Are inequalities a new global scourge?

While the global discussion on wealth equality has focused on the share of income accruing to the top one per cent, the world should concentrate on developing economic opportunities for the bottom 20 per cent.

Since the global financial crisis of 2008, income and wealth inequalities have taken an increasingly prominent place in economic debates. Not only left-leaning activists, but international economic institutions and academics with mainstream credentials have also recently trained their spotlight on the topic.

A book by French academic Thomas Piketty, showing that wealth inequalities in advanced economies are reaching levels last seen prior to the First World War, vaulted to the top of international bestseller lists earlier this year.

From France to Chile, several governments were elected largely on a wave of discontent over the perceived unfair distribution of incomes and economic opportunities. Many governments are aware that even the perception that they were helping the rich but not the poor nearly caused their defeat and even risked social peace.

Some of the global discussion has focused on the share of income accruing to the top 1% of earners. While yielding valuable insights, this focus sometimes amounts to pointing an envious finger at hardworking, successful individuals. The vast majority of top income earners are self-made entrepreneurs, professionals and others who carry heavy responsibilities in their fields. They did not arrive at their positions through inherited wealth.

But anemic economic growth rates in many countries also underscore the belief that rising tides do not always lift all boats.

In a slower-growth context, many see the distribution of incomes as a zero-sum game: if there is more for someone else, there must be less for me, they think. And it is true that income inequalities have risen sharply within many countries — from China to the United States, from Ireland to Switzerland and others.

The causes of inequality are not always clear. In advanced economies, those whose jobs disappeared or whose earnings faced downward pressures due to open trade or new technologies were often middle-income earners, and a less well-off middle class is seen as synonymous with growing inequalities. But the same trade and technology trends have facilitated the emergence of a middle class in many developing economies. Indeed, while income inequalities have increased within countries, inequalities between rich and poor countries have been greatly reduced.

Too much inequality in a country can hinder its long-term economic performance. But countries such as China may be willing to tolerate growing inequalities in the medium term, as rewarding success becomes an important underpinning of a more dynamic economy that generates higher incomes for all.

Conversely, some measures, such as higher personal income taxes, taken by countries such as France in the name of equality, may come at the cost of growth in overall population incomes.

Remarkably, some advanced economies, such as the Nordic countries, Germany and the Netherlands, managed to pull off a good economic performance in recent years without a great deal of rising inequalities.

And some developing countries — India and Malaysia, for example — have managed to boost economic growth while chipping away at historically high inequalities.

In these and other countries, income growth based on entrepreneurship and openness to trade and technological change does not seem to have increased inequalities. This is because these countries have been less concerned with pointing the finger at the 1% and more focused on ensuring that those at the bottom 20% of the income distribution ladder have access to good public investments and education, and face fewer barriers to economic opportunities.

In short, while the world has been paying attention to what appears not to work, it could benefit from paying more attention to what has worked.

About the Author

Daniel Schwanen


Daniel Schwanen is assistant vice-president, research, at the C.D. Howe Institute in Toronto.

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