How to reverse rising inequality

by Annett Victorero and Dominik Etienne

Today, the top 20 percent receive more than 70 percent of the global income, and the top one percent (70 million people) earn as much as the poorest 3.5 billion people - that is half the world population. Some positive news can be found, for example in the case of Latin America, but progress is much too slow. At the current rate of progress it would take 800 years for the bottom billion to get even 10 percent of the global income.

To discuss why it is crucial to integrate the economic equity perspective into national and international development processes, UNU-WIDER, the International Labour Organization (ILO) and the United Nations Conference on Trade and Development (UNCTAD) organised a policy seminar and shared examples of policies that have worked.

On October 23 more than 50 representatives of over 20 international organisations - among them 13 UN agencies and bodies - and permanent missions to the UN joined in the discussions with an expert panel consisting of Isabel Ortiz, Richard Kozul-Wright and Giovanni Andrea Cornia. The meeting was chaired by Tony Addison, Deputy Director and Chief Economist of UNU-WIDER.

New policy model key for falling inequality in Latin America

Many observers ask how rising inequality could be halted and reversed - through policies in the areas of trade and banking regulation, labour markets, social transfers and others. This debate can benefit from the evidence of a significant decline in inequality recorded in much of Latin America in the first decade of the millennium as presented by Giovanni Andrea Cornia, Professor at the University of Florence and former Director of UNU-WIDER.

The UNU-WIDER research project led by Andrea Cornia suggests that the drop in income inequality in nearly all of the Latin American countries was mainly due to: a fall in the skilled-unskilled wage ratio; an increase in social assistance transfers, and a lower concentration of capital incomes.

According to Andrea Cornia, the drop in inequality in the region is structural rather than cyclical as inequality continued falling during the crisis of 2009-12 and, based on the most recent data from 2014, is still doing so. The positive trend does not seem to have been due to improvements in the global economic conditions, but rather to the rapid and equitable accumulation of human capital as well as new policy approaches.

The new policy approach spread through the region following the return of democracy in many countries, starting in the early 1990s. Many of the new regimes, on the left and right, adopted more prudent macroeconomic policies and avoided the traditional pro-cyclical (and unequalising) fiscal and monetary policies of the past. The shifting focus from global to regional trade during the 2000s helped reduce vulnerability to macroeconomic shocks. Crucially, labour and social policies were targeted at battling the inherited problems of unemployment, job informalisation, falling low earners and minimum wage and a weakening of wage bargaining institutions.

Social expenditure started rising in most Latin American countries in the 1990s and accelerated during the early 2000s with more targeted social assistance transfers and more effective taxation systems.

A key role in the fall of income inequality was played by the rise of completion rates of secondary education which led to a marked improvement in the distribution of 'human capital'. A higher supply of skilled workers meant a lower wage premium for those skills, thus equalising income.

Also increases in minimum wages had an equalising effect Andrea Cornia reported.

Policies matter at both the national and international level

Isabel Ortiz, Head of Social Protection at ILO, shared Andrea Cornia's message that the right socio-economic policies are crucial if we are to tackle inequality in development processes.

She showed that since the global economic crisis in 2007-08 there have been further setbacks for the goals of equitable and fair human development for all, as the richest 10 percent continues to accrue most of the income generated.

The crisis, and the now prevalent austerity policies that followed initial bailouts and stimulus, have had a large impact on the lower earning quintiles.

This occurred through unemployment, wage cuts, lower remittances, a rise in cost of foods and fuel, loss of access to credit and savings, and cuts in government spending (ranging from education to health and social protection). Furthermore the level of official development aid has come under pressure.

- Our World