What does the future hold for global income inequality?

Graph shows Gini coefficient index estimates for 140 countries, World Bank, 2020

Anant and Reese (Lower Sixth)

Has inequality has risen too far? How to reverse it and how to prevent extremes from arising.

Income inequality can be traced back tens of thousands of years with some of the most prominent examples being displayed in ancient Egypt and Mediaeval Britain. Therefore, from a logical standpoint, it could be expected that this inequality would have shrunk to extinction throughout the numerous years between Egypt and the present day. However, in reality, inequality is as potent as ever. In the western world this crisis is commonly looked at as being a problem for only those in developing countries. However, the harsh reality is that every country’s economy from Asia to Africa to the United States faces a different classification of income inequality to an almost surprisingly alarming level.

If global inequality continues to rise at the rate that is has been rising since the 1980’s, then global income inequality will rise very steeply, even under the most optimistic assumptions regarding growth in emerging countries. The top 1% of the global population owned 20% of global wealth in 2018 and this is projected to rise to 24% by 2050, while the bottom 50% of the populations share will fall from 10% to less than 9%. (Alvaredo F, 2018)

Whilst some degree of inequality will always be inevitable, extreme divisions of inequality can have extremely far reaching and longlasting consequences. Until global inequality is much more widely recognised and fully understood, solutions to this crisis will never be found.

How Covid-19 exacerbated the rates of rising global inequality?

The ongoing COVID-191 pandemic has exacerbated global income inequality and the jeopardized the previous progress made in reducing income inequality in the previous two decades.

The inequality explosion seen during the global pandemic was largely enabled by the skyrocketing stock market prices, a boom in unregulated entities, a surge in monopoly power and privatisation alongside the erosion of real wages.

Monopoly power is a large proportion of market share with limited competition. This increased during Covid as the economy became much more digitalised with heavier reliance on e-commerce causing firms such as Amazon to gain large amounts of monopoly power. As monopoly power increases in an economy, firms are more likely to charge higher prices and exploit consumers. This for example has a regressive impact on low-income households and widens global inequality.

Inequality is now prolonging the course of the Covid 19 Pandemic, which has led to a sharp increase in poverty around the world which will continue to grow as the inequality gap widens. ‘More than 80% of the vaccines have gone to G20 countries, while less than 1% have reached low-income countries’. (Oxfam, 2021) In some countries the poorest people were nearly four times more likely to die from the Covid 19 than the richest.

The increase of inequality within individual countries caused by the pandemic may become entrenched as pandemic-induced disruptions to education and the disproportionate adverse effects on low-income households may worsen. High inflation and surging household debt levels may also hamper countries ability to support vulnerable groups and facilitate recovery and sustainable growth. (World Bank, 2022)

The next phase of automation could also further exacerbate global inequality. Automation is the substitution of machines and algorithms for tasks previously performed by labour. The pandemic has certainly given employers more reasons to look for ways of substituting machines for workers. Machine learning and artificial intelligence could take over many tasks previously performed by humans. In healthcare, engineering or manufacturing for example. Increasing job losses and further driving economic growth. (World Bank, 2022)

Where do the widest gaps between rich and poor exist?

The Gini coefficient index is the most widely used measure of inequality between countries. It is used to estimate how far a county’s wealth or income distribution deviates from a totally equal distribution. Therefore, using the most recent World Bank Gini index estimates, South Africa, Namibia and Haiti are among the most unequal countries in terms of income distribution.

How can global inequality be reduced?

Complete global equality within society is impossible to achieve and arguably also undesirable. However, a comprehensive strategy is imperative in helping to steer the global economy onto a more inclusive and equal development path. In order to improve both between-country inequality and in-country inequality, this strategy must involve measures to broaden access to education, health care, digital services and infrastructure and more debt relief from international organisations.

Greater spending by governments on health and education can lower poverty rates and the persistence of income inequality across generations. A healthier and more educated population will also have higher productivity rates which will increase the rates of economic growth. However, a common misconception is that higher growth rates or a larger economy will lead to less inequality. This is not the case. Increasing the size of the pie will not necessarily mean that everyone has a bigger slice. The benefits of economic growth are rarely shared equally.

To reduce inter-country inequality, inequality reduction policies within LIC’s must be prioritised. As LIC’s generally have more inequality than HIC’s, e.g. Namibia is an LIC with a GINI Coefficient of 0.591, compared to the UK; a HIC with a GINI coefficient of 0.394. In LIC’s, there may be limited access to education and secure work, hence policies should be introduced in which high income countries can increase their contributions to the World Bank, of which will then be distributed amongst LIC’s. This will provide certain LIC’s with sufficient funds to initiate campaigns to improve the education standards within these countries, such that a greater proportion of the population has the necessary skills to obtain a more secure and higher paying job. HIC’s will also benefit from donating further into the World

Bank, as this will improve their international relations with LIC’s, and therefore as the LIC develops, this will improve the efficiency and quantity of trade between these countries, inadvertently developing the LIC further due to the increased level of trade, therefore contributing towards higher incomes in the lower income country. The benefits of donating more into the World Bank can be shown through how the World Bank aided Bangladesh in September 2016, when a sanitation project provided 1.2 million people with access to improved water sources reducing global inequality.

However, for the population to move towards higher income jobs, more infrastructure must be developed within these countries to facilitate this. Hence, due to an increase in contributions from HIC’s, LIC’s can also use these funds to build their infrastructure to attract TNC’s (Transnational Corporations), which will provide work opportunities for the population of these low-income countries. However, over reliance on LIC’s can be undesirable and increase levels of inequality due to the exploitation of workers. The introduction of TNC’s and increased industrial advancements can also increase regional inequality, widening the rural-urban divide.

In order to make sure the funds that the HIC’s have put into the world bank are being used effectively, routine check-ups should be made by officially recognised regulatory bodies within these LIC’s, helping to reduce the impacts of corruption. Furthermore, there should be routine inspections on the working conditions within these TNC’s in the low-income countries, to make sure the workers are in good conditions, and are earning a suitable wage, which will therefore reduce wealth inequality within countries, as most of the workers’ incomes will increase. The importance of this can be shown through how in Bangladesh, there are less than 200 inspectors as of 2013, which meant that check-ups were not routine, which led to 1,100 workers dying due to the Rana Plaza collapsing. (International Labour Organisation, 2014) Therefore, more routine inspections will prevent problems such as this from arising in the future.

Moreover, to reduce wealth inequality in developed HIC’s, although more difficult, certain strategies can be implemented. A possible strategy to reduce wealth inequality in the UK is to increase income tax on the wealthier individuals, possibly by creating a further tax bracket, with individuals whom annual income is between £150,000 to £500,000 must pay between 50% to 60% of their income, which the government can use to help reduce poverty. As a broader, more general idea, work campaigns can be promoted, with possibly the national minimum wage rising, which could be funded by the rise in income tax of the top 0.5% to 0.1% of the country, as mentioned above. However, progressive taxation and welfare transfers are often not the most effective strategies for achieving global equality, especially as they are very controversial and unlikely to be achieved.

In the UK for example the top 20% of earners earn 12 times as much as the poorest 20% before redistribution through tax and benefits.

(World Bank, 2021) Boris Johnson has however promised large tax cuts that are likely to alter how this calculation looks in the future.

Therefore, the future of global inequality depends largely on government actions and the role of international organisations. Improved international relations and internal infrastructure improvements are necessary in order to achieve global sustainable and equitable development and to reduce the amount of global inequality.

Sources used for research: Alvaredo, F. 2018. The World Inequality Report: 2018. Cambridge, MA and London, England: Harvard University Press. Oxfam. (2021).A deadly virus: 5 shocking facts about global extreme inequality.Available: https://www.oxfam. org/en/5-shocking-facts-about-extremeglobal-inequality-and-how-even-it. Last accessed 13/06/22. World Bank. (2022). Inequality in Southern Africa: An Assessment of the Southern African Customs Union.Available: https://documents.worldbank. org/en/publication/documents-reports/ documentdetail/099125303072236903/ p1649270c02a1f06b0a3ae02e57eadd7a82. Last accessed 15th Jun 2022. International Labour Organization, 2014. The Rana Plaza Accident and its aftermath. [Online] Available at: https://www.ilo.org/global/topics/geip/ WCMS_614394/lang--en/index.htm

World Bank, 2021. Accelerating Sustainable and Inclusive Economic Growth. [Online] Available at: https://www.worldbank.org/ en/about/annual-report/our-work