Economic Inequality and Social Progress*

Much of the literature on inequality has focused on economic inequality, usually measured through income, but there are many dimensions of inequality. Often interacting, these include inequality in freedoms, opportunities, and capabilities. One might also distinguish between interhousehold and intrahousehold inequality, vertical and horizontal inequality. One should also make a distinction between static and intertemporal assessments and address the issue of mobility. One should differentiate between unidimensional and multidimensional measures of inequality, objective versus subjective measures, absolute versus relative inequality, inequality versus polarization, and various indicators of inequality that emphasize the various dimensions of inequality. Wide income and wealth inequality retards social progress intrinsically and instrumentally by inhibiting improvements in welfare and the promotion of social cohesion. While some social and economic differentiation is tolerable and even desirable, substantial inequality in resources, opportunities, or capabilities runs counter to most theories of justice. In addition, a wide inequality gap reduces overall well- being, increases poverty, lowers the impact of economic growth on poverty reduction, affects behavior that can trap poor people in poverty and promotes social conflict. There is, however, no consensus on the impact of income redistribution on economic growth. Most data suggest that between- country inequality has narrowed somewhat since the 1980s. Meanwhile, within- country income inequality has been widening in many countries since the 1980s and now contributes a significantly larger share of global inequality. Since the late 1990s, trends in within- country income inequality have been more heterogeneous across regions of the world, with deceleration or stabilization in Asia, the OECD and transition countries, decrease in Latin America, and heterogeneous trends in Africa. The findings on the nonincome dimensions of inequality point generally to narrowing global inequality in health care and education, and substantial heterogeneity in the trends in withincountry inequality. There is considerable uncertainty and debate about the findings on the trends in inequality. This is associated partly with differences in the definitions of inequality, but also with poor data quality, lack of comparable data, and the irregular, incomplete, and inconsistent collection of data, especially in developing countries. The key drivers of trends in inequality between and within countries and groups can be distinguished into two kinds: deep- seated causes and more immediate determinants. The drivers and determinants are often country- specific: contexts, policies, and institutions matter. Deeper causes in OECD countries include skill- biased technological change, the swelling trade in labor- intensive manufactured products with emerging countries, the rise in the incomes of top earners in the expanding financial sector, the declining redistributive role of the state, and labor market policies, especially on unionization, the minimum wage, and low- wage sectors. In developing countries, inequality trends are affected by the earnings distribution of employees, but also by differences in inequality across regions and between rural and urban areas. Greater trade with rich countries has not met expectations of narrowing inequality, but has often served to widen inequality. The substantial narrowing in inequality in Latin America more recently has been caused by positive economic conditions and favorable policies on taxes and fiscal redistribution, labor markets, and social protection. Many of the drivers of the trends in inequality are deep- rooted, change only slowly, and therefore reproduce themselves. This reproduction of inequality leads to substantial path dependency in inequality, aided by entrenched social stratification that causes persistent inequalities across population groups. Deep drivers of inequality dynamics are also related to the influence of social movements, long-standing norms and attitudes affecting the degree in redistribution, the strong link between economic and political inequality, and demographic dynamics. As recent trends in inequality in Latin America or the heterogeneity in trends among OECD countries suggest, policy can have a substantial influence on inequality. Policies focusing on inequality can be grouped into (1) policies to improve the conditions among the poor, the vulnerable, and the marginalized; (2) policies that promote the growth and sustainability of a strong middle class; and (3) policies that seek to curb the excessive concentration of income and wealth at the top. Among the first group, relevant policies should concentrate on building physical and human assets among the poor through, for example, land reform and pro- poor education policies; enhancing economic opportunities through, for instance, better access to markets, more progressive tax- expenditure systems, and cash transfer programs to cope with shocks; and promoting social inclusion through, for example, antidiscrimination policies, legal reforms, and improved access among disadvantaged groups to the courts and the legal system. Among the second group, policies should focus on the middle class by promoting labor- intensive growth, fostering competition, favoring micro and small enterprises, addressing shocks through universal access to social protection, and enhancing employment and a living wage. Policies in the third group should focus on the top of the distribution by supporting greater progressivity in the tax system including inheritance taxes, addressing tax avoidance and evasion, and establishing codes of practice to limit pay raises at the top of the distribution. Macroeconomic policies and appropriate international action can play a supporting role. Macroeconomic and fiscal policies can also expand the revenue base available for redistribution, especially in countries with low ratios of tax to gross domestic product (GDP), for example, through resource taxes and more progressive income and consumption taxes. International cooperation can support countries in designing and implementing pro- poor policies. It could also help narrow inequality by focusing on combating tax avoidance and evasion by wealthy individuals and multinational corporations, controlling illicit financial flows, regulating financial markets, and favoring more orderly and less costly international migration regimes. The potential for implementing policies to narrow inequality in countries depends crucially on political economy issues within countries, and these are affected by the size and voice of the middle class, the power and incentives available to entrenched elites, the nature of political alliances, and the role of popular and social movements.