China

This chapter describes the major trends in China’s income inequality over the past forty years and explains them as the outcome of four interleaved stories. The first story is a standard development story characterized by structural change, market development, labour absorption, and the Kuznets inverted-U path of inequality. The second is the economic transition story, in which changes in income distribution result from the shift from plan to market. The third is incomplete transition, with opportunities for rent-seeking, corruption, and hidden income. The fourth is the story of government efforts to moderate inequality through social and welfare policies.

India

India in the early years of the twenty-first century achieved per capita growth rates that were historically unprecedented. Poverty reduction also accelerated. There is concern, however, that this growth was accompanied by a rise in inequality. In this chapter, we report on a research project that examines inequality trends and dynamics at the all-India level over three decades up to 2011/12 and contrasts these with evidence at the level of the village or the urban block. We further unpack inequality to explore dynamics in terms of the movement of people within the income distribution over time. The assessment of mobility is informed both by evidence at the very local level, and by aggregate, national-level trends. The study attempts, further, to assess horizontal inequalities into a measure of inequality of opportunity as captured by inter-generational mobility in education outcomes.

China and the United States

The United States and China are the world’s largest economies. Together they are responsible for about one-third of the world’s economic output. This chapter aims to examine whether the two economic giants are also lands of opportunity where resources are allocated in a way that minimizes unrealized human potential. Our analysis shows that despite stark differences in their levels of development, the US and China report remarkably similar levels of socioeconomic mobility—levels considered low by international standards. The US’s level of mobility has historically been low. Before it embarked on its transition from planned to market economy, socioeconomic mobility was relatively high in China. However, as it underwent a period of rapid economic growth, China’s socioeconomic mobility declined significantly. The chapter concludes that the world’s two major economic powers have converged to a low level of socioeconomic mobility where talent from disadvantaged backgrounds is excluded.

South Africa

In this chapter the authors synthesize the findings from several recent studies on South Africa’s high income inequality. These studies use new datasets—including income tax data—and new empirical methods to investigate the drivers of household income and individual earnings inequality in South Africa. Increased returns to experience and an increased rate of return to tertiary qualifications are key drivers of a widening earnings distribution. Tax data merged with survey data show that those at the top of the earnings and income distributions have done well in both absolute and relative terms, thus increasing inequality. Direct taxes and social grants are progressive, indirect taxes are less progressive, and tax exemptions for health insurance and pension fund contributions are regressive. A significant proportion of the current middle class are vulnerable to falling into poverty. Overall, South Africa has not made progress in reducing its extreme inequality over the past decade.

Comparing Global Inequality of Income and Wealth

This chapter is the first to compare global trends in income and wealth inequality this century. It is based on large income and wealth synthetic microdata samples designed to be representative of all countries. Measured by the Gini coefficient, inequality between countries accounts for about two-thirds of global income inequality, but noticeably less—around one half—of wealth inequality. Broadly similar results are found for different years and different inequality indices, bar the share of the top 1 per cent. Over time, changes in countries’ mean income and wealth, and in population sizes, have reduced world inequality. Income inequality has changed little within countries, so the downward trend remains intact. However, within-country wealth inequality has risen, halting the downward shift in global wealth inequality and raising the share of the top 1 per cent since 2007.

Empirical Challenges Comparing Inequality across Countries

This study presents new empirical results, using microdata from the Luxembourg Income Study (LIS) database, on development patterns in economic inequality for a set of countries that are less covered in the empirical literature, mostly due to a lack of appropriate data. After discussing the main challenges when harmonizing income and consumption microdata from middle-income countries, we focus on Brazil, China, India, Russia, and South Africa, in a comparative perspective, and we compare them with a selection of benchmark middle- and high-income countries. We also run country-level regressions to correlate the inequality measures with selected macroeconomic indicators.

Mexico

This chapter focuses on income inequality in Mexico, which increased between 1989 and 1994. Between 1994 and 2006, inequality declined; between 2006–14, inequality was again on the rise. The authors apply decomposition techniques to analyse the proximate determinants of labour income inequality and fiscal incidence analysis to estimate the first-order effects of taxes and social spending on the distribution of income. The key component that underlies the ‘rise–decline–rise again’ pattern was the evolution of returns to skills. In addition, while changes in fiscal policy in the 1990s were progressive and pro-poor, the redistributive effect has declined significantly since 2010, as transfers have become less progressive and net indirect taxes have increased.

Setting the Scene

Inequality has emerged as a key development challenge. It holds implications for economic growth and redistribution, and translates into power asymmetries that can endanger human rights, create conflict, and embed social exclusion and chronic poverty. For these reasons, it underpins intense public and academic debates and has become a dominant policy concern within many countries and in all multilateral agencies. It is at the core of the seventeen goals of the UN’s 2030 Agenda for Sustainable Development. This chapter introduces a volume that contributes to this important discussion by bringing together assessments of the measurement and analysis of global inequality by leading inequality scholars with a comprehensive view of inequality trends in five of the world’s largest developing countries—Brazil, China, India, Mexico, and South Africa. Understanding inequalities in these economies remains challenging, but is of great value in coming to grips with the contemporary global inequalities detailed in other chapters.

Synthesis and Policy Implications

Within a stable macroeconomic framework, there is a need to change how the economy works for all of its citizens. Economics justifies the need to crack down on crony capitalism and rent-seeking, and break up monopolies and oligopolies. This would reduce income and wealth concentration at the top and increase growth by fostering stronger competition and equal access to economic opportunities. These policies are likely to reduce within-country inequality and between-country inequality as well, since they would have their most dramatic impact in poor countries. At a global level, the policy toolbox also includes foreign aid policies designed to attack between-country inequality. International trade policies have been and will continue to be key to give poor countries opportunities to develop faster, linking up with the obvious need for effective domestic and international agricultural and industrial policies in a context of increasing concern with socially and environmentally sustainable development.

Brazil

After three decades of persistently high income inequality, from 2001 onwards Brazil experienced a downward inequality trend followed by rising household income growth. Both movements lasted until 2015. This work synthesizes the results of six papers that describe the evolution of Brazilian income distribution. A common approach pursued was to jointly assess inequality, mean income, and social welfare rates of growth. We use a vast array of datasets to fill the gaps found in the literature. Top incomes’ movements reduced income inequality fall but increased mean income growth, suggesting challenges in measuring and interpreting inequality changes. Overall, inequality fall was driven by labour earnings through firm-specific effects. Rising schooling and falling returns also played a role, especially if parents’ educational background is taken into account. Missing income values did not affect inequality measures. Direct and indirect taxes increased inequality trends, while official monetary benefits helped to reduce them.