A World of Inequality

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The truth about inequality

  • The great promise of communism in the 20th century was the removal of inequalities. However if failed comprehensively by 1991.
  • The worldwide spread of capitalism and LPG wad the next big promise. But sadly data show that the world income inequality has grown and diminished.
  • The seven key truths about income inequalities are:
    1. Income inequalities is lowest in Europe and highest in Middle East.
    2. The top 10% income share is 37% in Europe, 41% in China and 56% in India.
    3. In the Middle East top 10% cornered 61% of National Income.
    4. Since 1980s inequality has sharply risen in India, China, Russia, and North America.
    5. Regions like Brazil, Middle East and Sub-Sharan Africa are the inequality frontiers, as they never experienced post World War-II egalitarian.
    6. In 1980 the top 1% income share was roughly 10% in US and Western Europe, but today it is roughly 20% in US and 16% in Western Europe.
    7. The bottom 50% of share in America steeply dropped from 20% in 1980 to ~13% today.

The Elephant curve of inequality

  • The x-axis as a world population divided into 100 groups of equal population size increasing from left to right.
  • The top 1% was divided into 10 groups, and the richest again into 10.
  • The topmost was again divided into 10 groups (equal population size). And the topmost was again divided into 10 groups.
  • The y-axis shows the income growth of an individual in any group between 1980-2016.

    • Learnings:

    1. The top 1% captured 27% of all global growth 1980-2016.
    2. The bottom 50% captured 12%.
    3. In the bottom 50% most were from India and China.
    4. The rest were the squeezed bottom 90% from America and Western Europe who saw the lowest average growth in income level.
    5. This graph shows that from 1980 to 2016 the global top 1% receive 15%-22% of total income share. The global bottom 50% were always lower than 10%.

Private versus Public Capital

  • Capital is anything that enhances a person's power to do economically useful work.
  • It can be of two types - Private to Public (Government).
  • It is seen that inequality is driven by unequal ownership of capital, and since 1980s large transfer of public to private wealth in all the countries.
  • In rich nations now, public wealth is negative to zero. governments do not have the capability to tackle inequality anymore.
  • The sum of public and private wealth is equal to National Wealth
  • Net Private Wealth is equal to the difference of Net Private Assets and Net Private Debts (Net Private Wealth = Net Private Assets - Net Private Debts)
  • Net Public Wealth is equal to the difference of Net Public Assets and Net Public Debts (Net Public Wealth = Net Public Assets - Net Public Debts)
  • The ratio of Net Private Wealth to the Net National Income shows how much more powerful are individual compared to government
  • When the net Public Wealth reduces, it diminishes the government ability to:
    1. Regulate the economy
    2. Redistribute Income
    3. Mitigate Rising Inequality

The Indian situation

  • Income inequalities have reached historically high levels. The Share of top 1% is 22% of National Income while the top 10% earning 56%.
  • Deregulation and economic reforms have increased inequality
  • Post 1980s, the top 0.1% have captured more growth than combined bottom 50%, the middle 40% is stuck.
  • Income Tax was introduced in India in 1922 and tax department has regularly published statistics except for the period 2000-2010.
  • Till Rajiv Gandhi came along in 1980s, India was a close, inward looking and a highly regulated economy hence inequalities were low but post 1980 huge LPG (Liberalisation, Privatisation, Globalisation) reforms saw the unwanted fallout rising inequality
  • The seventh five year plan (1985-1990) relaxed regulations, increased external borrowing and increased exports. Top marginal income tax fell from 97.5% to 50%.
  • By 1990 thing started changing disruptly. Due to D-D-D-D (Delicensing-Deinvestment-Denationalisation-Decontrol), we saw capital gaining over labour
    • COMPARISON OF NATIONAL INCOME HELD BY DIFFERENT GROUPS
    Parameter In 1983 In 2015*
    Top 1% earned 10% of National Income 21.3% of National Income
    Top 10% earned 35% of National Income 56.1% of National Income
    Middle 40% earned 43% of National Income 29% of National Income
    Bottom 50% earned 21.8% of National Income 14.7% of National Income
    * later date data not available

The future of Global Income Inequality

  • Convergence forces like growth in an emerging economy, and divergence forces like growing inequality within the nation will shape the future of global inequality.
  • Until the "within country" inequality are tackled well, global income inequalities will keep rising. A nightmarish scenario will be if in 2050 top 1% hold 24% and bottom 50% less than 9% of the total National Income.
  • Three scenario exists:
    1. All countries follow their own inequality
    2. All countries follow US inequality trend
    3. All countries follow EU inequality trend
  • Ideal Outcome: Scenario 3 where the gap between top 1% and bottom 50% will only by 19% -(minus) 13.5% only
  • How to tackle top income groups:
    1. Marginal Income Tax
    2. Inheritance Tax

Tackling inequality

  • More equal access to education and well paying jobs is the key to fighting stagnation and sluggishness
  • Final Solutions:
    1. Progressive income tax is a good option
    2. Tackling massive tax evasion is a must
    3. Access to education and good job are the only guarantee to large term capability creation
    4. Reducing public debt is important so that the governments can invest more in the future

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