How the G20 is failing on inequality

January 19, 2012 1 By admin

Another day, another Oxfam report. This time it’s a ‘practice what you preach’ survey of the G20 countries’ performance on inequality caroline-pearce100and the environment. According to this guest post from co-author Caroline Pearce, they don’t come out of it very well…….

G20 governments cannot afford to ignore inequality. An Oxfam report published today, Left Behind by the G20, examines G20 countries’ records on inequality and sustainability, and on the former shows an overall picture of rising income inequality: in almost all G20 countries, inequality is dangerously on the rise, despite the G20’s much vaunted commitment to promoting shared growth and narrowing the development gap. Crucially, what the report does not find is any link between particular stages of development and levels of or changes in inequality, casting doubt on those who argue that inequality is an inevitable stage along the way to development. Rather, inequality is a matter of political choices, and now the onus is on the G20 to make the right ones.

According to new data from the new Standardized World Income Inequality Database, just four G20 countries (Korea, Brazil, Mexico and G20 inequality Figure-3Argentina) have reduced income inequality in the last 20 years (see chart), and some with only modest levels of growth. Even these are not unambiguous success stories: in three, initial inequality was so high that decades’ more progress would still be necessary to bring them to levels seen in, for example, Pakistan, let alone in a country like Sweden. The exception is Korea, which grew to high-income status while reducing already comparatively low levels of income inequality. The others, along with the rest of the G20 club, face serious challenges in living up to G20 promises about ‘inclusive growth’.

As well as highlighting this troubling trend, the report spells out why G20 governments should care. Inequality – of many different kinds, not simply income inequality – is linked to weaker and less accountable public institutions, social unrest, crime, and lower well-being. The ongoing Occupy protests are just one illustration of popular discontent with growing inequality, and particularly with the way that inequalities of wealth and power reinforce each other. Our report acknowledges these concerns, and focuses on the links between income inequality, poverty reduction, and growth.

Firstly, high and growing levels of inequality severely limit the impact of growth on poverty reduction. This is a simple matter of logic: when the benefits of growth go disproportionately to the wealthy, then the resources left over to reduce poverty are inevitably reduced. World Bank analysis found that 1 percentage point of economic growth in a low inequality country could reduce poverty by 4 percentage points – or not at all, in a high inequality country.

Our report uses models developed by economists from the World Bank and the UN University to illustrate the potential impact of inequality on poverty in three G20 countries: Brazil, Mexico and South Africa. Using current IMF projections of economic and population growth, we show that continuing progress on inequality in Brazil would allow a million more people to exit from dollar-a-day poverty by 2020 than if inequality remains stagnant. Accelerating the fall in inequality in Mexico, taking 5 points off the gini by 2020, could reduce the number of people in absolute poverty by more than three quarters. Most worryingly, allowing inequality in South Africa to grow at the most recently observed rate could push well over a million extra people into extreme poverty, even as the economy grows. This is a powerful rebuttal of the assumption that a rising tide will lift all boats: on the contrary, without attention to inequality and distribution, the tide can rise but allow many millions of women, men and children to sink.

Moreover, a growing body of evidence demonstrates the pernicious impact of inequality on growth itself. Recent IMF research papers, for example, have illustrated the role of inequality in driving the 2008 financial crisis, and the fact that high levels of inequality shorten the average length of periods of economic growth. The overall message: without attention to inequality and distribution, the tide will slow or perhaps even stop rising.

The question of what should be done about this is harder, with different answers for different countries. Oxfam is undertaking a major research project to look at the impact of different policies on inequality and growth. But some obvious lessons stand out: progressive taxes and redistributive transfers make a huge difference; universal public services – particularly education and health – increase social mobility and reduce future inequality; a focus on gender inequality is not only necessary in its own right but crucial in reducing income and wealthy inequality; and redistribution of land can reduce poverty and prevent growing inequality.

Tomorrow, Kate Raworth discusses the G20’s record on sustainability