Income Inequality Despite Economic Growth

As the G-8 countries prepare to meet in May, the emerging economies of the G-20 are increasingly making their voices heard on the global economic stage. But a recent report by the Organization for Economic Cooperation and Development (OECD) highlights a disturbing trend in developing countries that the Occupy Wall Street protests have given voice to recently in developed ones: income  inequality.

The OECD’s recent report “Special Focus: Inequality in Emerging Economies” examines income inequality in emerging economies (EEs) and finds that inequality is severe, despite these countries’ generally high rates of economic growth. In analyzing the trends behind persistent inequality, the report recommends several comprehensive policy changes to shrink the gap between rich and poor.

The report focuses on the six largest EEs – Brazil, China, India, Indonesia, the Russian Federation, and South Africa – which together account for one fifth of the world’s GDP and nearly half of the global population. However, while their national economies continue to expand, income distribution among their populaces remains unequal. The report finds that each EE has greater income inequality than the OECD average. Brazil’s indicator for inequality, for example, is nearly twice as large as the OECD average; South Africa’s indicator is larger than that of Brazil.

The report investigates the drivers of inequality in the EEs, noting that these factors differ from those in OECD countries. Specifically, large informal employment sectors, regional divisions, inconsistent access to education, and barriers to women’s achievement fuel income inequality in the EEs.

Despite persistent income inequality in the EEs, the report points to their economic growth as an opportunity to develop a sizable middle class. For such growth to happen, however, several public policy changes must occur. To reduce inequality while still promoting economic growth, the report identifies four key measures that comprise a “multipronged approach” to policy initiatives. These include improved incentives for formal employment, larger and more direct social assistance programs, increased access to education, and well-designed plans for financing more social spending.

The report devotes particular attention to the question of public financing and the need for reformed tax systems in EEs. It states that “greater redistribution in EEs requires a change in the structure of the tax system,” which would give EEs better recourse to provide social service programs and improved education. The report acknowledges that such restructuring is difficult, but insists that reforming tax systems in order to fund social programs is essential for reducing income inequality in EEs.