ECONOMIC INEQUALITY

Living conditions are vastly unequal between different places in our world today. And they have also changed over time; in some places living conditions have changed dramatically, in others more slowly.

Our individual life stories are contributory factors but the major global changes and inequalities largely determine how healthy, wealthy, and educated each of us will be in our own lives. Certainly, our own hard work and life choices matter. These matter much less than the one big thing over which we have no control over: where and when we are born. This single, utterly random, factor largely determines the conditions in which we live our lives.

Today’s global inequality is the consequence of two centuries of unequal progress. Some places have seen dramatic improvements, while others have not. It is on us today to even the odds and give everyone - no matter where they are born - the chance of a good life. This is not only right but can be made to happen. Our hope for giving the next generations the chance to live a good life lies in the broad development that makes possible for everyone what is only attainable for a few today.

It strikes many people as inherently unfair that some people are able to enjoy healthy, wealthy, happy lives whilst others continue to live in ill-health, poverty and sorrow. For them, it is the inequality in the outcomes of people’s lives that matters. For others it is the inequality in opportunity - the opportunity to achieve good outcomes - that is unfair. But these two aspects of inequality are not separable.

Today’s global inequality of opportunity means that what matters most for your living conditions is the good or bad luck of your place of birth.

The inequality between countries is not the only aspect that needs to be considered. Inequalities within countries and societies - regional differences, racial differences, gender differences, and inequalities across other dimensions - can also be large, and are all beyond any individual’s own control and unfair in the same way.

This visualization shows the inequality in living conditions between the worst and best-off countries in the world today in a number of aspects:

·         Health: A child born in one of the countries with the worst health is 60-times more likely to die than a child born in a country with the best health. In several African countries, more than one out of ten children born today will die before they are five years old. In the healthiest countries of the world – in Europe and East Asia – only 1 in 250 children will die before he or she is 5 years old.

·         Education: In the countries where people have the best access to education – in Europe and North America – children of school entrance age today can expect 15 to 20 years of formal education. In Australia, formal education expectancy is 22.9 years. Children entering school at the same time in countries with the poorest access to education can only expect 5 years. And additionally, children tend to learn much less in schools in poorer countries.

·         Income: If you look at average incomes and compare the richest country – Qatar with a GDP per capita income of almost $132,886 – to the poorest country in the world – the Democratic Republic of Congo at $439 – then you find a 303-fold difference. Qatar and other very resource-rich economies might be considered outliers here, suggesting that it is more appropriate to compare countries that are very rich without relying mostly on exports of natural resources. The US has a GDP per capita income of $63,690 and Switzerland of $82,504. This means the Swiss can spend in 1 month what people in the Democratic Republic of Congo can spend in 15 years and 8 months.

When you are born in a poor place where every tenth child dies you will not be able to get the odds of your baby dying down to the average level of countries with the best child health.

In a place where the average child can only expect 5 years of education it will be immensely harder for a child to obtain the level of education even the average child gets in the best-off places.

The difference is even starker for incomes. In a place where GDP per capita income is less than $1,000 and the majority lives in extreme poverty where the average incomes of a rich country are unattainable. The short answer is that where you live is not just more important than all your other characteristics, it is more important than everything else put together.

What is true for inequality across countries around the world today, is also true for change over time. What gives people the chance for a good life is when the entire society and economy around them changes for the better. This is what development and economic growth are about: transforming a place so that what was previously only attainable for the luckiest few comes into reach for most. 

Finland is a country where people today are among the healthiest and the richest in world. Back in 1800, out of all children born in that year in Finland, 42% died in the first five years of their lives. And the average income in Finland then was extremely low: GDP per capita was only $827 per year (this is adjusted for price increases to keep the purchasing power comparable to today). And similarly, even basic education was not available for most.

A society where almost half of all children died was not unusual; it was similarly high in humanity's history until just very recently. At that time there was little global inequality; life was short everywhere and no matter where a child was born, chances were high that he or she would die soon.

And just as there was little inequality in mortality and health between different places around the world, there was also little inequality within countries. The health of the entire society was bad. The aristocrats and the rich died just as early as everyone else.Their life expectancy was below 40 years. Before social development, even the most privileged status within society would not give you the chance for a healthy life. You just cannot be healthy in an unhealthy place.

After two centuries of slow, but persistent transformation, Finland is today one of the healthiest and wealthiest places in the world. It was not smooth progress – during the Finnish Famine in the 1860s, the mortality rate increased to over half – but gradually child health improved and today the child mortality rate is just 0.23%. Within two centuries, the chances of a Finnish child surviving the first five years of its life increased from 58% to 99.77%.

The same is true for income. Back in 1800, global inequality between countries was much lower than it is today. Even in those countries that are today the richest in the world the majority of the people lived in extreme poverty until recently. Finland was no exception.

Until around 1800, today’s best-off places were as poor as today’s worst-off places, and child mortality was even worse. What created the global inequality we see today were the large cross-country differences in improvements in health and economic growth over the last two centuries. Some parts of the world escaped the worst poverty and diseases, while others lagged behind.

And just as there is almost no overlap between the distributions of income in today’s poor and rich countries, there is also almost no overlap between the distribution of income in a rich country today and that of the same country in the past.

The fact that these transformations improved the living conditions of entire societies so dramatically, means that it is not just where you are born that matters for your living conditions, but also the time when you were born. Children with a good chance of survival are not just born in the right place, but also at the right time. In a world of improving health and economic growth, all of us born in the recent past have had much better chances of good health and prosperity than all who came before us.

Without looking at the historic data, it is not possible to understand just how dramatically the prosperity and health of a society can be transformed. The health and prosperity in the past were so bad that no one in Finland could have imagined living the life that is today the reality for the average person in Finland.

The global inequality of opportunity in today’s world is the consequence of global inequality in health, wealth, education and the many other dimensions that matter for our lives.

The fact that it is the randomness of where a child is born that determines his or her chances of surviving, getting an education, or living free of poverty cannot be accepted. We have to end this unfairness so that children with the best living conditions are just as likely to be born in Sub-Saharan Africa as in Europe or North America.

The link between inequality and corruption seems compelling. Corruption is exploitative. Inequality breeds corruption by: 

(1) leading ordinary citizens to see the system as being stacked against them 

((2) creating a sense of dependency among ordinary citizens and a sense of pessimism for the future.

(3) distorting the key institutions of fairness in society, the courts, which ordinary citizens see as their protectors against evil-doers, especially those with more influence than they have. 

Economic inequality creates political leaders who make patronage a virtue rather than a vice, since it provides jobs for ordinary citizens. These leaders help their constituents, but more critically they help themselves. Inequality breeds corruption and leads to a dependency of the poor on the political leaders. Inequality leads to nepotism – leaders establish themselves as monopoly providers of benefits for their loyal supporters. Ordinary people do not approve of corruption. However, those at the bottom of the economic ladder see it as necessary evil for their survival. 

Technological advances may affect labour income inequality as they can benefit higher-skilled workers more than others. For example, to the extent that medium-skilled workers focus on routine tasks that can also be accomplished by computers, technological change will reduce the demand for such workers.

The opposite effect can be expected for highly-skilled and low-skilled workers who tend to focus respectively on abstract and manual non-routine tasks, both of which are harder to replace by machines. If the demand shifts are not offset by equal shifts in the composition of labour supply (e.g. by a large enough rise in tertiary education attainment), technological progress may reduce the earnings or employment of medium-skilled workers relative to both the low and high-skilled ones.

Globalisation may also widen inequality. A first channel through which this may happen is offshoring. The tasks that are relocated from richer to poorer countries are typically not skill intensive from the perspective of the skill-rich country, but they are from the perspective of the skill-poor country. As a result, offshoring makes labour demand more skill intensive in both poorer and richer countries, thus increasing inequality in both groups of countries. Secondly, if firms differ in their profitability and low-income workers work 

disproportionately in low-productivity firms that are battered by import competition, trade may increase labour income inequality by lowering employment or the relative earnings of low-income workers. 

The inequality that we see in the world today is the consequence of unequal progress. Our generation has the opportunity - and the responsibility - to allow every part of the world to develop and transform into a place where good health, access to education, and prosperity is a reality.

There is no reason to believe that what was possible for Finland – and all other countries which today are much healthier and wealthier than they were two centuries ago – is not possible for the rest of the world. Indeed, as shown by the massive reduction in global child mortality between 1800 and 2020 – from a global average of 43% to 3.8% – similar effort and determination is required to achieve economic equality.

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