F&D Spotlights Widening Gap Between Rich and Poor

Income inequality within countries is rising, research shows

Global financial crisis probably narrowed inequality across countries

Equality is important ingredient in sustainable economic growth

Some say that inequality doesn’t matter as long as markets are working efficiently and economies are growing so that everyone is getting more. But research is finding a number of important advantages to reducing inequality. Some of the pluses are practical—a more even distribution of income facilitates economic growth. Others are normative: many people believe there is a limit to how much of a gap is fair, and too much inequality can lead to social unrest as witnessed by the Arab Spring.

In addition to the cover theme of income inequality, the September issue of F&D magazine profiles Elinor Ostrom—the first woman to win the Nobel Prize in economics, looks at lessons learned by the euro area from its debt crisis, and describes the rise of emerging markets as systemically important trading centers.

More or less?

Economists used to think that income inequality didn’t matter as long as people were doing better overall. And when machines were the key to economic growth, that required a large proportion of rich people who could save their income and invest it in capital.

But technological advances in rich countries have increased demand for highly educated workers, so that education has now become the secret to growth. And the more equal a society, the more people have access to education, explains Milanovic.

Income inequality has been on the rise in most countries since the early 1980s, including in advanced, emerging, and transition economies, Milanovic finds. Explanations for this increase include technological progress, government policies on the use of taxes and social transfers to redistribute income, changing social norms, and globalization. Today, the poorest 20 percent of the world’s population receive only 1.27 percent of global income, while the richest 1 percent alone receive 13.08 percent.

Despite the increase in inequality within most countries, the global economic crisis may have narrowed inequality somewhat between countries, because most emerging and developing economies maintained strong growth. But global inequality is still far higher than inequality within any one country.

Some say inequality doesn’t matter as long as markets work and economies grow so that everyone gets more. But research finds advantages to reducing...