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Economic Inequality and Social Progress1

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Economic Inequality and Social Progress1 Chapter 3: Economic inequality and social progress1 Coordinating Lead Authors: Stephan Klasen, Giovanni Andrea Cornia, Rebeca Grynspan, Luis F. López-Calva, Nora Lustig2 Lead Authors: Augustin Fosu, Sripad Motiram, Flora Myamba, Andreas Peichl, Sanjay Reddy, Eldar Shafir, Ana Sojo, Ingrid Woolard3 Contributing Authors: Shai Davidai, Michael Förster, Rahul Lahoti, Judith Sutz, Rainer Thiele4 Abstract Inequality and its effects on societies have received increasing prominence in debates among economists and social scientists and in policy circles over the past thirty years. There are many, often interacting inequalities and different forms of inequality. Wide income and wealth inequality has harmful consequences for the economic welfare of societies, social cohesion, and other factors that intrinsically and instrumentally diminish social progress. While between- country income inequality has been falling recently, within-country inequality has been rising to varying degrees in most industrialized and many developing countries, though the experience of 1 Acknowledgments: Note that all authors have contributed to this chapter in their personal capacity and any views expressed here should not be attributed to the organizations the authors are affiliated to. 2 Affiliations: University of Florence, Florence; Ibero-American General Secretariat, Madrid; University of Göttingen, Göttingen, Germany; World Bank, Washington, DC; Tulane University, New Orleans. 3 Affiliations: University of Ghana, Accra, Ghana; University of Massachusetts, Boston, and Indira Gandhi Institute of Development Research, Mumbai; REPOA, Dar es Salaam, Tanzania; Center for European Economic Research, Mannheim, Germany; The New School, New York; Princeton University, Princeton, NJ; United Nations Economic Commission for Latin America and the Caribbean, Santiago, Chile; University of Cape Town, Cape Town. 4 Affiliations: The New School, New York; Organisation for Economic Co-operation and Development, Paris; University of Göttingen, Göttingen, Germany; University of the Republic, Montevideo, Uruguay; Kiel Institute for the World Economy, Kiel, Germany. Reprinted with permission from Cambridge University Press. See final version at https://doi.org/10.1017/9781108399661 1 declining inequality in Latin America is a notable exception. Globalization and technological change have contributed to widening inequality in many contexts, but country-specific explanations and policies have often played a more important role. They include the role of economic conditions, levels and trends in the distribution of physical assets and human resources, the functioning and regulation of labor markets, regional and sectoral disparities, and macroeconomic, tax, transfer, and social policies that affect inequality directly or indirectly. Many of the trends in inequality are related to deep-rooted and self-reinforcing factors such as strong social stratification, well-established norms, political inequality, governance, demographic factors, and the role of social movements. National policies and, to a lesser extent, international supporting actions can have a powerful impact on inequality. 1. Introduction 1.1 Motivation and overview The concern to explain and to justify inequalities in society goes back at least to Rousseau in the European Enlightenment, and indeed had its predecessor in the form of episodic criticisms of the distribution of goods in society in various world civilizations. Nevertheless, after a long period of relative neglect, economic inequality and its effects on societies have become increasingly prominent in debates among economists and social scientists and in policy circles over the past three decades. Among the many recent ways this has become clear are the inclusion of the reduction of inequality as a separate goal among the seventeen Sustainable Development Goals (SDGs) recently adopted by the United Nations and the much greater attention being paid to inequality in academic literature and in the policy analyses of the 2 International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), the United Nations system, the World Bank, and other leading international organizations and financial institutions. The focus in the 1980s and 1990s was on issues in economic inequality in industrialized countries. This was largely because of the sharply rising income inequality observed in many OECD countries beginning in the early 1980s aided by increasing availability of comparable data on income inequality. More recently, a debate in industrialized countries has revolved around inequalities in education and health. New information is also emerging on the advantages accruing to people at the top of the income and wealth distribution, which is usually poorly captured in standard household survey tools. This has extended the debate to include more about this segment of the distribution in the overall assessment of income and wealth inequality. Whereas earlier economic thinking had often involved the presumption that inequalities were relatively stable in developed countries, it came to be recognized that major shifts in such distributions are possible, and are in fact occurring. In developing countries, the interest in and the debates on inequality issues have been long-standing and have related, for example, to Kuznets’s well-known curve or inverse U hypothesis of rising and then falling inequality in the development process. Until the early 1990s, however, comparable and consistent data to assess inequality trends across countries and over time were largely lacking. As many more, more reliable, and more frequent household surveys were run in a larger number of countries, the picture changed dramatically, allowing detailed assessments of trends in inequality for the first time. Analyses thus began to reveal that within- country income inequality has been widening in many parts of the developing world especially since the 1980s. The 1990s and 2000s saw the emergence of a debate on global income 3 inequality, which is related to both inequality within and inequality between countries. Similarly, supported by the availability of more data, growing attention is being paid to measuring inequality in other dimensions of well-being, such as education, health, and access to water, sanitation, and adequate housing. This chapter surveys the literature in economics and the social sciences on inequality over the past three decades. While it includes a brief discussion on global inequality, the chapter focuses mainly on inequality within countries. Inequality between countries, especially in income, is principally an issue of differences in economic growth rates across countries, a subject covered in detail in Chapter 4. The chapter discusses inequality in many dimensions, but a greater emphasis is inevitably placed on economic (and in particular income) inequality, simply because there is more information on this dimension, and much of the literature has dealt with it. The chapter also dwells on measures of the trends in and determinants of inequality, offers a detailed examination of the impact of inequality on the well-being of people now and in the future and, therefore, of the effect of inequality on social progress. 1.2 Summary of the main findings Much of the literature has focused on economic inequality, usually measured through income, but there are many dimensions of inequality. Often interacting, these include inequality in freedoms, opportunities, capabilities, such as good health, education, or social integration, political power, and social standing. One might also distinguish between interhousehold and intrahousehold inequality by, for example, age and gender, and between vertical inequality (among individuals or households) and horizontal inequality (among social groups). One should also make a distinction between static and intertemporal assessments of inequality and address 4 the issue of mobility. One should differentiate between unidimensional and multidimensional measures of inequality, objective versus subjective measures, absolute versus relative inequality, inequality versus polarization, and various indicators of inequality that emphasize the various dimensions of inequality. Much of the heterogeneity in findings in the literature relate to different concepts and dimensions. 1.2.1 Why economic inequality matters Wide income and wealth inequality retards social progress intrinsically and instrumentally by inhibiting improvements in welfare and the promotion of social cohesion. While some social and economic differentiation is tolerable and even desirable, substantial inequality in resources, opportunities, or capabilities runs counter to most theories of justice that view such inequalities as inherently unfair. In addition, a wide inequality gap reduces overall well-being, is perceived to be problematic by a vast majority of societies, is a particular burden on the well-being of the poor, and is associated with lower intergenerational mobility. Instrumentally, wide economic inequality increases poverty, lowers the impact of economic growth on poverty reduction, affects behavior that can trap poor people in poverty. and promotes social conflict, disaffection, and protest. Economic inequalities often promote social and political inequality and vice versa. Wide economic inequality tends to lead to large inequalities in health and education and is associated with lower subsequent economic growth. There is, however, no consensus
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