If you were to walk down the beach in Rio de Janeiro, past Ipanema and Leblon, you would come across some of the finest villas in Brazil. These lavish multi-million-dollar palaces have a wealth of luxurious components—fully equipped cinemas, tennis courts, swimming pools, jacuzzis and servants’ quarters. And yet only yards away sits one of the largest and most lawless shantytowns in the world. How can such acute poverty exist alongside so much plenty?
Inequality is nothing new. In Victorian England it was particularly severe, rich industrialists amassing unprecedented fortunes while the average working family was forced to endure immense hardship working in mills and mines and living in houses not altogether dissimilar to those shantytowns of Brazil.
Despite politicians’ continued efforts to reduce the gap between rich and poor, the divide remains intractably high. In the two and a half decades since the early 1980s, levels of inequality have, in fact, widened significantly in almost every developed country around the world. Although the gap decreased in France, Greece and Spain, the poverty divide worsened significantly in the UK, and toward the end of the first decade of the new millennium, both in the UK and in the US, inequality hit the highest level since the 1930s.
Wealth gaps Given that capitalism is a system that rewards individuals’ hard work and entrepreneurship, it is hardly surprising that some will be richer than others—after all, what incentive would there be to work hard unless it offers some sort of reward? However, what has become alarming is the sheer size of the disparity. In the US the richest one-tenth have around 16 times bigger incomes than the poorest tenth, while the rich in Mexico, which has shantytowns as squalid as those in Rio, are more than 25 times wealthier than the poor.
Meanwhile, in Nordic countries such as Denmark, Sweden and Finland, the gap is far smaller, with the wealthiest earning around five times the amount that the poorest earn. These wealth gaps are calculated using something called the “gini coefficient,” which is a comparison of income between the top earners and those at the bottom of the pile.
The disparity is wider still when one compares levels of wealth in different countries. By most yardsticks, the poorest fifth of the world’s population—those mainly in sub-Saharan Africa—still live in the economic equivalent of the Middle Ages, while even the poorest in the UK and US are incomparably wealthier and healthier.
“A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”
Milton Friedman
The redistribution dividend There are some clear explanations for these disparities. Nordic countries—and many Northern European ones—tend to tax their citizens more heavily in order to redistribute money to the poor, through social-welfare schemes and tax breaks. This is one of the main objectives of tax systems in modern democracies—to reduce unfairness and help support those citizens who find themselves in need.
As rich countries around the world constructed their respective welfare systems in the post-war years, levels of inequality dropped significantly. By offering all families similar access to education and healthcare, many countries—particularly the Nordics—succeeded in equalizing the opportunities available to families. It is what is often referred to as the “Swedish Model” of running a country.
However, raising taxes on the rich in order to give more to the poor is not enough by itself. In the UK, the Labour government elected in 1997 did precisely this, so that the average lone parent saw his or her income rise by 11 percent over its first decade in power. And yet, at the same time, inequality rose to the highest level in recent decades. Worse still, a study from the Organization for Economic Cooperation and Development (OECD) found that a son’s income was closely tied to his father’s, implying that youngsters had few opportunities to break free of poverty.
The benefits of inequality
Some economists argue that, since people are innately different in terms of their habits and capabilities, a certain amount of inequality is inevitable in a major economy. Indeed, those who favor free markets argue that attempts to redistribute wealth have perverse unintended consequences. Higher taxes can drive the most productive members of society overseas, or can discourage them from working harder, which in turn reduces the amount of wealth generated overall by society.
Driving the difference The world is in the midst of a major shift in its economic structure, as companies capitalize on new technologies such as the Internet and advanced computing and telecommunications. When these shifts happen it often pushes up inequality, those prepared for the shift becoming wealthy while those who aren’t—for instance, a Detroit car worker—finding themselves left behind. It is what happened in the Industrial Revolution and it is also happening now.
Another explanation is that a very small number of people have managed to become super-rich. In the UK, for instance, whereas the 3 million people that make up the top one-tenth of workers earn an average of £105,000 before tax, the top 0.1 percent, or 30,000 people, have an average annual income of £1.1 million. These super-wealthy are often able to avoid paying significant amounts of tax by moving their wealth offshore to tax havens, meaning that less cash is redistributed. On the flip-side, these wealthy families can contribute to the economy through the indirect taxes they pay when they spend extravagantly on luxury goods, and by employing local workers—ranging from cleaners and maids to stylists and lawyers. This is often known as the “trickle-down” effect.
The consequences of inequality There is no clear sign that, taken as a whole, a high level of inequality prevents a country from becoming wealthier over time. Indeed, prominent economist Robert Barro found that, while it seems to reduce growth in the developing world, inequality actually boosts growth in the developed world.
However, a gaping wealth divide can be damaging for a country in other ways. The main point of concern is that of social unrest. Studies show that in countries and areas where income inequality is small, people are more likely to trust each other, which makes sense, given that people there will generally have less reason to envy others. Violent and fatal crimes are also far less frequent. For example, there is a strong correlation between US states with a high wealth divide and a high incidence of homicides.
Low incomes are also closely associated with poor health. In Glasgow, Scotland, where the gap between rich and poor is particularly acute, the average male’s life expectancy is worse than in much of the developing world, including Algeria, Egypt, Turkey and Vietnam.
Such inequality issues are not merely to be found in economics. People derive their sense of self-worth, which feeds into their personal productivity, largely from how they view themselves in comparison to others. When people are aware of their income deficit in relation to others, they will tend to be less contented and strive less hard.
A study has found that Hollywood actors who won an Academy Award lived on average four years longer than their non-winning counterparts, and double Oscar-winners an extra six years. Being rewarded for one’s hard work really does make a difference. Whether it hits your pride or your purse, inequality matters.
the condensed idea
The wealth gap will destabilize nations
| timeline | |
|---|---|
| 1840s | Levels of inequality in industrial England inspire Friedrich Engels to write The Condition of the Working Class in England |
| 1930 | Inequality in the US reaches record highs |
| 1950s | Wealth divide narrows, partly as a result of Franklin D. Roosevelt’s New Deal |
| 1990s | Gap increases in the wake of Thatcherism and Reaganism |
| 2000s | Inequality hits new peaks |