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Is Income Inequality Biggest Global Risk?

Chris Ratcliffe | Bloomberg | Getty Images

Severe income inequality is the biggest risk facing the world, according to a study by the World Economic Forum.

In a landscape of 50 global risks facing the world over the next 10 years, respondents rated severe income inequality as the most likely global risk. On a scale of 1 to 5, with 5 being "almost certain" to occur, severe income disparity was given a risk rating of 4.14 by the experts, ranking above chronic fiscal imbalances (3.99), greenhouse emissions (3.91), water supply crisis (3.85) and mismanagement of population aging (3.83).

It is the second year in a row that income inequality has reached first place as the most likely global risk. Major financial systemic failure gained the top spot for the biggest global risk in terms of impact.

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Branko Milanovic, lead economist at the World Bank's research group, said that severe income inequality could fuel mass migration and popular uprisings.

"Global inequality reflects two types of increasing inequalities: rising gaps between nations (which cause migration) and rising inequalities within nations (which cause protests, disenchantment and revolts). So, in that double sense, what happens to global inequality is very important," Milanovic said.

Governments and Inequality

As the financial crisis in Europe and the U.S. forces governments to reduce their budgets, debt and spending, government entitlement policies have been cut and income inequality has increased.

"[Government policies] impact a lot," Milanovic said. "Obviously through tax-and-transfer policies, but also through a host of other rules, regulations and subsidies," he added.

The financial crash in 2007 changed the role and priorities of global governments, Milanovic said.

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"With the financial and then fiscal crisis, the redistributive role of government has become more limited. Also, with globalization, taxing rich people and mobile capital is harder," he said. "Thus, globalization increases the political power of highly skilled individuals…for whom there is a global market, [and] reduces the power of those who cannot easily move." .

As U.S. politicians begin to negotiate over the debt ceiling and spending cuts that the December "fiscal cliff" deal postponed, the debate on social services has come to the fore again, particularly as the gap between "haves and have-nots" increases.

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The non-partisan Congressional Budget Office reported in 2011 that between 1979 and 2007 the top 1 percent of households saw their income grow by 275 percent, while for the bottom 20 percent, income grew by just 20 percent. For the middle 60 percent of Americans, average incomes grew just under 40 percent.

Another global superpower, China, offers an interesting example of income disparity, with rapid economic growth leading to an explosion of China's middle class. Meanwhile, an estimated 128 million Chinese are living under the poverty line (that's 13.6 percent of the population living on less than $1.25 per day, according to the World Bank).

Europe’s Inequality

Dimitris Pavlopoulos is from the VU University of Amsterdam and is the co-author of a pan-European analysis entitled, "Accounting for Inequality in the EU" assessing income disparities between and within member states.

"For an increasing number of people, the fulfillment of basic needs, such as food, education and health, is problematic," he said. "Even in countries with traditionally equal income distributions and strong welfare states, such as the Netherlands, the number of people that cannot make ends meet is increasing."

Income inequality in the EU has been driven by the deregulation of the labor market and the retrenchment of the welfare state -- and it will become more pronounced and destabilizing in the near-future, he added.

"It is quite clear that income distribution will become more unequal in the coming years," he said. "The common perception is that even if the current crisis is overcome… a jobless growth will follow. In a scenario of high unemployment and large dispersion in labor earnings, we can expect a strong increase of income inequality in all EU member states."

Pavlopoulos says such a scenario creates a "very gloomy" outlook for Europe. "Whole parts of the population will find themselves with little prospect for proper integration in the labor market. In southern Europe, we can safely speak about a 'lost generation'," Pavlopoulos said.

Two-Tier Societies the Future?

While experts associated with the World Economic Forum might agree that severe income inequality is the biggest global risk in the near future, the desire, not to mention the ability, to solve income disparities is limited, Milanovic said.

"[Governments] cannot do much because they are cornered in by the financial system, on the one hand, and globalization on the other. An increase in taxation needs to be multilateral in order to avoid "beggar thy neighbor" policies (in other words, competitive reduction in tax rates). That is something that EU and U.S. could in principle achieve," he said.

But regulation and spending on education could help, he said. The protracted debates over the "fiscal cliff" in the U.S. showed that conflicting political ideals make it nearly impossible to find agreement within a government, let alone between countries.

If not, the world can expect more two-tier societies like that in Brazil, where gated communities and elite private schools for the rich exist cheek-by-jowl with "third world" ghettos.


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