Gap between rich and poor 'keeps growing'

21May 2019
The Guardian
Gap between rich and poor 'keeps growing'

The gap between the rich and the poor keeps widening, the Organisation for Economic Cooperation and Development (OECD) says.

By Anthony Reuben   

In its 34 member states, the richest 10 per cent of the population earn 9.6 times the income of the poorest 10 per cent.

There is no standard measure of inequality, but most indicators suggest it slowed or fell during the financial crisis and is now growing again.

The OECD warns that such inequality is a threat to economic growth.

The report says this is partly because there is a wider gap in education in the most unequal countries, which leads to a less effective workforce.

OECD member states include most of the European Union as well as developed economies such as the US, Canada, Australia and Japan.

One of the factors that the OECD blames for growing inequality is the growth in what it calls non-standard work, which includes temporary contracts and self-employment.

The OECD says that since the mid-1990s more than half of all job creation in its member states has been in non-standard work. It says that households dependent on such work have higher poverty rates than other households and that this has led to greater inequality.

It also says that tax and benefit systems have become less effective at redistributing income.

On the other hand it says that one of the factors limiting the growth in inequality has been the increasing number of women working.

The report says that one of the few areas where inequality has not been growing in the last 30 years has been Latin America, although levels of inequality were much higher there to start with.

Analysis: Robert Peston, economics editor

The main theory the OECD puts forward for why inequality and growth are negatively correlated is that poorer people invest less in their own education and self improvement - which is why its main anti-inequality prescriptions are government investment in skills and education, and a focus on a promoting better quality jobs.

Strikingly it isn't saying that the best way to greater equality and faster growth is to soak the rich. Instead it wants activism focused on raising the living standards of the poorest, especially the poorest 40 per cent.

It calculates, therefore, that if living standards in the UK for poorer people were raised to the relative levels of France - that if so-called "bottom inequality" was reduced by half of a standard deviation (to use the jargon) - annual growth in national income or GDP would rise by 0.3 per cent every year for 25 years.

That's not to be sniffed at. It would represent increasing our current growth rate by around 13 per cent.

One of the best-known commentators on inequality is Prof Joe Stiglitz from Columbia Business School. He told BBC News that the problem was not just with lack of training and education.

"What we've seen, particularly in the last 15 years, is that even those who are college graduates have seen their incomes stagnate. The real problem is the rules of the game are stacked for the monopolists, the CEOs [chief executives] of corporations."

"CEOs today get pay that's roughly 300 times that of ordinary workers - it used to be 20 or 30 times. No increase in productivity justifies this change in relative compensation."

Behind the OECD averages there is a considerable range in the degrees of inequality in each country.

Household wealth

The Gini coefficient is a figure showing how well income is distributed across a country. A coefficient of zero would mean everybody was paid the same amount, while one would mean all the money was earned by one person.

The average across the OECD was 0.32. Chile had the highest at 0.50, indicating that income distribution there was the most unequal, while Denmark was the lowest at 0.25, making it the most equal.

The UK and US were both near the top of the rankings with coefficients of 0.35 and 0.40 respectively.

One of the report's authors, Mark Pearson from the OECD, told BBC News: "It's not just income that we're seeing being very concentrated - you look at wealth and you find that the bottom 40 per cent of the population in rich countries have only 3 per cent of household wealth whereas the top 10 per cent have over half of household wealth."

"So that combination of both wealth and income being very concentrated, it means there is no equality of opportunity in many societies and that undermines our growth."

Research from the Institute for Policy Studies found that in 2014, bonuses paid to Wall Street employees had been double the total annual pay earned by all Americans who worked full-time at the federal minimum wage.

I crunched the numbers and it turned out that the same was true for the UK.

But is this actually a good measure of inequality? If a load of people earning minimum wage suddenly received a pay rise then bonuses would become an even greater multiple of minimum wage salaries.

One of the most commonly used measures of inequality is the Gini Coefficient, which gives countries a score between zero and one. A score of zero would mean that everybody in the country earned the same amount while one would indicate that all of the country's income was earned by one person. It can also be used to measure wealth inequality.

The Gini Coefficient is more than 100 years old now, and attention in inequality has been turning recently to measures that concentrate more on comparing extremes in the population - for example, looking at what proportion of wealth is held by the richest 1 per cent of the population and what proportion is held by the bottom 50 per cent.

Earlier in the year, Oxfam predicted that the combined wealth of the richest 1 per cent would overtake that of the other 99 per cent of people next year. There were problems with the way the charity extrapolated that conclusion from previous years' figures, but the conclusion was not implausible.

The figures were based on some research by Credit Suisse, which estimated the distribution of wealth across global populations.

A third way to think about inequality is in terms of poverty measured by relative incomes.

The Office for National Statistics (ONS) had figures out on Wednesday based on the definition that people were in poverty if their income was below 60 per cent of the median level (to find the median income, line up all the people in the country in order of income and take the middle one).

It found that almost a third of the UK population had experienced poverty in at least one of the years between 2010 and 2013, which is very high by European standards.

The OECD sets out a summary of what has happened to examples of all three of these measures. Across its 34 member countries, the Gini Coefficient rose gradually from 1996, fell slightly for the financial crisis and then resumed its upward path.

Relative-income poverty grew steadily over the period and a comparison of the top 10 per cent and bottom 10 per cent showed growing inequality that paused briefly for the financial crisis before accelerating.

So while there are a number of different ways of calculating inequality, each of which have their own strengths and weaknesses, they seem to agree that inequality has been growing in recent years.

But these measures tell us little about other inequalities such as health, education or opportunities.

A student at university would be expected to have a low income and indeed negative wealth because of student debt, but would not necessarily be in poverty.

In health, the ONS found a gap of 18 or 19 years in the life expectancy of people in the most and least deprived areas.

And the OECD talks about how wealth and income inequality cause overall economic problems because they affect access to education for the next generation.

Why is the development gap increasing?

The development gap is the socio-economic and political division that separates the rich developed countries and the poorer developing countries.

The development gap is caused by a complex interplay of factors and, consequently, has no specific answer to remedy or ameliorate the chasm that separates groups of countries; Causation is a combination of demographic, environmental, political and cultural factors.

Having these different approaches to explain why the gap is increasing will be difficult due to these engaging topics. In the current climate the development gap is substantial in size. For instance, 1.3 billion people live on less than $1 a day around the world and that it would only cost $6 billion to educate the world to primary school standard; yet $50 billion is spent on cigarettes in Europe per year.  

The increasing development gap has many complex interplaying reasons, one of a range of factors is international aid.

Aid is assistance or support by means of skills, materials and/or money between two countries; it has both negative and positive impacts. By a country receiving aid, it can begin to enter a vicious circle, or cycle of poverty, of which it can become dependent on aid.

For example, Nicaragua in Central America became unable to feed itself after the injection of America food aid after the devastating series of Hurricanes in the late 1990’s. Emergency food aid is paradoxically a double edged sword. 

Arguably, this not only damages the country economically, it also strips the countries power in being able to move higher up in the development pathway. In return, this would increase the development gap between the donors and recipients as the donor country would progress and the recipient would be trapped in a recovery cycle.

However, we cannot, or should not over generalize and say that all aid is bad. When in fact some aid does help countries in need get out of a crisis scenario, such as the provision of humanitarian aid in the form of emergency shelters in the recent Sumatran Earthquake in September 2009.

However, many aid grants come with strings attached. An example of an agreement that comes with the aid would be the donor countries then get a comment in the countries policies.

This places a hold over the country which can further stunt the growth of the economy. As a result, this further increases the development gap. Oxfam says that aid does more good than bad. They say that for every £1 donated, £2 is paid back to the donor. This shows that both countries may have mutual benefits.

This still does not explain the theory behind the development gap. One explanation of the widening of the development gap is called Rostow’s model of economic development.

The model shows that a country has to pass through different stages of economic development to reach a developed status. These stages were fixed and had layers, such as the federal system.

There were factors that were not included in these stages such as rates of population growth and political changes which are huge factors of development.

It explains why there is an increasing development gap, ie some regions are trapped in the early stages of development , such as sub-Saharan African countries like Niger and Chad.  While others, for example, the USA and the BRIC’s, are at the top of the model; they are the most developed. This theory focused mainly on countries being able to develop through stages that involved the economy and society transforming itself as it drove towards a mature capitalist state and did not take into account the negative cycles that can impede development.

This theory, un question, is the poverty cycle which focuses more on the underdeveloped countries which get trapped in a positive feedback loop. Countries get trapped in these poverty cycles for a range of reasons often underpinned by a lack of capital.

Although this theory does account for socio-economic and political factors, it assumes the country is isolated and has no global interactions such as aid or Overseas Direct Investment through the emergence of TNC branch plants eg Botswana’s rapid extrication from poverty has come hand in hand with its increasing ability to use foreign investment to exploit its wealth of natural resources. Many countries have proved these poverty cycles wrong such as the rapid emergence of India and South Korea.

Global players such as large TNCs or other big players in international trade like the world trade organization (WTO) can impact the development gap. Some TNCs are so large that they can match a countries wealth.

TNCs are continually trying to develop so that their share holders can make a profit.

As TNCs develop, they offer economic opportunities to developing countries for example, obtaining resources or finding new assets (see point above about Botswana). A direct economic impact of a TNC is dependency.

Countries may become dependent on investment made by some TNCs in the host country. Therefore, if the TNC was to move somewhere else, that country would be heavily impacted economically. This is potentially a negative impact on the country, as they always under threat. BP, based in the UK, is 4th ranked by the top 100 TNCs.

There are many organizations which try to reduce the size of the development gap. One organization which works towards reducing the gap is the world trade organization.

It promotes trade between the rich developed countries and the developing countries which offer developing countries economic gain. Another organization is named the international monetary fund.

The organization provides investment so that is can improve the standards of economies. Their approach to investment is seen as a top down. Other non government organizations include Unicef and Oxfam.

They help raise awareness of global differences and help to provide good aid and to assist developing countries. 

The role of the UN is also significant (brief synopsis of MDG-and evaluation of stumbling blocks eg Education critical/progress re role of women hitting the buffers-failure to impact on much of sub Saharan Africa.

Trade patterns are another factor to count as to the reasoning of why the development gap is increasing.

In general, increasing the number of exports a country does will narrow the development gap. For example, Africa’s international export value was $250 billion in 2005.

While western Europe had an export value of $3000 billion in 2005. This shows what part of the development gap is but also can explain why the gap is increasing; countries are not able to export enough goods to generate income. Arguably, rich countries set the price of the values which are imported to them. Therefore, they are able to dominate and dictate to other poorer countries. 

An example of this is the coffee industry. Ethiopia, Africa, is said to be the birthplace of coffee production.

It is the largest exporter in Africa of which 15 million people depend on the income the trade produces (67 pc of Ethiopia’s trade is coffee). 

This is where we can see how the development gap is increasing. The rich countries such as USA buy coffee from them, for a very low price. This leaves the USA with the profits while the coffee producers receive next to nothing for their work.

This shows how USA has a tight grasp on coffee producers, of which they can easily exploit.

Africa’s share of the world trade is 1 per cent, if this raised to just 2 per cent, it would be the 5 times the amount that Africa receives in aid a year.

As discussed earlier, this economic boom would boost Africa along Rostow’s model of development, therefore, would reduce the development gap.

Overall, the development gap has many more reasons of cause of the increase. However, these are just a few examples which influence the gap.

Such as, trade patterns, international aid and global players such as TNC’s. There are also models to explain the gap like Rostow’s development model.

The gap is generally caused by rich countries being able to exploit the poorer countries as they have the dominant political power to be able to do so.

As a result, the poorer countries suffer from lack of resources and spiral into poverty cycles which widen the development gap. Perhaps in the future………..we need to recognize……we must as consumers…….