Register now or log in to join your professional community.
There are many reasons of inequality, some of them I presented below:
- access to natural resources (oil, gas,coal, water, food)
- susceptibility to natural disasters (flood, earthquake, tsunami, tropical storm, snow storm, etc.)
- characteristic of local climate (country located in one or many climate zones) and changes in global climate (faster in one region than another)
- access to capital
- access to know-how
- development level of education system
- demography
- political and social unrest
- very often difficult history of the country
lack of capital
global politics
religion
cultural differencestechnology levels
1. Rising inequality is a widespread concern. Inequality within most advanced and emerging markets and developing countries (EMDCs) has increased, a phenomenon that has received considerable attention—President Obama called widening income inequality the “defining challenge of our time.” A recent Pew Research Center (PRC 2014) survey found that the gap between the rich and the poor is considered a major challenge by more than 60 percent of respondents worldwide, and Pope Francis has spoken out against the “economy of exclusion.” Indeed, the PRC survey found that while education and working hard were seen as important for getting ahead, knowing the right persons and belonging to a wealthy family were also critical, suggesting potential major hurdles to social mobility. Not surprisingly then, the extent of inequality, its drivers, and what to do about it have become some of the most hotly debated issues by policymakers and researchers alike. 2. Why it matters. Equality, like fairness, is an important value in most societies. Irrespective of ideology, culture, and religion, people care about inequality. Inequality can be a signal of lack of income mobility and opportunity―a reflection of persistent disadvantage for particular segments of the society. Widening inequality also has significant implications for growth and macroeconomic stability, it can concentrate political and decision making power in the hands of a few, lead to a suboptimal use of human resources, cause investment-reducing political and economic instability, and raise crisis risk. The economic and social fallout from the global financial crisis and the resultant headwinds to global growth and employment have heightened the attention to rising income inequality. 3. This note. The objective of the note is two-fold. First, it shows why policymakers need to focus on the poor and the middle class. Building on earlier IMF work which has shown that income inequality matters for growth, we show that the income distribution itself matters for growth as well. In particular, our findings suggest that raising the income share of the poor and ensuring that there is no hollowing-out of the middle class is good for growth through a number of interrelated economic, social, and political channels. Second, we investigate what explains the divergent trends in inequality developments across advanced economies and EMDCs, with a particular focus on the poor and the middle class. In that context, we are filling a gap in the literature since existing studies typically focus only on advanced economies or a smaller sample of EMDCs. This approach allows us to suggest policy implications depending on the underlying drivers, and country-specific policy and institutional settings. 4. Roadmap. Section II provides an overview of the macroeconomic implications of high inequality of outcomes and opportunities and shows why policymakers’ focus on the income shares of poor and the middle class can prove growth-enhancing. Section III provides a rich documentation of recent trends in both monetary and nonmonetary indicators of inequality across advanced economies and EMDCs, while Section IV investigates the drivers of the rise in inequality, including from an empirical perspective. Section V concludes and discusses policy implications.
5. Outcomes and opportunities. The discourse on inequality often makes a distinction between inequality of outcomes (as measured by income, wealth, or expenditure) and inequality of opportunities―attributed to differences in circumstances beyond the individual’s control, such as gender, ethnicity, location of birth, or family background. Inequality of outcomes arises from a combination of differences in opportunities and individual’s efforts and talent. At the same time, it is not easy to separate effort from opportunity, especially in an intergenerational context. For instance, parental income, resulting from their own effort, determines the opportunity of their children to obtain an education. It is in this spirit that Rawls (1971) argued that the distribution of opportunities and of outcomes are equally important and informative to understand the nature and extent of inequality around the world. 6. Is inequality a necessary evil? Some degree of inequality may not be a problem insofar as it provides the incentives for people to excel, compete, save, and invest to move ahead in life. For example, returns to education and differentiation in labor earnings can spur human capital accumulation and economic growth, despite being associated with higher income inequality. Inequality can also influence growth positively by providing incentives for innovation and entrepreneurship (Lazear and Rosen 1981), and, perhaps especially relevant for developing countries, by allowing at least a few individuals to accumulate the minimum needed to start businesses and get a good education (Barro 2000). 7. Why is rising inequality a concern? High and sustained levels of inequality, especially inequality of opportunity can entail large social costs. Entrenched inequality of outcomes can significantly undermine individuals’ educational and occupational choices. Further, inequality of outcomes does not generate the “right” incentives if it rests on rents (Stiglitz 2012). In that event, individuals have an incentive to divert their efforts toward securing favored treatment and protection, resulting in resource misallocation, corruption, and nepotism, with attendant adverse social and economic consequences. In particular, citizens can lose confidence in institutions, eroding social cohesion and confidence in the future. 8. Income distribution matters for growth. Previous IMF studies have found that income inequality (as measured by the Gini coefficient, which is 0 when everybody has the same income and 1 when one person has all the income) negatively affects growth and its sustainability (Ostry, Berg, and Tsangarides 2014; Berg and Ostry 2011).
9. Inequality affects growth drivers. Why would widening income disparities matter for growth? Higher inequality lowers growth by depriving the ability of lower-income households to stay healthy and accumulate physical and human capital (Galor and Moav 2004; Aghion, Caroli, and Garcia-Penalosa 1999). For instance, it can lead to underinvestment in education as poor children end up in lower-quality schools and are less able to go on to college.3 As a result, labor productivity could be lower than it would have been in a more equitable world (Stiglitz 2012). In the same vein, Corak (2013) finds that countries with higher levels of income inequality tend to have lower levels of mobility between generations, with parent’s earnings being a more important determinant of children’s earnings (Figure 1). Increasing concentration of incomes could also reduce aggregate demand and undermine growth, because the wealthy spend a lower fraction of their incomes than middle- and lower-income groups.410. Inequality dampens investment, and hence growth, by fueling economic, financial, and political instability. Financial crises. A growing body of evidence suggests that rising influence of the rich and stagnant incomes of the poor and middle class have a causal effect on crises, and thus directly hurt short- and long-term growth.5 In particular, studies have argued that a prolonged period of higher inequality in advanced economies was associated with the global financial crisis by intensifying leverage, overextension of credit, and a relaxation in mortgage-underwriting standards (Rajan 2010), and allowing lobbyists to push for financial deregulation
