Income inequality refers to the uneven distribution of income/wealth among the population. It may happen both in micro (country specific) and macro level (global).
Reasons behind income inequality:
In 2016, the contribution of nation’s 10% earners in the national income was lowest in Europe and highest in Middle East (Exhibit 1). The figure shows the presence of varying range of income inequality in all the important countries, irrespective of they being developed or emerging. This phenomenon can be better understood by examining the number of millionaires and billionaires in these countries. There are around 36 million millionaires and 2200+ billionaires in the world. Their existence apparently raises the national income of the country. Simultaneously, the average low wage rate of the common people increases income inequality.
The presence of income inequality is not new in the global economy. In the pre- industrialised phase, people used to get ranked from the richest to poorest with their estimated average incomes. During the of British industrial revolution between 1750 to 1850 huge disparity of income took place. In recent times, the unequal distribution of income and wealth has increased in all the countries, but at different paces. It is found to be lowest in Europe and highest in African countries.
The Gini coefficient is a measure of inequality of a distribution. It is defined as a ratio with values between 0 and 1. The Gini Index is the Gini coefficient expressed as percentage. This is equal to Gini coefficient multiplied by 100. The Gini index is the most widely used measure of inequality. It looks at the distribution of a nation’s income or wealth, where 0 represents complete equality and 100 refers to total inequality. The higher the value of Gini index, more is the income inequality.
Here, an analysis has been done on more than 150 countries for understanding the structure of income inequality across the globe. Based on the study, 16.6 and 63 are the lowest and highest values of Gini Index. Given this range of income inequality, four groups have been formed as follows:
The glimpses of income inequality across the different regions are as follows:
In the following section we have done an analysis by regions where the pie charts represent the percentage of the countries in that region falling in low/medium/high/very high-income inequality band.
Section – A (Countries with Low-Medium-High income inequality)
Region I – Europe
- Among all the regions, Europe’s income inequality is a little lower. Europe’s maximum level of Gini Index is 37.4 which is maximum of all individual regions (refer to the tables above).
- Here the Gini Index lies in the medium range for more than 80% of the countries.
- Between 1994 to 2008 the income inequality declined in these countries. It actually became possible due to the convergence of income. Income convergence is the process where the poorer economies start to grow at a faster rate than the richer ones. In the European union, some countries were in a good state with their wealthy economic condition and many of them were in totally opposite state.
- Different European countries decided to implement policies related to income convergence to increase their average income relative to richer European nations. A balanced wage rate in the labour market, encouragement of labour productivity, incorporation of better technologies, a fair taxation policy etc. were the examples of such initiatives.
- Today, the top 1% population in Europe take 12% of income while the bottom 50% people have 22%.
Region II – Asia Pacific
- More than 50% of the world’s population reside in this region.
- Most of the large economies of Asia are experiencing a widening divide between the rich and the poor.
- When it comes to the world’s most expensive cities, then the Asian cities like Tokyo, Singapore, Hong Kong, Beijing reserve a place in the top 10 list but half of the world’s poor stay here.
- Gini index of the countries with high human development index like China and Malaysia actually are 42.2 and 46.3 respectively.
- Greater population density, lesser accessibility to education, wage disparity, low coverage of social security and healthcare are some crucial reasons for increasing income inequality in this region.
Region III – Middle East and Central Asia
- Here, the major reason behind the rising income inequality is oil ownership and the huge amount of profit earned from it.
- Countries from this region are characterized by dual economic structure. In one side, there is the existence of established elites who usually have huge amount of accumulated wealth within their families. Only 10% population of this region share more than 60% of the national income. On the other hand, 50% people of this region also share only 10% of the national income.
- Failed economic policies, poorly managed tax system, regressive socio-political issues, continuous war in the Central Asian countries have triggered the situation where 57% and 36% countries belong to the high and very high bands of income equality respectively.
- Surprisingly, Azerbaijan with high human development index showcase lower income inequality with a Gini Index value of 16.6. However, other countries of this region need to work a lot to improve their situations.
Section B – (Countries with Medium – High – Very High-Income Inequality)
Region IV – North America
- Instead of being wealthy, developed, technologically innovative and powerful, North American countries are the ones with highest level of income inequality in the world.
- Top 47% of the national income are earned by only 10% of population in the countries like US and Canada, while the bottom 50% earn only 6% of the it.
- The main reasons for such greater level of inequality are considered to be technology, trade and education.
- Large wage premiums are fixed for the workers with high levels of education and skills. Simultaneously, increasing numbers of school dropouts (around 1.2 million/year) and high school freshmen (close to 25%) failing to be graduate widen the wage gaps.
- Growing trade relations between United States and rest of the world (Specially China) for a long time actually has increased the proportion of imports in US. It led to fall in domestic production of these goods in US, resulting in rising unemployment and weak inflation adjusted wage growth.
- US prefers to hire skilled people from the emerging economies at a lower labour cost in order to be competitive in global marketplace. Till 2016, the number of such workers were more than 15 million in US, which affected the jobs of around 7.5 million US people.
- Technological advancement here has substituted the labours in various jobs. Besides, unfavourable tax structure helps the wealthy people to contribute less and make poor people pay more.
Region V – South America
- South America or Latin America is considered as the most unequal region in the world.
- All the countries of this region fall in high or very high level of income inequality with Gini index lying between 39.7 to 51.3.
- According to a report of 2014, 10% people of this region contributed 71% of the national income.
- Poorly designed tax structure is one of the serious reasons for such rising income inequality. Instead of imposing the property and inheritance tax, the system mainly concentrates on the consumption taxes. As a result, revenues collected from the personal income of the high-income groups become lower and tax burden of the low-income groups is higher for constant payment of consumption tax.
- Extreme concentration of productive lands and restricted distribution of its benefits are the unresolved problems of this region. According to a report, more than 50% of the fertile land is controlled by the top 1% of the largest farms. In Colombia, 84 % of the smallest farms occupy less than 4% per cent of productive land, due to which its income inequality is one of the highest in the region.
Region VI – Africa
- In Africa, the structure of income inequality is a result of mismanagement of several policies for years.
- The disparity of education, skill development and earning levels are extremely high in these countries. Over the years, the differences have widened. It is evident that it will take a long time to reduce the poverty level in this region.
- Africa’s Gini coefficient is greater than the global average. 82% countries belong to the range of high and very high-income inequality. In South Africa, the Gini Index is 63, which is highest in the world.
- Multinational companies operating here generate lesser amount of jobs and that is also at lower wages for the people compared to the informal sectors.
- The crisis of land distribution and other socio-economic assets are high in the countries like South Africa, Botswana, Namibia, Zambia, Central African Republic, Comoros and Lesotho.
- Human labour and land are highly concentrated in Eastern and Southern Africa.
Is income inequality a vicious circle?
Currently, a situation has appeared where there is a lot of wealth shared by lesser percentage of the global population whereas millions and billions of people are left out.
The problem of wealth concentration actually has made inequality a vicious cycle. Under this condition, the wealth is only possessed by the ones who are already wealthy. It happens because the person who is already rich gets the opportunity to invest or to engage their money in the further accumulation of wealth. Whereas, the opposite happens to the ones who do not have the luxury to engage themselves in such financial endowments. They only earn money to satisfy their basic daily needs and sometimes to invest for their own future. That is how the process of income inequality continues to build up.
The following economic and social measures by the governments can help manage this global curse of income equality:
- An affordable, accessible and quality education system
- Investing in programs of skilling the labour pool of the economies
- Reducing gender gap and invest in women so that they can participate in country’s workforce
- Expanding access to capital and encourage entrepreneurships
- Reforming the judiciary system to manage social crime involving juvenile criminals