Inequality Rising Worldwide

The news on inequality is both good and bad. While global income disparity has narrowed significantly over recent decades thanks to robust economic growth in many low- and middle-income economies, gaps within countries have widened significantly.

In developed countries, the average income share of the richest 10% of the population has increased to 35% today from 29% in the 1980s. In a large part of developing Asia, including China, India and Indonesia, the region's three most populous economies, inequality has worsened since the 1990s, according to Asia Development Blog data, adb.org reported.

Reducing inequality is a key priority for governments. If left unfettered, it can dampen the poverty-reducing impact of economic growth and even undermine growth itself. Indeed, if inequality had remained stable in Asia, economic growth between 1990 and 2013 would have lifted an additional 165 million people out of extreme poverty. In OECD countries, rising inequality is estimated to have knocked nearly 5 percentage points off cumulative growth between 1990 and 2010.

High inequality can affect growth in several ways. It can cause misallocation of human capital, create social tensions, hollow out the middle class and damage the quality of a country's institutions. Empirical studies link inequality to increased crime and violence which can in turn hurt investment.

It can cause political problems too, as public pressure grows on governments to rebalance the scales. In response, politicians may favor populist policies that benefit low-income groups over the short term, but which in the long run can hold back efficiency and growth.

Recent policy discussions have focused on technological change, globalization and market deregulation as key contributing factors to rising inequality worldwide. These forces have been primary drivers of global economic growth in recent decades, but this has not benefited everyone equally.

Divisive Factors

Growth has favored skilled over less-skilled workers, and gains have been skewed to favor capital over labor and certain geographical locations over others.

Technological change can increase the productivity of skilled workers faster than that of manual workers, thereby reducing demand for the latter while increasing wage differentials and skewing incomes. It can also reduce demand for labor overall, pushing down real wages relative to returns on capital such as machinery, computers and software, and reducing the share of national income going to labor.

Globalization and trade integration can alter demand for skilled and manual workers and change wage differentials. Financial integration can expand access to finance for the poor, but increase exposure to global financial market volatility, which often hurts the poor more than the rich.

Further, those with higher incomes and assets often have disproportionately wider access to financial products and services.

Market deregulation can support economic growth but also widen income gaps. Labor market reforms may reduce the influence of trade unions or soften employment protection, thereby weakening the bargaining position of workers.

A Complex Challenge

Numerous studies offer empirical evidence showing how income distribution is affected by a person's relative access to skills and capital as well as by where they live. In many Asian countries, the amount of inequality due to differences in educational attainment increased significantly during the 1990s and 2000s. In China, it increased from less than 10% to more than 25%; from 20% to 30% in India; and from 30% to 35% in the Philippines. During the same period, the share of labor income out of value added in manufacturing declined in China, India, Indonesia, Singapore and the Republic of Korea.

In developing Asia, spatial inequality, as manifested in gaps between different areas, particularly urban versus rural districts, has been a key driver of rising income inequality. In China, spatial inequality accounted for more than 50% of total income inequality in 2007, though recent data suggest that regional disparities and urban-rural income gaps have begun to decline.

Rising inequality is a complex challenge. The solution is to introduce policies that do not slow down economic growth, but spread its benefits more equitably.