Wealth inequality continues to grow, according to the 2018 edition of the World Inequality Report. In the past three decades, 28% of the aggregate increase in real incomes in North America and western Europe was captured by the top 1% of earners. The bottom half saw less than 10% of this increase. Inequality has also settled at alarmingly high levels in sub-Saharan Africa and the Middle East.
This crisis was never inevitable. Middle-class wealth reached its peak in the mid-1980s. But it’s been ravaged by stagnant incomes, and unstable property and investment markets. Growing consumer debt is also a problem. Failed policy and weak political will are two culprits: more creativity and effort seems to have gone into election-year soundbites and platitudes than into substantive solutions.
Many developing nations have targeted poverty alleviation and improved living standards as ultimate policy goals. While China has achieved poverty alleviation on a historic scale, policy obstacles remain. These include bureaucratic inefficiency and failed policy implementation. India has likewise made progress in alleviating poverty, though it lags significantly behind China.
Inequality hampers growth by leaving human potential unrealised. The middle class provides a crucial market for consumer goods and services, which in turn creates jobs. The cycle is interrupted when profits are excessively retained rather than reinvested into further capacity—such as strong health and education sectors. Market purists argue simplistically that there should be no constraint to profiteering within legal bounds. Government policy is needed to balance private and social interests.
China and India
The ability of China, India, and other developing countries to end poverty lies with job creation. Industrial jobs replace agricultural jobs, lifting incomes as labour is shifted to higher value-added work. However, this continuing shift also exacerbates the growing inequality gap. The World Inequality Report points out that in China, this gap is geographic. Coastal urban regions are leaving the more rural interior far behind.
Between 1978 and 2015, the report shows, the urban share of national income increased from 30% to 80%. Today urban households earn 3.5 times more than rural households. Two Chinas are emerging. One is urban, educated, and mobile. The other is isolated, immobile, and tethered to outdated livelihoods and social assistance.
India, meanwhile, is expected to be the world’s fastest-growing large economy in 2018. It’s now home to more than 200,000 millionaires and over 100 billionaires. India’s population of 78 million who earn $10 per day are considered “middle class” by the National Council of Applied Economic Research.
By World Bank estimates, 270 million Indians—that’s nearly 20% of the population—were considered poor as of 2012. India also saw the fastest rise in inequality of all major world regions between 1980 and 2016, and 55% of the country’s income share is in the hands of the wealthiest 10%. There is little hope that these discouraging trends can be reversed. Across the developing world, blunt policies are not only proving ineffective at reducing poverty. They are also arguably widening the wealth gap.
