Global economy made substantial progress in reducing extreme poverty (i.e. number of people leaving with less than $1.9 a day) in the last decades. However, the income of the richest grew way faster than the rest of the populations during the same period. To our big surprise, the UK was the champion of the developed World: The top (1%) UK earners saw their incomes grow fastest while their taxes got slashed by half since 1960. Finally, the largest increase in the total number of billionaires in history was registered in 2018!
Since the 1980s, no G7 country has managed to collect more than 1% of GDP per year, from real estate, gift, or inheritance taxes! In most countries, corporate tax cuts meant less social spending for the poor and vulnerable. As you would expected, Trumps’s tax cut boosted corporate profits instead of raising wages.
I know, I am not giving you any good news…Inequality and poverty are controversial and politically-sensitive topics. Their multi-dimensionality and limited comparability across regions make it hard to have a world-wide accepted metric. Unfortunately, this paves the way for picking the measure that serves the best someone’s political rhetoric.
Just to illustrate, there is no doubt that absolute poverty has decreased worldwide whereas the “relative” poverty (number of people earning 60% of median income) has increased in many advanced countries.
The same goes with inequalities: While inequality between countries appears to decrease, inequality increased within countries (see the illustration below).
I would like to share with you the slides of my Development Economics course in Paris-Sorbonne University.
Some takeaways from slides 21-23 :
Relative vs. absolute measures of inequality
Which country has a more egalitarian income distribution?
country A = { 1; 2; 3}
country B = { 2; 4; 6}
In both countries, the proportion of the income of the rich to the poor’s is the same (3/1 = 6/2). However, in absolute terms, the income difference between the rich and the poor is larger in country B (6-2>3-1).
Relative measures of income inequality are based on proportions of a total amount, or on the ratio of one group or individual’s income to another.
An absolute measure of income inequality depends on the actual numeric distance between groups or individuals of the unit in question.
To illustrate, suppose individual A earned $10, and B $100, and then both experienced a 20% increase. Individual A earns now $12, and individual B $120.
Relative measures of inequality would register this movement as no change in distribution, as both incomes increased by the same percentage. However, in absolute terms, the difference in income has changed from $90 to $118.
Therefore, it would be reasonable to consider this change as an expansion of inequality or non-inclusive growth!
Unfortunately, nowadays the most commonly used measures of income inequality (both in academic literature and popular discussion) tend to be relative measures of inequality.
Can poor countries “really” catch up with the rich?
Sorry to disappoint, but my short answer is NO!
After two decades of faster growth in India, the gap between India and the US’s GDP per capita has grown in absolute terms!
Let me be more precise: If India’s GDP per capita were to continue to grow at 5% annually, and the US’s were to grow at 1.5.%, the absolute gap would not even begin to shrink for more than three decades! These average growth rates would need to continue for almost 70 more years before the two countries had an equal GDP per capita.
Then emerges another key question: Is it really possible for all less developped countries to equal current levels of production in advanced economies, given the resource and other environmental limitations?
I hope you enjoyed this post, please leave me your comments and questions. Also let me know if you would like me to share more teaching material on economics and finance.
Best wishes for New Year 2020!