Global Economic Inequality–and What Might Be Done About It
Income inequality is a global issue that has become more prominent in recent years. As the top 1 percent now own 40 percent of all national wealth, economists and politicians have been debating solutions for decreasing this growing wealth disparity and increasing the economic prospects of the lower and middle classes. While economists and social scientists tend to disagree about the best solutions for this dilemma, the Czech Republic, Denmark, Slovenia and several other nations have made incredible strides in containing or decreasing income inequality (Business Insider, Vanity Fair). To learn more, view the infographic below:
What Is Income Inequality?
High levels of poverty and disparate wealth distribution are the clearest signs of income inequality. According to Inequality.org, “income inequality refers to the extent to which income is distributed in an uneven manner among a population.”
While global income inequality has existed for thousands of years, its shape has continuously changed. In 1975, the distribution of global income was bimodal, which means that the developed world was 10 times wealthier than the developing world. Within the past 40 years, global income inequality has actually decreased.
Even though income inequality in developing countries is decreasing, developed countries have seen an increase in income discrepancies within the past several decades. (VOX) Based on information from the Global Wealth Report 2015, 71 percent of adults worldwide possess less than $10,000 USD in total wealth.
According to Christoph Lakner, the global increase in income was primarily influenced by populations living in China, India and other developing countries. Conversely, developed countries are seeing the reverse of this trend, with incomes stagnating among the poor and lower middle classes in wealthy countries like the United States.
The Causes of Income Inequality
When investors and capitalists enjoy a greater rate of return than is seen throughout the overall growth of the economy, it leads to income inequality.
Increasing income disparities within nations can be tied to two major causes. Either returns to private investments become greater than the overall growth of the economy, or the overall population experiences a declining rate of growth.
According to Foreign Affairs, developed countries saw a decrease in economic growth during the ’80s and ’90s due to having a declining population and high levels of return. Slow economic growth in combination with declining population growth leads to higher concentrations of wealth and is a huge driver for income inequality. (The Economist)
However, the economy grew by a total of 3 percent in the second quarter of 2017, which was a faster increase than the growth rate experienced in the preceding two years. (NY Times)
Population growth also influences economic growth. The world’s population has increased exponentially during the past few centuries, growing from 0.9 billion in 1800 to 7.4 billion today. According to The Economist, “population growth is a critical component of economic growth, accounting for about half of average global GDP growth between 1700 and 2012.”
The rise of Chinese exports has caused the wages of the American middle class to decline. This increase in exports has helped businesses owned by America’s top 1 percent, causing greater disparities in income. (NY Times)
International trade never exceeded 10 percent of GDP before 1800. Currently, companies are driving global trade for the sake of lowering costs, which can harm native workers.
According to Our World in Data, international trade saw an annual growth rate of over 3 percent between 1800 and 1913. By the beginning of the 21st century, global trade has greatly increased.
A growing number of countries are becoming more dependent on trade. In 2013, 30.03 percent of the U.S. GDP came from trade. And in 2014, 85.35 percent of Sweden’s GDP, 64.14 percent of Canada’s GDP and 41.54 percent of China’s GDP came from trading with other countries.
As some countries now prefer exports over imports, native workers are being displaced by outsourced labor and income inequality is becoming a bigger issue, with the top 10 percent reaping most of the profits.
Fighting for Income Equality
While inequality across the globe is a massive issue, steps can be taken in the effort to redistribute global wealth.
Promoting trade policy that is simultaneously democratic and transparent can benefit workers, employee health, public interest and the environment. As trade benefiting only the wealthiest 1 percent of a country could worsen income inequality, executives and corporate lobbyists should strive to be more transparent when drafting international trade agreements.
Inhibiting illicit financial outflows can help reduce income inequality. International trade is increasing, and opportunities for illicit financial outflows are increasing as well. These developments can harm workers and governments.
Imposing a living wage can force businesses to come up with strategies to help the business profit while helping employees earn a sustainable wage.
Implementing a progressive income tax on the wealthy can help decrease income disparities. According to NYbooks.com, inherited wealth accounts for 20 to 25 percent of annual income, so taxing inherited wealth may reduce income inequality.
Advocating for the right to organize unions can help members increase wages and bring other benefits. Unfortunately, union membership decreased from 34 percent in 1979 to 10 percent in 2016, which could have exacerbated income inequality. (The Atlantic)
While income inequality has been decreasing in developing countries, it is increasing in developed countries. International relations professionals must work together with governments and businesses to establish policies that can be beneficial to a country’s native employees.
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