Inequality And Development: An Overview

Introduction

Inequality is a complex and multifaceted issue that persists within countries and across the global landscape. At its core, inequality refers to an uneven distribution of income, wealth, opportunities, and other attributes within a society or population. Understanding inequality matters greatly for reasons related to fairness, justice, economic outcomes, and overall human wellbeing.

Defining and analyzing inequality provides insight into how resources, capital, and access are allocated in a society. It sheds light on discrepancies that may exist between different groups based on factors like gender, race, geography, and socioeconomic status. Examining inequality involves measuring gaps in income, consumption, wealth, health, education, political power, and more. The resulting information can inform policies and interventions aimed at balancing these distributions and promoting more equitable societies.

Discussions around inequality consider critical philosophical and pragmatic questions about what constitutes a just society and how disparities impact overall human development. Inequality intersects fundamentally with poverty, limiting opportunities and freedoms for many individuals. Extreme inequality can exacerbate social ills like crime, erode trust in institutions, and hamper economic mobility. Defining and understanding inequality is thus essential for promoting fairness and progress.

Types of Inequality

Inequality can take different forms and span various groups within society. Two key types of inequality are vertical and horizontal.

Vertical inequality refers to inequality among individuals within a country. This considers the distribution of income, wealth, or other attributes across the population. Measures of vertical inequality examine disparities between richer and poorer people within a society.

In contrast,** horizontal inequality** looks at disparities between groups that are at the same economic level. Rather than focusing on individuals, horizontal inequality examines differences between groups defined by characteristics like ethnicity, race, religion, or geography. For example, horizontal inequality may capture gaps in income between ethnic groups in a country, even if they share similar economic status overall.

While vertical inequality concentrates on individuals, horizontal inequality centers on inequality between groups and categories of people. Assessing both vertical and horizontal inequality provides a more comprehensive understanding of disparities within a society. The distinction helps clarify whether inequality stems from gaps between individuals or divides between different groups. Considering both dimensions is crucial when evaluating and addressing inequality.

Inequality of What

When assessing inequality, an important consideration is what attribute or metric should be used to measure differences between individuals or groups. Traditionally, income and consumption levels have been used to quantify inequality. However, some argue that these economic measures fail to provide a complete picture of inequality.

The capability approach, developed by Amartya Sen, proposes evaluating inequality through the lens of human capabilities. Capabilities encompass the freedoms and opportunities available to people to lead lives they value. This multidimensional perspective looks beyond income to consider factors like education, health, political participation, social belonging, and more. Assessing inequality through capabilities provides a more comprehensive understanding of the disparities people face in achieving wellbeing.

Despite the appeal of the capability approach, income and consumption remain vital attributes for measuring inequality. Access to many capabilities directly depends on monetary resources. Income distribution has a significant influence on the ability to obtain health care, education, food security, housing, and other essential goods and services. While the capability approach offers a broader conceptualization, income and consumption continue to serve as important markers of inequality.

In summary, capabilities provide a multidimensional framework for assessing inequality, encompassing a wider range of freedoms and opportunities. However, economic attributes like income and consumption distributions directly impact access to capabilities and resources. There are merits to both perspectives, and an integrated approach may prove most effective in developing a thorough understanding of inequality.

Timeframe for Inequality

When analyzing inequality, the temporal dimension is a key consideration. Inequality can fluctuate significantly over time, which necessitates examining trends over several years or decades rather than just a snapshot. This is especially relevant in the context of horizontal inequality that persists across categorical divisions for extended periods.

The concept of durable inequality focuses on understanding horizontal inequalities that endure over generations. Categorical inequalities that align with divisions like race, ethnicity, or gender often sustain over long stretches of time rather than being temporary.

Examining the persistence of durable inequality involves looking at factors like unequal opportunities, exploitation, and social imitation. Restricted access to education, jobs, and capital can constrain opportunities and sustain intergenerational inequality between groups. Exploitation through uneven wages, discrimination, or limited political representation also perpetuates divisions. Additionally, norms and expectations derived through social imitation tend to reproduce existing patterns of inequality.

Analyzing inequality from a longitudinal perspective provides greater insight compared to only assessing a single point in time. Durable inequality that sustains decade after decade demands close scrutiny in order to understand the root causes and implement effective solutions. Assessing inequality trends over time is crucial for obtaining an accurate representation.

Is High and Growing Inequality Undesirable?

The question of whether inequality is undesirable involves intrinsic and instrumental reasons.

Intrinsic Reasons

Intrinsic reasons emphasize the humanist perspective of equality based on shared human rights. From this viewpoint, inequality violates fundamental human dignity and rights. High inequality represents a society that does not fulfill basic equality among all people. Some political philosophers like John Rawls have argued for equality based on a social contract agreed upon behind a “veil of ignorance”, not knowing one’s status in society. In this original position, people would advocate for a society with greater equality.

Instrumental Reasons

Instrumental reasons focus on the efficiency and consequences of inequality, considering its impact on economic growth, poverty, crime rates, and happiness. While some inequality may provide incentives, extreme inequality may be inefficient and socially detrimental. High inequality has been associated with lower social mobility and economic growth as wealth concentrates at the top. It may increase financial instability and reduce aggregate demand. Inequality can also worsen health and social problems. Instrumental reasons suggest high inequality may lead to unfavorable social outcomes.

The combination of intrinsic and instrumental reasons provides a case that extreme inequality is undesirable, violating notions of human dignity and leading to unfavorable consequences. However, views differ on the appropriate level of equality and inequality that allows for adequate incentives and economic dynamism. Policymakers must weigh these factors carefully when evaluating the social impacts of inequality.

Measuring Inequality

There are a few key metrics used to measure inequality, focusing on either vertical inequality (between individuals) or horizontal inequality (between groups).

The most common measures of vertical inequality include:

• Gini coefficient - measures the statistical distribution of income, with 0 representing perfect equality and 1 representing maximum inequality. It is one of the most widely used measures.
• Palma ratio - compares the richest 10% of the population’s share of gross national income vs. the poorest 40% of the population’s share.
• 90/10 ratio - compares the income at the 90th percentile to the 10th percentile.
• Top 1% income share - looks at the percentage of total income earned by the top 1% of income earners.

There are also multidimensional measures of inequality that aim to capture multiple factors like education, health, living standards, etc. These include the Human Development Index and the Multidimensional Poverty Index.

Some key properties help determine which measures best assess inequality:

• Anonymity - not affected by who the high and low earners are
• Scale independence - not affected by whether income is measured in dollars or thousands of dollars
• Population independence - not affected by population size
• Transfer principle - transfers from high to low income decrease inequality

Choosing appropriate measures involves assessing these properties and the type of inequality being analyzed. Income distribution remains vitally important, but multidimensional measures provide a more nuanced picture of inequality.

Historical Trends

The level of inequality between and within countries has ebbed and flowed over the past century, exhibiting both increases and declines during different eras. Looking at global inequality trends, the gap between countries hit a peak in the 1980s before declining over the next few decades. At the same time, inequalities within countries followed more of a U-shaped pattern, declining after World War 2, hitting a low point around 1980, and then rising significantly since then.

The United States, in particular, has experienced a major surge in inequality over the past 40 years. After several decades of stability, income inequality in the U.S. has substantially increased since 1980. This rise has been driven by multiple economic, political, and social dynamics, including technological change, globalization, weaker unions and labor standards, changing social norms, and policy changes on taxation and regulation. The distribution of wealth has also grown increasingly unequal, with the top 10% of families controlling 77% of the total wealth in 2019 versus 61% in 1989. Overall, rising inequality represents a defining feature of the modern American economy.

Drivers of Inequality

In recent decades, economic inequality has substantially increased in many countries, especially the United States. Several key factors have driven this trend, including technological change and globalization.

Advances in technology and automation have enabled productivity growth while reducing demand for low-skill and middle-skill labor. This has put downward pressure on wages for less educated workers while increasing the premium for high skills. Network effects and winner-take-all dynamics have also allowed top talent to capture disproportionate gains. Many economists argue that skill-biased technical change has been a prime contributor to rising wage inequality since the 1980s.

Globalization and expanded trade have also impacted inequality levels in advanced economies. Low-skill manufacturing jobs have flowed to developing countries with lower labor costs, hollowing out middle class jobs in wealthier nations. Highly skilled workers in developed countries have benefited through greater access to foreign markets and consumers. The outsourcing and offshoring of routine jobs has negatively affected less educated workers in particular.

While technology and globalization have created significant value and efficiency gains overall, the distributional consequences have inadvertently increased economic disparities. Understanding these drivers of inequality can inform public policy aimed at broadening prosperity and opportunity for all segments of society. Investments in education, job training programs, and social safety nets may help mitigate the impact of these structural forces.

Policies to Address Inequality

Policymakers and economists have developed policy proposals across a range of levers to reduce or mitigate inequality. Understanding the complex dynamics of inequality and its many drivers helps target the most effective policy options to address the issue.

• Taxation Policy: Progressive taxation is a key means of redistributing income in a way that can reduce inequality. This can include increased taxation of income, wealth, and inheritances for the highest earning households and individuals. Expanding certain tax credits, like the Earned Income Tax Credit, can provide significant benefit to lower and middle income families.
• Social Insurance Programs: Social programs to support healthcare access, unemployment insurance, housing benefits and other needs can positively impact inequality. These help fill income gaps and provide a greater social safety net, smoothing disruptions and barriers faced by lower income individuals. However, care must be taken to structure the programs in a way that promotes work and mobility.

• Investment in Education: Increased investment in educating and training the US workforce can help build human capital, boost economic mobility and increase access to higher-wage jobs. Policies could support improved primary and secondary education in disadvantaged districts as well as making college and vocational training more affordable and accessible.

• Child & Family Care: Policies to make high-quality child care and paid family leave more accessible can enable increased workforce participation and earnings potential, especially for low income women. Building assets and economic security for working families can help break cycles of poverty and drive economic mobility across generations.

The right combination of policy approaches that consider both growth and redistribution can help reduce inequality and expand opportunities in the long-term. Policymakers continue to debate the impacts of these options and balance tradeoffs.

Conclusion

In conclusion, inequality is a complex concept with multiple dimensions like income, consumption, and capabilities that can be measured both vertically and horizontally. While some increase in inequality may be an inevitable byproduct of economic development, extreme and persistent inequality can be detrimental, hampering economic growth, increasing poverty and unhappiness, and undermining social cohesion. Policymakers seeking to address inequality have several options, including progressive taxation, investments in education and healthcare, and strengthening social safety nets. But these policies may involve balancing tradeoffs between equality and incentives for productivity. Overall, the costs and benefits of inequality depend on a society’s values and circumstances. Though some inequality may be unavoidable, societies should aim to ensure equality of opportunity and maintain inequality within reasonable limits. The ethical and pragmatic considerations around inequality and proposals to address it will likely remain topics of ongoing debate and analysis.