Much ado about rising inequality

In his "apostolic exhortation", Evangelii Gaudium, Pope Francis stated that "today we . . . have to say 'thou shalt not' to an economy of exclusion and inequality". Barack Obama, US president, has remarked that the result of technological, social and political change "is an economy that's become profoundly unequal and families that are more insecure". Pope and president are saying much the same thing. But are they right? What is the best response?

Between 1870 and 2000, distribution of incomes across the world's households became hugely unequal. But the determinants of inequality shifted radically over time: in 1870, income distribution within countries determined the bulk of the inequality among the world's households; by 2000, differences among countries determined the bulk of the by then far more unequal distribution. What mattered most then was not what you were, but where you were born.

Research at the World Bank suggests, however, that distribution across the world's households has in fact become less unequal since 2000. If global inequality has indeed fallen, that would be the first time in two centuries. This small reduction in inequality is the consequence of two offsetting forces: relatively fast growth of average incomes in some very large poor countries, notably China and India, and rising inequality within almost all countries, notably including China.

Two groups did relatively well between 1988 and 2008: the top 10 per cent of the global distribution (and especially the top 1 per cent) and those in the fifth to 70th percentiles from the bottom. Two other groups did poorly: the bottom 5 per cent and those from the 70th to 90th percentiles.

The picture is the result of three developments: first, the world's lower and middle-income groups (but not the poorest) did relatively well; second, the upper-middle income groups (made up, in large part, of the lower and middle-income groups of high-income countries) did quite badly; and, finally, the world's richest people did extraordinarily well.

Meanwhile, in most high-income economies distribution of incomes has grown more unequal over the past three decades. Particularly important for the US president is the fact that "since 1979 . . . our productivity is up by more than 90 per cent but the income of the typical family has increased by less than 8 per cent". This means "the basic bargain at the heart of our economy has frayed".

What, then, is the best response? First, globalisation has created opportunities for a large swath of humanity. Those opportunities need to be preserved and extended. The world's better-off should continue to help the poorer to prosper.

Second, the combination of globalisation with technological change, financial liberalisation and opportunities for rent extraction have generated highly unequal distribution of gains within nearly all countries. The Pope is right: this is socially corrosive. Unfortunately, the processes that generate the unequal distribution of gains undermined willingness and ability to respond effectively.

Third, domestic and global order depend on the ability of states to provide essential public goods. Partly for this reason, the obligation to help the relative losers and particularly the children of such losers is most pressing within countries. Otherwise, the sense of solidarity essential to sustaining trust and consent may be in peril.

Finally, countries should help one another. This is particularly true in the area of taxation.

The picture is not as bleak as many believe. On the contrary, humanity may be beginning to move away from the situation in which location largely determined life chances. But the challenges created by this very development are huge. The sharing of gains matters. It should not be ignored.

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