CityReads│All You Need to Know About the Global Inequality

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All You Need to Know About the Global Income and Wealth Inequality

Global top1%captured twice asmuch growth asbottom 50% since 1980.

Facundo Alvaredo, Lucas Chancel,Thomas Piketty,Emmanuel Saez, Gabriel Zucman. World inequality report 2018

Source:https://wir2018.wid.world/

World Inequality Report 2018 is based on WID.world, the most extensive database on the historical evolution of income and wealth distribution. Project regrouping more than 100 researchers over 5 continents. It is 100% transparent, open source, and reproducible.

It is also the first systematic assessment of globalization in terms of economic inequality. Despite high growth in emerging countries, global inequality increased since 1980. The top 1% captured twice as much global income growth as bottom 50%. Diverging country inequality trajectories highlight the importance of institutional changes and political choices rather than deterministic forces. This suggests much can be done in the coming decades to promote more equitable growth.

Here are the main findings about the global income and wealth inequality.

1 Global income inequality

Income inequality varies greatly across world regions. It is lowest in Europe and highest in the Middle East. Inequality within world regions varies greatly. In 2016, the share of total national income accounted for by just that nation’s top 10% earners (top 10% income share) was 37% in Europe, 41% in China, 46% in Russia, 47% in US-Canada, and around 55% in sub-Saharan Africa, Brazil, and India. In the Middle East, the world’s most unequal region according to our estimates, the top 10% capture 61% of national income.

In recent decades, income inequality has increased in nearly all countries, but at different speeds, suggesting that institutions and policies matter in shaping inequality. Since 1980, income inequality has increased rapidly in North America, China, India, and Russia. Inequality has grown moderately in Europe. From a broad historical perspective, this increase in inequality marks the end of a postwar egalitarian regime which took different forms in these regions.

There are exceptions to the general pattern. In the Middle East, sub-Saharan Africa, and Brazil, income inequality has remained relatively stable, at extremely high levels. Having never gone through the postwar egalitarian regime, these regions set the world “inequality frontier.”

The divergence in inequality levels has been particularly extreme between Western Europe and the United States, which had similar levels of inequality in 1980 but today are in radically different situations. While the top 1% income share was close to 10% in both regions in 1980, it rose only slightly to 12% in 2016 in Western Europe while it shot up to 20% in the United States. Meanwhile, in the United States, the bottom 50% income share decreased from more than 20% in 1980 to 13% in 2016.

US-Canada: average income grew by 63% btw 1980 and 2016, and bottom50% by 5%;

Europe: average income grew by 40%, and bottom50% by 26%.

The income-inequality trajectory observed in the United States is largely due to massive educational inequalities, combined with a tax system that grew less progressive despite a surge in top labor compensation since the 1980s, and in top capital incomes in the 2000s. Continental Europe meanwhile saw a lesser decline in its tax progressivity, while wage inequality was also moderated by educational and wage-setting policies that were relatively more favorable to low and middle-income groups. In both regions, income inequality between men and women has declined but remains particularly strong at the top of the distribution.

China vs. India: rise in inequality in both countries but was extreme in India, moderate in China. More investments in education, health, infrastructure for the bottom 50% in China. 

China: average income grew by 831%, and bottom50% by 417%;

India: average income grew by 223%, and bottom50% by 107%.

Diverging trajectories among similar regions highlight importance of policies.

At the global level, inequality has risen sharply since 1980, despite strong growth in China. The poorest half of the global population has seen its income grow significantly thanks to high growth in Asia (particularly in China and India). However, because of high and rising inequality within countries, the top 1% richest individuals in the world captured twice as much growth as the bottom 50% individuals since 1980. Income growth has been sluggish or even zero for individuals with incomes between the global bottom 50% and top 1% groups.

The rise of global inequality has not been steady. While the global top 1% income share increased from 16% in 1980 to 22% in 2000, it declined slightly thereafter to 20%. The income share of the global bottom 50% has oscillated around 9% since 1980. The trend break after 2000 is due to a reduction in between-country average income inequality, as within-country inequality has continued to increase.

The geographical breakdown of global income groups changed significantly between 1990 and 2016.

2 Why does the evolution of private and public capital ownership matter for inequality?

Over the past decades, countries have become richer but governments have become poor. The ratio of net private wealth to net national income gives insight into the total value of wealth commanded by individuals in a country, as compared to the public wealth held by governments. The sum of private and public wealth is equal to national wealth. The balance between private and public wealth is a crucial determinant of the level of inequality.

There has been a general rise in net private wealth in recent decades, from 200–350% of national income in most rich countries in 1970 to 400–700% today. This was largely unaffected by the 2008 financial crisis, or by the asset price bubbles seen in some countries such as Japan and Spain. In China and Russia there have been unusually large increases in private wealth; following their transitions from communist- to capitalist-oriented economies, they saw it quadruple and triple, respectively. Private wealth–income ratios in these countries are approaching levels observed in France, the UK , and the United States.

Conversely, net public wealth (that is, public assets minus public debts) has declined in nearly all countries since the 1980s. In China and Russia, public wealth declined from 60–70% of national wealth to 20–30%. Net public wealth has even become negative in recent years in the United States and the UK , and is only slightly positive in Japan, Germany, and

France. This arguably limits government ability to regulate the economy, redistribute income, and mitigate rising inequality. The only exceptions to the general decline in public property are oil-rich countries with large

sovereign wealth funds, such as Norway.

3 Global wealth inequality

Wealth inequality among individuals has increased at different speeds

across countries since 1980. Increasing income inequality and the large transfers of public to private wealth occurring over the past forty years have yielded rising wealth inequality among individuals. Wealth inequality has not, however, yet reached its early-twentieth-century levels in Europe or in the United States.

The rise in wealth inequality has nonetheless been very large in the United States, where the top 1% wealth share rose from 22% in 1980 to 39% in 2014. Most of that increase in inequality was due to the rise of the top 0.1% wealth owners. The increase in top-wealth shares in France and the UK was more moderate over the past forty years, in part due to the dampening effect of the rising housing wealth of the middle class, and a lower level of income inequality than the United States’.

Large rises in top-wealth shares have also been experienced in China and Russia following their transitions from communism to more capitalist economies. The top 1% wealth share doubled in both China and Russia between 1995 and 2015, from 15% to 30% and from 22% to 43%, respectively.

4 What to do to address the global inequality？

The future of global inequality depends on convergence forces (rapid growth in emerging countries) and divergence forces (rising inequality within countries). No one knows which of these forces will dominate and whether current trends are sustainable.

We project income and wealth inequality up to 2050 under different scenarios. In a future in which “business as usual” continues, global inequality will further increase. Alternatively, if in the coming decades all countries follow the moderate inequality trajectory of Europe over the past decades, global income inequality can be reduced—in which case there can also be substantial progress in eradicating global poverty.

Tackling global income and wealth inequality requires important shifts in National and global tax policies. Educational policies, corporate governance, and wage-setting policies need to be reassessed in many countries. Data transparency is also key.

First, tax progressivity is a proven tool to combat rising income and wealth inequality at the top.

Second, a global financial register recording the ownership of financial assets would deal severe blows to tax evasion, money laundering, and rising inequality.

Third, more equal access to education and well-paying jobs is key to addressing the stagnating or sluggish income growth rates of the poorest half of the population.

Fourth, governments need to invest in the future to address current income and wealth inequality levels, and to prevent further increases in them.

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