below South Africa has the highest income inequality and Slovak Republic - the lowest one.
Source: OECD data
Top 10% national income share
WID.world measures pre-tax national income share held by a 10% group which is the sum of all pre-tax personal income flows accruing to the owners of the production factors, labor and capital, before taking into account the operation of the tax/transfer system, but after taking into account the operation of pension system. The central difference between personal factor income and pre-tax income is the treatment of pensions, which are counted on a contribution basis by factor income and on a distribution basis by pre-tax income. The population is comprised of individuals over age 20.
Source: https://wid.world/
However, international experts criticized the methodology and data collected by OECD and IMF. For example, low-income families invest less money in education, so they are less likely to have a good job. But it cannot be refuted that inequality in most countries has indeed increased. The IMF calls it "one of the biggest challenges of our time."
Meanwhile, the World Inequality Report-2018 indicates the similarity of trends throughout the world. In particular, the authors of this study note that income inequality has increased over the past decades in almost all regions of the world. It remains unchanged only where the income difference is already extremely large, for instance Middle East.
Globally, countries that used to be very poor have improved their position over the past 30 years. Rich and middle class in China and other Asian countries have won from this trend. Although the gap between rich and poor is huge in China and India, the income gap between these countries has narrowed compared to the United States or Europe.
Source: World Inequality Report-2018
The reduction of differences on a global scale and at the same time the growth of inequality within individual countries is one of the possible explanations for the emergence of populism, nationalism and protectionism.
The question remains open whether the governments of the countries will be able to withstand these trends, since in the state budgets there are often not enough funds. “Countries have become richer, but governments, on the contrary, have become poorer,” concludes the World Inequality Report, explaining that this matter limits the ability of states to fight against economic inequality.