Daily Management Review

Are unequal income good or bad for the economy?


The gap between rich and poor is growing in many countries and economists are studying the consequences of this process. Experts of the IMF, whose spring session begins in Washington, are also participating in the studies.

The view of economists is turned to figures, so most of them do not see problems in income inequality and personal property. On the contrary, people work more when they want to improve their situation. Yet, redistribution of income reduces motivation for work.

But this view has changed in recent years. The International Monetary Fund (IMF), which is often blamed for the fact that its policy contributes to increasing property stratification in society, recently warns about its negative consequences. The Organization for Economic Cooperation and Development (OECD) looks at the matter in this way, except that its arguments lie in the field of economics, not politics.

"If the income gap grows, then economic growth decreases," the OECD study said. The IMF comes to a similar conclusion: if the share of income of 20 percent of the richest people in the total volume grows, then in the medium term, the growth of the economy will decrease.

OECD experts estimate the damage to economic growth over the past 25 years in as much as 8.5 percent of GDP. However, supporters of redistribution found hope. Finally, evidence is presented that the struggle against inequality is not only ethically and politically justified, but also makes sense for development of the economy.

"All reasonable people being in favor of a greater redistribution? Too beautiful to be true," says Holger Stichnoth, head of the research group for distribution studies at the Center for European Economic Research (ZEW) in Mannheim.
Experts hurried to criticize the theory - it concerned the methods of research, the amount of data, the studied period of time. Ultimately, according to Stichnoth, it remains unclear whether there is a positive or negative relationship between inequality and economic growth. The expert sees the dilemma of the social sciences in the absence of an unambiguously proven causal relationship.
Meanwhile, the debate continues. Recently, IMF researchers presented new analyzes, refined previous results and attempted to determine the exact moment from which inequality starts to have a negative impact on the economy.

Inequality is increasing

Some conclusions do not cause doubts among economists - for example, the fact that families with low incomes invest less in education, and thus have even less chances in the labor market, which requires highly qualified staff.

The fact that inequality in most countries has increased is also not a question. The IMF calls this "one of the major challenges of our time." OECD confirms: the gap between rich and poor has reached the level of 30 years ago in the 35 countries of the organization. 

A similar trend can be traced all over the world. "Inequality of incomes in recent decades has grown in almost all regions of the world," says the World Inequality Report 2018. Inequality remained stable only where it was already "extremely large" - in the Middle East, in Africa south of the Sahara and Brazil.

So, everything is hopeless? The rich will be even richer, and the poor - even poorer? No, Stichnoth says: "Globally, those countries that used to be very poor in the last 30 years began to massively liquidate the backlog. Very rich as well as middle class in China and other Asian countries benefited most of all from this process." 

In China and India, the inequality between the poor and the rich is enormous. Still, the gap between these countries has become less in terms of income from the United States or Europe. On a global scale, the level of inequality has declined. 

Particular countries are less unfair than the world as a whole

This can be seen in the Gini index, which represents concentration of income in the form of a numerical value. In theory, this indicator is located in the range between 0 (uniform distribution) and 100 (all owned by one person). Recently, the Gini index around the world was 65, which indicates a significant improvement in the situation, according to a study by the Institute of World Economics Peterson. This is the consequence of the economic growth of many poor countries in the past, primarily in Asia. Until 2035, the stratification of society in the world may be further reduced, as the researchers expect, to the Gini index of 61. 

However, even then the global index will be much higher than in some countries, such as Germany (29), the United States (39), or China (47). The world as a whole is more unfair than particular countries.

And even when global inequality declines, "this is a very weak consolation for those who will not get anything out of this," says Holger Stichnoth. This applies to people with low and middle income in Europe and the United States. On a global scale, they appear to be rich, but their incomes have almost not increased at all, according to the World Inequality Report. Other studies have even recorded a drop in income. 

Global equalization, while increasing inequality within individual countries, is also one of the possible explanations for the strengthening of populism, nationalism and protectionism. "Citizens can lose confidence in state institutions, and this undermines cohesion in society and faith in the future," write the IMF experts.

source: dw.de