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Chapter 13: The Great Levelling

Zanny Minton Beddoes |Special to CNBC.com
Friday, 16 Mar 2012 | 11:33 AM ET

Zanny Minton Beddoes is the Economics editor of The Economist.

The gap between the world’s rich and poor will be far narrower in 2050. It will depend much less on where you live than on how educated you are.

IN THE EARLY 20TH CENTURY, the vast gap between rich and poor spawned political upheaval and social reform in many of the world’s big economies. America’s Progressive era brought a slew of policies, from trust-busting to the introduction of income and inheritance taxes, to prevent the Vanderbilt, Carnegie, Rockefeller and other great fortunes of the Gilded Age from forming an entrenched elite. In Britain, Lloyd George’s government introduced an array of welfare reforms, from old-age pensions to unemployment insurance.

A century later, worries about income disparities are back on the political agenda, this time around the globe. In America, long a society where people admired the wealthy and aspired to join them, polls now suggest a majority of people consider inequality to be a pressing problem. The “Occupy Wall Street” protest movement, which sprang up in 2011 to rail against it, was copied in cities around the world. The question of whether to raise taxes on the rich looms large in America’s 2012 presidential election campaign. In Europe, concerns about fairness are colouring an era of budget austerity. Britain introduced a top tax rate of 50% in 2010, and France, Spain and Italy expanded surtaxes on the rich. Talk of new, and tougher, wealth taxes is becoming commonplace.

Though the economic outlook in emerging markets is rosier, many politicians there share similar worries. China’s outgoing president, Hu Jintao, has fretted publicly that widening income gaps, particularly between the rural poor and urban affluent, threaten progress towards a “harmonious society”. Indian politicians debate furiously about how to make the country’s growth more “inclusive”.

Technocrats have come to share the politicians’ concerns. Bastions of economic orthodoxy, such as the International Monetary Fund (IMF)

, used to pay little attention to income disparities, arguing that in most cases it was far more important to focus on lifting all boats with faster economic growth. The standard view was that trying to reduce inequality might be counterproductive, if redistributive taxes sapped the incentive to save or invest. But a spate of new research, including at the IMF, suggests that

income inequality can be economically damaging in itself, leading to weaker, less sustainable and more volatile growth. Some economists argue that the roots of the 2008 financial crisis lay with widening income gaps: as their living standards were squeezed, poorer people resorted to debt-fuelled spending.

Inequality, in other words, has leapt towards the top of the global agenda. A 2011 survey by the World Economic Forum, a Swiss-based club of the global elite, found that its members regarded widening income disparities as one of the two main global risks for the next decade (alongside failings in global governance).

Over the past few decades inequality has risen in many countries.

Look at the numbers, and you can see why. Over the past few decades inequality has risen in many countries, often dramatically. In more than three out of four advanced economies, income disparities are higher than they were in the 1980s. Many poorer countries have grown less equal too. China has gone from being one of the world’s most egalitarian (albeit impoverished) societies 30 years ago to having some of the biggest income disparities. Following the collapse of communism, inequality has soared in eastern Europe and the former Soviet Union. All told, a majority of the world’s citizens now live in countries where the gap between the rich and the rest is a lot bigger than it was a generation ago.

But the past is not necessarily prologue. The future evolution of income disparities will turn out to be more nuanced than recent history suggests. More countries will see wider inequality, particularly poorer parts of Africa and Asia that are still in the early stages of development. But in those countries where income gaps are already wide, such as America and China, they are likely to stabilise or even narrow over the coming decades. By 2050 national income disparities will have converged, for many countries at a higher level than they were in the 20th century.

These national trends will be what attract political attention. But from a global perspective, they will not be the main determinant of inequality. That is because the global distribution of income depends not just on the gaps within a country, but also on those between countries, in terms of average living standards. And over the coming decades the wealth gap between rich and poor countries will narrow dramatically as emerging economies grow faster than advanced ones. This will stand in stark contrast to the experience of the past 200 years, when richer countries in Europe and North America typically grew faster than poorer ones.

The narrowing of disparities between countries will be greater than any widening of disparities within countries. As a result, overall global inequality – the income gaps between all people, regardless of where they live – will fall, probably rather sharply. The coming decades will see a great levelling of global living standards. At the same time the nature of inequality will change. Today the gaps between the richest and poorest within any country are still far smaller than the gaps between countries. Around 70% of global income inequality comes from the fact that poor countries lag so far behind rich ones. By 2050 that picture will be quite different, with a large and growing global middle class coinciding with big income gaps within countries. Wealth disparities will depend less on where people live than on what they do.

Zanny Minton Beddoes is the Economics editor of The Economist.