Income inequality – a helicopter view

One of the most glaringly charged of all social issues concerns income inequality. A deep chasm divides opinion on how to address this issue among those who want to reform society.

In the course of decades of development, a lot of economic data on income inequality among countries have been collected.

It is useful to examine the available data before we go into a full-dress discussion of some of the relevant policy issues on income inequality, the conquest of poverty and economic growth.

“World-wide information on income inequality.” Data on income inequality are tracked in different countries through surveys of incomes received by individuals (or households) in terms of groups of the poorest individuals to the richest in the population.

Over the decades, the United Nations agencies have helped to refine methodologies and the generation of information. Much still needs to happen in making the statistical information uniformly reliable, but improvements have happened.

Among different measures of income inequality, the most popular metric is the “Gini index,” named after the statistician who invented the formula. The Gini index measures the extent to which the distribution of income or expenditure among individuals or households within an economy deviates from a perfectly equal distribution of income.

A Gini index of “0”(zero) represents perfect equality, while an index of “100” implies perfect inequality. Often, the Gini is represented as a ratio with a value from “0” to “1”. (Remove the percentage thru division by 100 of the Gini index, to get the Gini ratio. A ratio is a proportion.)

“Countries by measures of income distribution.” It is best to understand some of the important nuances by reference to groups of countries. A little knowledge could, however, lead to seriously wrong conclusions and interpretations.

To judge a country’s experience within a comparative framework of countries is a useful beginning approach. (Below, I rely on World Bank tables, some academic studies, and Wiki encyclopedia.)

“Countries with very unequal income distribution.” Countries from the Latin American region tend to have very unequal income distribution. The countries have Gini ratios that are above 0.50.

Brazil’s Gini ratio had peaked to 0.63 and in recent times is 0.55, so that income inequality has been reduced slightly. Chile and Colombia have numbers that are as high. The pattern is repeated among the smaller Central American countries.

Mexico and Argentina have the lowest Gini ratios, but recently, these are 0.48 and 0.44 which are still high Ginis. They used to have their ratios in the 0.5+ range.

A few countries in Africa follow this pattern of very high income inequality: South Africa, Botswana, Central African Republic, Zimbabwe, and Seychelles.

Hong Kong is the only Asian region which has a Gini ratio of 0.53.

“The world standard of income inequality?” The average or median statistic among all countries concerning income inequality measure would be close to the lower bounds of 0.40 to 0.49. When size of the countries in this group is taken into account, this is true. The inequality observed, however, is still high.

Countries from different regions and development levels are all included here: high growth poor countries; remarkably high performing East Asian countries; and also highly developed economies.

Among the highly developed countries, the United States has a Gini ratio of 0.48 and the United Kingdom, 0.45. These two countries are set apart from most of Europe where the Gini ratio is generally lower.

In Southeast Asia, Malaysia has the highest Gini ratio, at 0.46. This had fallen only slightly from 0.48 from a past measure. Thailand’s ratio has ranged from 0.4 to 0.46, but lately this has stabilized toward 0.4, implying improving incomes though still at a high Gini ratio.

Philippine Gini ratios have been in the range of 0.40 to 0.44, the last being the latest Gini reading. Income inequality has risen over the last three decades, ever so slightly but worse nonetheless.

The case of China (People’s Republic) is here too. In the early years when it started to embark on its remarkable market oriented reforms, the Gini was just below 0.3, at 0.29. The latest measure of the Gini for China is 0.47. The rise of income inequality in China has been more marked as its miracle annual growth rates of around 10 percent for three decades took place.

Russia’s case also reflects that of the Chinese experience. After the collapse of the Soviet Union, the country undertook a serious economic reconfiguration. Today, the Gini ratio for Russia is 0.41.

“Lower bounds of income inequality.” Income inequality is lower in a number of countries. The Gini ratios of these countries have a range from 0.30 to 0.39. A few of them are below 029. To this group belong three classes of countries:

(1) They are very poor and their level of development needs to go much higher in scale. Many of them are from Africa and from the South Asian sub-continent. Poorer countries are much more equal in incomes than richer ones, or those on the way to becoming much richer.

(2) They are countries that are either in the socialist-communist-central planning camps or were there before. Most of the former socialist countries have rising inequality, but have not attained the scale of growth of China. After the 1990s when communism fell, these countries have experienced rising income inequality.

(3) They are high income industrial countries that have grown in the social welfare tradition of Europe. The European Union countries represent an example of these countries. Through social programs and high rates of taxation, they have reduced their income inequalities. The European Union countries represent an example of these countries. The members of OECD (Organization for Economic Cooperation and Development, an organization of highly industrialized high income countries) also fall in this group that also includes Canada, Australia, Japan and South Korea. (To be continued) –Gerardo P. Sicat (The Philippine Star)