Income inequality — practice question

A government commission released a report stating that global poverty and inequality were getting worse and warning that the divide between rich and poor could widen further. However, a newspaper argues that much of what is claimed about inequality is incorrect. It ignores the fact that the past 50 years brought a dramatic decline in global inequality. The usual measure of relative inequality is the Gini coefficient. The global inequality figure was 0.75 in 1975, 0.72 in 2020 and 0.67 in 2022. The reduction in global inequality ought not to be unexpected. For around two hundred years, the gains from industrialisation mainly went to countries in Europe and North America. Income inequality between these countries and poorer countries became worse. The spread of globalisation in recent decades has reduced this gap. Countries such as China and India have seen very large rises in per capita (average) income, as shown in Table 1.1. Once per capita incomes rise by this amount, some degree of inequality may not matter. In fact, it may even be a required condition for economic growth. Rather than focusing on removing inequality, the emphasis could be on the absolute situation of the poorest people. If the priority is easing poverty instead of increasing the wealth of the richest, improvements can be identified. Life expectancy has risen, especially by ten years over the past two decades in the poorest region of sub-Saharan Africa. Literacy rates have also gone up. The number of people in absolute poverty worldwide has dropped from more than a third to below a tenth of the world’s population. All of this has happened while the world’s population has grown. Opponents of globalisation and foreign direct investment (FDI) by multinational companies highlight the possible harmful environmental consequences, the weakening of individual cultures and dependence on international financial institutions that may fail. They also argue that workers can be exploited, causing wider wage inequality, and that cheaper imports may increase domestic unemployment.