Since the early 1980s, the world has witnessed the emergence, consolidation and diffusion of a new economic paradigm, which emphasizes stringent macroeconomic stability, deregulation of domestic product and factor markets, privatization and a reduced role of the state in the economy. During the last decade, such policy paradigm has extended its reach by emphasizing policies - such as the removal of barriers to international trade, opening up to foreign direct investments and liberalization of short-term portfolio flows - which helped to accelerate the pace of the endogenous globalization of the world economy due to the rapid decline in the cost of international telecommunications and transports.
The proponents of this policy approach - which has deeply marked policy-making in developed, developing and transitional countries - claim that it increases competitition, offers major opportunities for export and growth to developing countries, promotes the convergence of the living standards of poor countries with those of advanced countries and reduces the incidence of poverty worldwide. They also claim that the within-country distributive impact of these policies is - on the whole - neutral, that the long-term income distribution is broadly stable and that there is no clear association between inequality and growth.
Against this background, chapter III reviews the tendencies in within-country inequality over the last 20 years, i.e., the years of domestic liberalization and globalization. It argues the last two decades have been characteriezed by a surge in within-country inequality in a large number of developing, developed and transitional economies. In many of these countries, especially those where the upsurge in inequality was sizeable, growth and poverty alleviation slowed down perceptibly, especially in the 1990s. To an important extent, the recent surge in inequality has been triggered by the shift to the new policy regime although other factors – such as technical progress and the rise in educational inequality in some developing regions – are likely to have contributed to higher inequality. Chapter III concludes that in order to simultaneously achieve growth and poverty alleviation it is necessary to tackle not only the traditional sources of inequality but also to adopt macroeconomic and structural policies which avoid the distributive distortions of the new neoliberal paradigm.
Inequality trends in the postwar period2
OECD countries: a reversal of declining inequality trends since the late 1970s
The developed market economies emerged from the Second World War with a fairly high income inequality. Income concentration, however, declined steadily in the 1950s, 1960s and most of the 1970s. Since the late 1970s, this trend was halted or reversed in most Western European countries. Inequality rose in the mid-late 1970s in the United States, the United Kingdom. Australia and New Zealand, which were among the first OECD countries to adopt a neoliberal policy approach (see also chapter VI). In contrast, the Scandinavian countries and the Netherlands and Italy are part of a second group in which inequality trends were reversed, though less markedly. A third group - including Finland and France - experienced a gradual flattening of inequality, starting during 1975-1980. Only in Ireland and Western Germany is there evidence of an uninterrupted decline in inequality until 1992.
Despite its reputation for having achieved fast growth with equity, Japan experienced a rise in income inequality during the last 20 years. The income gap between the rich and the poor was substantially reduced during the first three post-war decades, and by the mid-late 1970s the Gini coefficient of net disposable income had dropped to around 0.30 (the Gini coefficient is the standard index of income inequality: it ranges between 0 if all citizens have the same income and 1 if one person receives all national income; in reality, the lowest observed value of the index is about 0.15 and the highest 0.70). However, this trend was reversed since the early 1980s, and in 1993 the Gini coefficient stood at 0.44 (table III.1). Few countries have seen inequality rise so sharply in such a short period. The main factors contributing to this rise in inequality were the abandonment of Japan's old egalitarian lifetime employment system, a decade-long recession, the growing number of low-paid women entering the workforce and soaring land prices.
Trends in the Gini coefficient of various income concepts in Japan
Source: Ozawa, Marta and Shigemi Kono (1997), “Child Well-Being in Japan: The High Cost of Economic Success”, in Giovanni Andrea Cornia and Sheldon Danziger, Child Poverty and Deprivation in the Industrialized Countries, 1945-1995, Oxford University Press, Oxford, 1997, pages 307-334.
Most of the increase in income inequality observed in the OECD countries is explained by a rise in earnings inequality.3 Countries with centralized wage-setting institutions (Germany, Italy), a high union density and adequate minimum wages (France) contained the pressures towards higher earnings inequality. At the other end of the spectrum, countries with decentralized wage negotiations and flexible labour markets experienced the largest increases in earnings inequality. An upsurge in the share of financial rents, urban land rents and profits contributed to the growing dispersion of market incomes. Finally, the fairness of the tax and transfer systems declined, as transfers fell relative to gross domestic product (GDP) and personal income tax became less progressive. 4
The widespread rise of inequality in post-socialist countries
Since 1989, the beginning of the transition to the market economy in most of this region, income concentration has risen moderately (by 1 to 5 Gini percentage points) in the countries of Central Europe, which maintained a fairly comprehensive if costly welfare state and where wage inequality rose less than anticipated. In contrast, in the former USSR and South Eastern Europe, Gini coefficients rose by 10 to 20 points, i.e., 3 to 4 times faster than in Central Europe (The Worldl Bank, World Development Indicators 2000). In these countries, the transitional recession and fall in the wage share were very pronounced, social transfers declined, their composition and targeting deteriorated and privatisation was less egalitarian than in Central Europe.
As in OECD countries, rising earnings inequality played a key role in the surge of total inequality (see table III.2). Such a rise has been attributed to the emergence of “scarcity rents” for such professions as accountants, bankers and so on, a rise in returns to education, a fall in the minimum wage relative to the average5, mounting wage arrears and a surge in inter-industrial wage dispersion.
Latin America: a surge in inequality from already high levels
With the exception of Uruguay and Argentina - i.e., highly urbanized countries with an educated labour force and a comparatively extensive social security system - in the early-mid 1950s Gini coefficients in Latin America traditionally ranged between 0.45 and 0.60, i.e., among the highest in the world6. This acute income polarization was rooted in a highly unequal distribution of land and educational opportunities, which benefited a tiny oligarchy. On the whole, the rapid growth of the 1950s and 1960s increased social polarization. In the 1970s, however, inequality declined moderately in most of the region except for the Southern Cone, where growth was disrupted by the adoption of an extreme version of neo-liberal
Decomposition of the increase in the Gini coefficient of the distribution of household
incomes between the pre-transition period and the years 1993-1996
Source: Milanovic, Branko (1998), Income, Inequality, and Poverty during the Transition from Planned to Market Economy, The World Bank, Washington D.C.
reforms. From 1980 to the mid 1990s, inequality and poverty in the region were exacerbated by major shocks (debt crisis and “El Nio”), the recessionary adjustment introduced to respond to them and the unstable growth pattern which began in 1988 and lasted through the 1990s. The income polarization of the 1980s was the result of fast inequality rises during recessionary spells and slow declines during periods of recovery, resulting in a 5 to 6 percentage points decline in the labour share between the early and late 1980s in Argentina, Chile and Venezuela, and a 10-point decline in Mexico7. This fall of the labour share was caused by a slowdown in job creation, growing work informalization, a faster fall in formal sector wages than GDP per capita, an even faster contraction of minimum wages and a widening in wage differentials by skill and educational level.
Such tendencies – rising inequality in the 1980s and stable or increasing inequality in the 1990s – are confirmed also by the latest comprehensive reviews of inequality in the region. A study that focused on the 1990s using comparable microdata from 49 nationwide surveys covering 90 per cent of the regional population concluded that none of the 15 countries examined recorded a distributive improvement during this period.8 Statistically significant increases in inequality were found in eight cases while in seven there was no change. The review concluded by noting that under these new economic modalities
(characterized by trade openness, fiscal austerity, a prudent management of monetary policy, less public regulation of markets and more reliance on private initiative), the pattern of income distribution tends to be unequal at the very least and more unequal than those that prevailed during the last stages of the previous growth phase in the 1970s.
China: rising regional and urban-rural inequality
Also in China, income inequality followed over the last 50 years a U-shaped pattern, with the turn-around point located around the mid 1980s. Inequality fell sharply from 1953, the beginning of the Maoist experiment, to 1975 (table III.3). The market reforms adopted in agriculture since 1978 replaced the rural communes with an egalitarian family-based agriculture and introduced considerable price incentives for the farmers. The result was a sharp acceleration of growth, which jumped to 9 to 10 per cent a year during 1978-1984, was sustained at the same level over the 1985-1995 period and declined only marginally for the rest of the decade. Between 1978 and 1984 – the years of rapid agriculture-led growth - there was only a modest upsurge in inequality and the rural poverty rate fell at an unprecedented rate – from 30.7 per cent in 1978 to 15.1 per cent in 1984 – literally halving the percentage of rural poor in just six years9.
Evolution of the Gini coefficients and the income gap in China, 1978-1995
Income gap, U/Ra
Income gap (rural)b
Income gap (urban)b
income gap (total)b
a ratio between the average urban and rural average income;
b ratio between the average income of the highest to the lowest province, by rural, urban and total area;
c data for these two years are not strictly comparable with those of the following years;
d refers to 1983;
e refers to 1985.
In turn, the urban Gini coefficient stagnated at a very low level thanks also a social policy that sheltered the registered urban population from the food price reforms through an increase in transfer payments which rose from 4.8 to 5.5 per cent of national income between 1979 and 1985.
In contrast, income concentration rose rapidly between 1985 and 1990, and very fast after 1990 (table III.3) owing to the spatially unbalanced expansion of non-farm activities and in particular of the town and village enterprise10, as indicated by the widening of the gap between mean incomes per capita of poor (interior) and rich (coastal) provinces (last column of table III.3). Such a rapid rise in inequality had a negative impact on poverty alleviation. Rural poverty declined from 15.1 per cent in 1984 to 7.1 percent in 1995 (i.e., by 0.8 percentage points a year, as compared to the 2.6 percentage points during 1978-1984). Furthermore, between 1988 and 1995, such slow aggregate poverty decline was accompanied by a rise in rural poverty rates in western China and mountain locations and among ethnic minorities. Finally, it appears that the worsening in inequality more than offset the poverty alleviation effect of growth, and that the decline in poverty over 1988-1995 was due to the fall in average family size due – inter alia – to the adoption of the one-child family policy11.
Public policy contributed to the widening of the inter-provincial divergence alluded to above. The fiscal decentralization introduced since 1978 substantially reduced the possibility of the central Government to control regional inequality by means of resource transfers. Industrial policy was even more disequalizing, as it favoured explicitly the coastal provinces.
East and Southeast Asia: a common, if milder, reversal of inequality trends
It is widely believed that these countries were able to combine fast growth with low assets and income inequality. This view, however, is not accurate. First, the initial level of income inequality varied considerably within the region. The countries or areas of North-East Asia - such as the Republic of Korea and Taiwan Province of China – which carried out a major land reform in the late 1940s and early 1950s - had and still have a distinctly more equitable distribution of income than the South-East Asian countries or areas, where no major redistributive reform was ever launched. Second, between the late 1950s and the 1990s, the Gini coefficient of income distribution rose steadily in Thailand and The Republic of Korea. In the latter country, however, this rise was accompanied by a steady decline in wage dispersion owing to a fall of wage differentials between educational groups, occupations and genders12. In Thailand, the Gini coefficient of the distribution of total income rose steadily during the years of rapid growth, from 0.42 in 1975/6 to 0.51 in 1996, mostly because of the surge in the share of non-farm profits linked to the expansion of the globalization-related financial, insurance and real estate (FIRE) sector in the Bangkok region13.
In Taiwan Province of China, inequality fell steadily for many years thanks to a rapid expansion of employment for both well educated and low-skilled workers. Over 1980-1993, however, the development of skill-intensive sectors again pushed up wage inequality, while the share of capital and property incomes in the total surged due to the development of large corporations and the escalation of land prices. In Indonesia, inequality fell, initially owing to the use of the oil rent for the financing of the green revolution. This substantially raised employment and production opportunities in the rural sector and – given the low degree of land concentration – reduced the index of rural income inequality from 0.31 in 1964-1965 to 0.25 in 1990. The years from 1987 to 1996 – the period of rapid globalization - were characterized in contrast by the growth of the urban-based manufacturing and capital-intensive finance, insurance and real estate sector, a slow down in agriculture, the widening of the urban-rural gap and the retrenchment of rural work programme. As a result, overall inequality rose from a low of 0.32 in 1987 to 0.38 in 199714.
Financial globalization was also behind the Asian crisis which erupted in September 1997 and its regressive impact on equity. The impact seem to have followed a two-stage pattern. While the impact on poverty was immediate – due to a sharp output contraction – inequality declined marginally during the first phase, as in the first months the crisis hit the middle-high income groups employed in the FIRE sector the hardest. In a second phase, inequality and poverty rose sharply – especially among the urban poor - because of the recession induced by the crisis and the stabilization measures introduced to combat it. In a summary analysis of the impact of the Asian crisis, Knowles et al15 found that during 1997-1998 inequality dropped marginally in Indonesia but rose in Thailand, the Philippines and the Republic of Korea. One may thus conclude by noting with Jomo16 that liberalisation since the 1980s seems to have adversely affected income distribution. Deregulation, reduced government interventions, declining commitment to earlier redistributive mechanisms and greater government efforts to meet investors expectations have probably all contributed to increased inequality in the region.