Economics

How to End Global Income Inequality


Children playing outside a primary school in the village of New Pohan, Liberia

Photograph by Canadian Press via AP Photo

Children playing outside a primary school in the village of New Pohan, Liberia

With a speech on inequality last week, President Obama sought to kick-start a national debate about the growing gap between America’s rich and poor and what to do about it. Since 1979, U.S. productivity has increased by more than 90 percent, but the income of the typical family has increased by less than 8 percent. Worse, inter-generational inequality is huge. “A child born in the top 20 percent has about a two-in-three chance of staying at or near the top. A child born into the bottom 20 percent has a less than one-in-20 shot at making it to the top,” Obama noted. Behind growing inequality lay the impact of technology, greater competition, slashed taxes on the rich, limited investment in public goods, a lagging minimum wage, and weaker unions, argued the president. The unspoken implication: A growing wealth gap wasn’t primarily because of the harder work of the people at the top.

What the president didn’t note is that almost everything he suggests about the U.S. income gap is also true about income distribution worldwide. This has implications for how we should think of fighting global poverty.

The comparatively good news about global incomes over the past 20 years—as opposed to incomes in the United States—is that the largest proportional increases have been enjoyed by those in the middle. Global income expert Branko Milanovic estimates (PDF) that worldwide, consumption for the median inhabitant increased about 80 percent over the 1998-2008 period, compared to around a 60 percent increase for the world’s highest-spending 1 percent.

Of course that still leaves space for massive global inequality. The median person in the world today (give or take, the 3,564,000,000th person) lives on about $1,225 a year (PDF) according to Milanovic. He estimates that the poorest 5 percent of Americans are still living on more than that—around $3, 000 to 4,000 per capita per year. Only the richest 5 percent of people in India live on the same amount.

Because of the immense level of inequality, it is worth looking at where consumption is growing in absolute terms. Peter Edward of Newcastle University and Andy Sumner of Kings College London estimate (PDF) that the planet’s population is consuming about $10 trillion more than they were in 1990—that’s about an 80 percent increase. To put that in perspective, $10 trillion is approximately the same as the total value of current U.S household consumption. Though median incomes in the U.S. have pretty much stagnated, a lot of the increase in planetary consumption has been caused by increased spending by people in the U.S. and other wealthy countries.

According to Edward and Sumner, nine out of 10 of the world’s richest 1 percent—the 71 million people in households that enjoy incomes somewhere around $250,000 and above—live in North America and Europe. And the richest 1 percent of the planet’s population accrued $1.5 trillion of the global increase in consumption from 1990 to 2010. Compare that to the 35 percent of the world that lived on less than $2 a day in 2010. Collectively, they got about $0.5 trillion in increased consumption. Give or take, each member of the bottom third of humanity got $1 in increased consumption for each $100 of increased consumption by the richest 1 percent. Or consider another metric: A little more than 3 percent of the world live on $50 or more a day. Yet that 3 percent accounted for 29 percent of consumption growth from 1990 to 2010.

In order to close the gap between the global rich and poor, policymakers need to understand how the rich got that way in the first place. Over the last 20 years, there isn’t much evidence that the countries home to the top of global income distribution started saving so much more (PDF) or working so much harder. The vast majority of the global rich got their outsized portion of increases in planetary consumption because they started off rich in 1990. Many were helped along the way by reduced tax rates and—thanks to globalization—more opportunities to make money off investments in rapidly growing developing countries. It is great that this investment is occurring—without it the world’s poor would be poorer. But the distribution of benefits from that investment isn’t an act of God. It’s a decision of man— and it can be changed.

Among the world’s poorest people, there’s evidence of increased and considerable sacrifice by many to improve the earnings potential of their children. By the tens of millions, parents have been taking their kids out of the fields and putting them into classrooms, forgoing their children’s help today in the hope that schooling contains the secret to better prospects for their futures. Primary school enrollments in Sub-Saharan Africa have risen from 70 percent in 1990 to 100 percent today. Secondary enrollment in the region has climbed from 22 percent to 41 percent over the past 21 years. (That the investment is so considerable for poor families is one reason it is so inexcusable that the quality of education is so low in many of the countries involved).

Perhaps it is time to shift a little bit more of global consumption gains to the people who have been working the hardest. There are relatively simple ways to do that, involving tax policy and transfers. Giving money directly to the world’s poorest isn’t a panacea—it won’t guarantee faster economic growth in the countries where they live, or fix the quality of public services. But you could approximately double the incomes of those living on less than $1.25 a day worldwide by transferring to them one-third of the consumption growth enjoyed by the world’s richest 1 percent since 1990. Think of it as bringing the consumption levels of the global 1 percent back to where they were around 2003 or 2004, in return for wiping out global absolute poverty. Is that such an unreasonable tradeoff?

Kenny is a senior fellow at the Center for Global Development and author of The Upside of Down: Why the Rise of the Rest is Great for the West.

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