ARTICLES
Inequality and Wealth
By Vasco Laranjo, CFA
Inequality Matters!
The Global Financial Crisis (GFC) is one decade past now, but now we are embracing a new challenging economic outlook due to the outbreak of the Covid-19 (SARS-CoV-2). Oppositely to what happened during the GFC, we saw now a fast response from Governments (Fiscal Policy) and Central Banks (Monetary Policy) around the world. The outcome of this effort is still to be seen as we are just in the middle of this new crisis. However, there is something that is already being discussed: the topic of Inequality.
It is true that most of the economies, which suffered strongly from the GFC, were observing a fully (or almost fully) recovery back to their pre-crisis economic levels, during the last years. Nevertheless, a major criticism to the Governments and Central Banks is that who benefitted the most from the policies taken in the aftermath of the Crisis were the wealthy, while the poor were left apart. Well, if we realize that companies were bailed out using tax-payer money, it is possible to understand that those companies’ stakeholders’ wealth was partially saved by their nations’ citizens. Also, the low-interest rate environment inflated asset prices, namely Real Estate, Stocks and Bonds, which is concentrated on the wealthier part of the society.
In that sense, in this article I feel it is important to take a look at the topic of Inequality and its relationship with Wealth.
Inequality
The most well-known measure of Inequality is the Gini Index, also known as the Gini coefficient or Gini ratio.
Gini Index: is a statistical measure of the extent to which the distribution of income among individuals or households within an economy deviates from a perfectly equal distribution. Therefore, the lower the deviation from that perfectly equal distribution, the lower the level of inequality. The values for the Gini Index range from 0 and 100. Hence, a Gini Index of 0 represents perfect equality, while 100 indicates perfect inequality.
Having digested the definition above, it is now time to have a practical look at the Gini Index. Let’s have a look at the world map. The latest available values for the Gini Index are for 2017 for some countries, however, as this index is not annually estimated for most of the countries, I decided to include the values down to 5 years-back (2013). For references on the Data Sources, please refer to the end of the article.
Tip: zoom and other functions available on the right corner, in all the graphs presented.
*Most of the values shown are for 2017, otherwise the latest data available down to 2013.
The first conclusion we can take from the map above is that inequality is focused on Central and South America, as well as, Southern Africa. Moreover, the most alarming countries in terms of inequality seem to be South Africa, from the strong red color denoting high inequality; and Brazil, from its large size and orange color clear in the world map.
On the other hand, Europe, the old continent, looks like the “greener” area leaded by the Nordic countries (unsurprisingly) and Eastern Europe Countries (probably a bit more surprising). Also, it is interesting to note, in these times of Trade War between the USA and China, that China presents a lower level of inequality compared to the USA. As I don’t want to get too much involved in politics, I allow the rest of the conclusions to lay on the readers’ side.
Wealth
As far as Wealth is concerned, I will focus on the previously presented metric for measuring wealth: the Gross National Income (GNI) per capita PPP.
Gross National Income (GNI): is a measure of a country’s income, including all the income earned by a country’s residents and businesses, which comprises income earned abroad. Oppositely to GDP, it does not account for income earned by foreigners located in the country.
GNI per capita breaks down the total GNI by the number of a country’s inhabitants.
GNI per capita PPP adjusts the GNI per capita by considering the standards of living between countries through a “basket of goods” approach. Thus, it presents a more consistent metric to make a comparison between different countries.
Similarly to what we did for the Gini Index, let’s have a look at the world map. The values for GNI per capita PPP are shown in thousands of dollars and, for each country, correspond to the same year as presented in the above map for Gini Index.
*Most of the values shown are for 2017, otherwise the latest data available down to 2013. Note: in the previous article a wider range of countries were included, however, here it was decided to solely present the countries for which Gini index values were available.
In this map, we sadly observe much more orange and red-like colors than in the previous one. Thus, indicating high inequality across the globe. The clear view here is that the wealthiest countries appear to be in the Western world: Europe, especially Nordic countries and Central Europe; the USA and Canada; and Australia.
On the other side, the poorest countries seem to be, again, situated in Central and South America, as well as, in Africa. Nevertheless, it is now interesting to note that the poorest countries in Africa are not the ones where we observed the highest inequality, the Southern African countries. Furthermore, this observation is also seen in Eastern Europe countries, which appear to be the poorest countries in Europe, but before were the ones where we observed the lower levels of inequality.
This leads us to the question: How does Inequality relate to Wealth?
Are the Wealthiest countries the ones providing higher levels of Equality?
In this section, I present a scatter plot displaying the relationship between our metric of Wealth against our measure of Inequality so to understand the relation between the two.
Here I would like to remind the reader that lower levels of Gini Index indicate a lower level of Inequality, that is, more equality between the distribution of income among individuals within a country. In that sense, when we see the negative trendline in the scatter plot it indicates that wealthier countries are providing higher equality to their citizens.
Nonetheless, one cannot avoid spotting that the country with the lowest level of inequality, Ukraine, is the second poorest in Europe, right after Moldova which also presents a very low level of inequality. When looking at the country with the highest level of Inequality, we find South Africa, which is also the third richest country in Africa by GNI per capita PPP. Therefore, here we see a tale of two worlds: poor countries with high equality and rich countries with high inequality. In addition to this view of dispersion in the world, another outlier surges: the USA, which is one of the richest countries in the world but, at the same time, presents a level of inequality greater than any European country.
All in all, this scatter plot indicates that richer countries provide higher levels of equality to their citizens. Yet, it was important to notice the outliers, that is, the dispersion in the results among countries. In that sense, I found it was relevant to see the timeline evolution in Inequality vis-à-vis Wealth. In other words, does the increase in a country’s Wealth provide a reduction in its Inequality levels?
Impact of the Evolution of Wealth in Inequality
In the topic of Development Economics, one of the most important factors affecting inequality is the quality of Institutions in a country. Accordingly, it would be fair to consider that an increase in a country’s wealth would allow for a higher investment in the establishment of those Institutions and, thus, reducing the level of inequality. Having this in mind, below I present a graph demonstrating the evolution of Inequality and Wealth by country.
Please note that, the GNI per capita PPP is presented in thousands of USD, while the Gini Index is presented on an index scale from 0 to 100.
In most of the (considered) developed countries by the 1990’s, we observe a small reduction on the Gini Index, despite the large increase in GNI per Capita PPP. This may denote that either these countries devoted a small effort on improving equality or that it is very hard to reduce equality past a given level.
Alternatively, when looking at our cover’s country, we observe that Brazil has followed a continuous path of inequality reduction followed by wealth increase. However, there is still a long way to go and the impacts of financial crisis, such as the one starting in the middle of 2014 in Brazil, are high and can quickly undermine the pursuit of equality.
What is your take from this analysis? Be welcome to share your thoughts and comments on the discussion below!
Sources
Data Source:
Code Source: GitHub Page
Cover Image Credits: © TUCA VIEIRA