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Less Poverty Makes People More Equal, Sometimes

  • Economic growth and higher standards of living can spur inequality
  • Disparities within nations can lead to political upheaval and social unrest
  • Equal opportunity often improves a country's overall welfare

WASHINGTON, April 25, 2012 – India’s economic growth, projected to slow down to around 7 percent in 2012, is the envy of many nations.

But there’s another side to India’s booming economy: Economists worry that the gap between the country's rich and poor is widening as well.

Brazil, meanwhile, is celebrating the fact that 31 million people have moved into the middle class over the past decade. All the while, the country’s famously high level of inequality continues to decline.

And then there are the Northern European countries of Sweden and Finland, long known for their egalitarianism, where the inequality curve has been pointing upwards in recent years.

What is going on and what, if anything, can governments do to promote stable and harmonious societies in a global economy?

Leading economists gathered at the World Bank in April to discuss challenges countries face as they try to balance economic growth or recession with disparities that can lead to social unrest.

“Inequality has come back to the center of the development agenda in the post-crisis world,” Otaviano Canuto, the World Bank’s vice president of poverty reduction and economic management, said in his opening remarks. “Wealth inequality is seen by many as the most serious challenge facing both developed and developing nations.”

Holding children back because they lack economic and educational opportunity is not just morally wrong, Canuto said, “but also an obstacle to progress.”

Inequality politically sensitive matter

Kaushik Basu, the chief economic advisor in India’s Ministry’s of Finance, joked that for years, India solved its inequality problem “by not measuring it.” Now, however, growing disparities can no longer be swept under the rug, he said.

Poverty in India declined an impressive 7 percent over the last five years, but while the incomes of the country’s poor are rising, they cannot keep pace with the swelling incomes of the rich. Such gaps, “cannot be tolerated,” Basu said.

Transferring money from the rich to the poor can help even out differences, but it can also scare capital and skilled workers away.

Inequality has come back to the center of the development agenda in the post-crisis world.

“So what you need in my opinion…is some kind of fiscal policy coordination in the management of global inequality, realizing that for a single country in today’s globalized world hands are tied about what you can do and how much you can do,” Basu said.

Andrea Brandolini, head of the Economic Structure and Labour Market Division in the Bank of Italy, was not convinced. “Europe is proving that coordinating efforts is very hard,” he said, referring to the recent struggle over economic policy within the European Union.

Nordic countries no longer shine

In the 1990s, Finland showed that a country can remain relatively fair also amid rapidly rising unemployment with the help of safety nets and welfare programs that sustain incomes for those who lose their jobs, Brandolini said.

The gradual dismantling of the Nordic welfare states has changed that equation, he said, and now the Gini score – the measure economists use to gauge inequality – is climbing in countries such as Finland and Sweden as low-income groups fall farther behind.

An increase in productivity coupled with innovative transfer programs helped Brazil narrow the gap. Today, the country’s poor are approaching Brazil’s middle class as rapidly as China, as a nation, is approaching Germany, noted Ricardo Paes de Barros, secretary of the Office of Strategic Action in the Brazilian Presidency.

One of Brazil’s challenges today is to adapt government policies to meet the needs of the country’s rapidly growing middle class, he said. In its favor is a federalist system that allowed states and municipalities to experiment with policies such as Bolsa Familia before they became national programs.

That’s not to say all’s well in Brazil, Paes de Barros added.

“We still need to double the income of the poor to reach a decent level of inequality and at the current rate it will take 15 years,” he said. “Our dream is to be like Turkey.”

In 2008, Brazil’s rounded Gini score was 0.55, compared with Turkey’s 0.39. On the Gini scale, 1 represents maximum inequality, where only one person controls all wealth; while a 0 represents total equality.




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