by Kanes
Income levels across countries have been both diverging and converging. On account of its very high economic growth, the ratio of per capita income of East Asia and the Pacific to that of high income OECD countries has improved from around one-tenth to nearly one-fifth over the period 1960-1998. The relative income of South Asia worsened in the sixties and seventies but improved in the eighties and nineties, but the ratio has worsened from about one-eighth to one-tenth in the same period. The income ratio of Latin America to high income countries also worsened from about half to about one-third.

In Sub-Saharan Africa the picture shows a rapid deterioration with the per capita income worsening from one-ninth to one-eighteenth. Thus, it is only in East Asia that per capita incomes increased and the income ratio between them and high income countries improved; in almost all other developing countries the income ratio worsened. It is also significant that while there was a reduction in the relative differences between high income and East Asian countries, absolute gaps in per capita incomes have increased in this period. The income gap between East Asia and the high income countries thus widened from $ 6,000 in 1960 to more than $ 13,000 in 1998. ( See Table I )

Income gaps among countries

The gap between the GDP per capita of high income OECD countries and that of developing countries in 1999, as shown by the table, is $ 22,520 and the gap between the high income countries and the lowest income (Sub-Saharan African) countries is even higher — $ 24,410.

Income Inequality

Inequality of income in the world is very high. In 1993 the poorest 10 per cent of the world’s people had only 1.6 per cent of the income of the richest 10 per cent. The richest 1 per cent of the world’s people received as much income as the poorest 57 per cent. The richest 10 per cent of the US population (around 25 million people) had a combined income greater than that of the poorest 43 per cent of the world’s people (around 2 billion people). Around 25 per cent of the world’s people received 75 per cent of the world’s income.

While incomes are unequal between the developed and developing countries and between developing countries themselves, it is important to note that incomes are unequal within countries and further incomes have become more unequal in the last fifty years in most of the countries. A study of 77 countries with 82 per cent of the world’s population shows that between the 1950s and the 1990s, income inequality rose in 45 of these countries or 58 per cent while it fell in only 16 or 21 percent; in the remaining 16 countries there was no clear trend either way.

Inequality of income in the nineties

Perhaps the greatest equality of income or the least inequality of income is in Japan and the Scandinavian countries where the poorest 10 per cent of the people have about one-fifth of the income of the richest 10 per cent. They are followed by the larger countries of Western Europe: Italy one-sixth, Germany one-seventh and France one-ninth. In the UK, the poorest 10 per cent have one-tenth of the income of the richest 10 per cent and consequently it is more unequal than Continental Europe. The most unequal distribution of income in the developed countries is in the USA where the income of the poorest 10 per cent is nearly one-seventeenth of that of the richest 10 per cent. In Russia inequality is even greater with the poorest 10 per cent receiving one-twenty third of the income of the richest 10 per cent.

Among developing countries, Latin American countries have the highest income inequality. 13 of the 20 countries with data for the 1990s show that the poorest 10 per cent had less than one-twentieth of the income of the richest 10 per cent. In Honduras, for example, the income of the poorest 10 per cent was one-one hundred and twentieth of that of the richest 10 per cent and in Brazil it was nearly one-fiftieth and Mexico one-twenty sixth. Many countries in Sub-Saharan Africa have higher income inequality; in 16 of the 22 countries with data for the 1990s, the poorest 10 percent of the people had less than one-tenth of the income of the richest 10 per cent, and in 9 less than one-twentieth. The poorest 10 per cent had one-eighty fifth of the income of the richest 10 per cent in Guinea-Bissau, one-forty third in South Africa and one-twenty-fifth in Nigeria. (See Table II)

East Asia and the Pacific show much variation. The poorest 10 per cent of the people have one-twenty-second of the richest 10 per cent in Malaysia, one-sixteenth in the Philippines and one-twelfth in China and Thailand; on the other hand in South Korea, the poorest 10 per cent have one-eighth of the income of the richest 10 per cent and in Indonesia one-seventh. South Asia has the lowest inequality of income among developing countries; the poorest 10 per cent of the people receive one-seventh to one-eighth of the income of the richest 10 per cent in Pakistan, Bangladesh and Sri Lanka, while the comparable figure is slightly above one-tenth in India.

Negative Aspects of Inequality

Mainstream economists have treated inequality, at worst, as a necessary evil, helping to enhance growth by concentrating income among the rich, who save and invest more and by creating incentives for individual to work hard, innovate and take productive risks. But income inequality matters and needs more attention than it has received in the recent past. It is directly related to poverty as generally, children of the poor have less opportunity and income mobility than those of the rich. In South Africa for instance, 63 per cent of the households in poverty in 1993 were still there in 1998 while 60 per cent of the households in the highest income category in 1993 was still there in 1998, indicating limited income mobility. On the other hand, there was downward income mobility in Russia in the late nineties when the rich became less rich or poor. The UN Human Development Report 2001 highlights the negative aspects of inequality as follows:

"Inequality can exacerbate the effects of market and policy failures on growth and thus on progress against poverty. That makes inequality a special problem in poor countries where imperfect markets and institutional failures are common. For example, where capital markets are weak, poor people lacking good collateral, will be unable to borrow. Their potential to start small businesses will be limited reducing overall growth and limiting opportunities for poor people. Though growth is not always sufficient to advance human development and reduce income poverty, the experience of China, the Republic of Korea and other countries or East Asia suggest that it makes a big contribution. Finally, there is the arithmetic reality. Even if there is growth and poor people gain proportionately from that growth, the same growth rate buys less poverty reduction where inequality is high to start with.

Concentration of income at the top can undermine the kinds of public policies — such as support for high-quality universal public education — that are likely to advance human development. Populist policies that generate inflation hurt poor people in the long run. Artificially low prices for water and sanitation mean that bankrupt public utilities never expand to poor neighbourhoods. If rich people support industrial subsidies or cheap loans for large landowners, that may reduce growth directly as well. Developing and implementing good social policies is especially difficult where inequality takes the form of concentration at the top combined with substantial poverty at the bottom — and thus the absence of a middle class that demands accountable government.

Inequality is likely to erode social capital, including the sense of trust and citizen responsibility that is key to the formation and sustainability of sound public institutions. It can undermine participation in such common spheres of community life as parks, local sports leagues and parent-teacher associations of public schools. Street crime undermines communal life and differences in income inequality across countries are closely associated with differences in rates of crime and violence.

Inequality may over time increase a society’s tolerance for inequality. If global pressure lead to increases in wage differences (for example, as the salaries of the most skilled and internationally mobile people rise), the social norm for what wage gap is acceptable may eventually shift. If inequality matters for any of the reasons above, the possibility that it can worsen matters too".