View all newsletters
Receive our newsletter - data, insights and analysis delivered to you
  1. Analysis
14 December, 2021

Weekly data: Will charity solve global inequality?

Attempts to close the gap between rich and poor countries through charity are flawed, as within-country inequality is much bigger than between-country inequality.

By Ben van der Merwe

There are a few facts that will always get a reaction of confusion and disbelief. No one knows where eels come from. The Renaissance began in an Italy with no tomatoes. Global inequality is falling.

It might not feel like it, but income inequality has been falling consistently for the past two decades. The fall has been driven by a reduction in inequality between countries, a result of relatively slow growth in the Global North since the financial crisis and much more rapid growth in parts of the Global South, most notably China, since the turn of the millennium.

The reason that this feels incorrect is twofold. The first is that global inequality remains extraordinarily high – today it stands at levels similar to those in the roaring 1920s, at the height of imperialism. The second is that inequality within countries has indeed been on the rise.

The result is that the current global distribution of income resembles that of the 1920s in another way – in the relative importance of within-country and between-country inequality.

Since around 1980, the gap between rich and poor countries has been shrinking even as the gap between the rich and poor within countries has grown. Data released earlier in December as part of the World Inequality Report 2022 shows that, since the turn of the 21st century, it has been differences in income between the rich and poor within countries that have been the chief cause of global income inequality.

As of 2020, the researchers estimate, within-country inequality accounts for 68% of global inequality, compared with 32% that results from differences in average income levels between countries.

A different take on inequality

What does this mean in practice? Imagine a world where every country had the same average income, but the distributions within each country remained as they are today. According to the new analysis, global inequality in such a world would be 32% lower than its current level. Now imagine a world where everyone in each country earns the average income of their nation, but differences between countries persist – in this world, global inequality would be 68% lower.

This goes against previous analysis, such as an influential 2015 paper by Branko Milanovic, which estimated that two-thirds of global inequality is a result of differences between countries.

This is important because it tells us where policy efforts are best focused. If inequality is overwhelmingly the result of differences between countries, then efforts that focus on redistribution within countries are less important than those that focus on levelling the international income distribution (for instance, through catch-up growth or international aid).

In a recent article for Our World in Data, based partly on Milanovic's analysis, Max Roser writes: “In a world of such vast inequalities between countries it is not who a person is that determines whether they are well-off or poor, but where a person is.”

Roser argues: “Redistribution through the state plays a large role in reducing inequality within countries and could also reduce global inequality. However, the reality is that, no matter in which rich country you pay your taxes, almost none of that goes to the world’s poor people.

“The redistribution that governments do is not reaching the poorest people: it is domestic not international redistribution. If you want to reduce global inequality and support poorer people, you do, however, have this opportunity. You can donate some of your money.”

Roser is right that although taxes paid in rich countries might go towards the poor in those countries, very little is likely to end up in the pockets of those who are poor in global terms. Global development aid, both public and private, amounts to just 0.2% of global GDP.

However, this elides an important point: government-backed redistribution efforts in the Global South can have significant benefits in terms of reducing global inequality. Countries such as China, South Africa and Brazil contain both many of the world’s poorest people and some of its richest.

Suppose South Africans elected a government willing and able to engage in redistributive politics, such that it was successful at bringing inequality down to levels seen in Denmark. Without any aggregate economic growth, the share of people living on less than $30 per day (purchasing power parity, or PPP, pre-tax), roughly corresponding to the poverty thresholds used in rich countries, would plummet from 69% to 37%, according to Investment Monitor’s analysis of 2016 data from the World Inequality Database and World Bank.

In Brazil, the effect would be similarly dramatic. The share living on less than $30 per day would fall from 62% to 26%; in China, from 52% to 38%; and in Nigeria, from 48% to 31%. A distribution of wealth more egalitarian than present-day Denmark would, of course, have an even greater effect on poverty levels.

Before it embarked on its economic reform programme in 1978, China had one of the most egalitarian income distributions in the world, with the top 1% of earners receiving 6.5% of income. By 2021 that share had risen to 14%. Had China achieved its extraordinary growth without increasing inequality, the share of Chinese people living on more than $30 per day would not be 48%, but 74%, similar to Croatia.

A potential wasted?

This enormous potential for redistributive politics in the Global South is obscured when analyses focus on inequality between countries. Solving global inequality has to involve interrogating why it is that countries in the Global South are so unequal and why the same forces that compelled redistribution in Europe and North America during the middle of the 20th century have not yet seen the same success elsewhere.

It may be that inequality is a necessary correlate of economic growth. It is certainly true that the industrialisation of Europe and North America went along with spiralling inequality, but between the First World War and around 1980, these countries managed an incredible feat of redistribution. In France, the share of income earned by the top 1% of earners fell during this period from 20% to just 8.6%; in the UK, from 20% to 7.2%; and in the US, from 20% to 10.5%.

This change was not a result of philanthropy, but politics. Trade unions used strikes to force concessions from unwilling governments, or replaced them with governments led by parties of their own.

Aid, whether delivered by wealthy philanthropists or foreign governments, cannot provide a stable fiscal basis for the kind of welfare state taken for granted in Europe today. Individual projects may be highly successful in distributing malaria nets or eradicating polio, but donations are a poor foundation for broader public service provision.

This is not to say that people living in the Global North owe nothing to those in the developing world and can do nothing for them. Western governments and corporations have a long and sorry history of disrupting redistributive efforts in the Global South.

This interference is not limited to Cold War coups. Developed, democratic governments today maintain support for highly regressive regimes around the world, regimes that have no interest in wealth redistribution. 

Meanwhile, countries such as Timor-Leste are punished by international institutions for improving social provision, while others are required to gut their welfare states in exchange for loans. The very legal architecture of foreign direct investment owes much of its character to the West’s fear of redistributive movements in the Global South.

Transferring wealth from rich countries to poorer ones is an urgent necessity, most critically in order to fund the energy transition and climate change resilience. It is also a moral imperative, given the history of exploitation between the two blocs. 

However, international aid is insufficient, both because it entrenches these power relations rather than levelling them and because the bulk of inequality today is within countries, not between them. 

The fact that global inequality today is dominated by within-country inequalities is something to celebrate, because it has historically been easier to effect redistribution at the national than the international level. The last time within-country inequality was such a large component of overall inequality, in the 1920s, the industrialised world stood on the precipice of enormously successful redistributive efforts.

The difference is that today’s sweatshops are not located in the centres of global empires but on the periphery of a competitive trading system. That means their internal inequalities are not simply domestic affairs: they owe much of their staying power to the incentive structures of globalisation, which reward subsistence wages and Victorian working conditions, structures entrenched where possible in international treaties and backed up when necessary by direct foreign meddling.

If these rapidly industrialising countries are to follow Europe’s 20th-century playbook in tackling inequality, they require not charity but solidarity.

Topics in this article:
NEWSLETTER Sign up Tick the boxes of the newsletters you would like to receive. Data, analysis and deep insights on foreign direct investment delivered to you
I consent to GlobalData UK Limited collecting my details provided via this form in accordance with the Privacy Policy
SUBSCRIBED

THANK YOU

Thank you for subscribing to Investment Monitor