Abstract
This chapter deals with income inequality in developing countries. It gives a historical overview on how income inequality has been addressed in developing countries and discusses contemporary issues of income inequality, especially in the context of growing globalization. Globalization and especially financialization and to a certain extent skills based technical change, have been important exogenous drivers of inequality. These drivers have in various cases strengthened existing patterns of inequality through a stubbornly high wealth inequality and through intergenerational transfers of inequality due to skewed access to higher-level education. The adverse effect of financial and trade globalization, on income inequality during the past three decades have been exacerbated by national policies that had a negative impact on income distribution. Monetary policies that emphasized price stability over growth, labour market policies that weakened bargaining position of labour vis-à-vis employers, and fiscal policies that prioritized fiscal consolidation at the expense of benefits and progressive taxation, all contributed to increasing income inequality. However, national policies, including a strengthening of institutions to deal with inequality can play an important role on reducing income inequality. Several countries have managed to use fiscal policies to mitigate a high primary income inequality down to lower levels of secondary and tertiary inequality. Additionally, the right mix of macroeconomic, fiscal, labour market and social policies (policy coherence) can reverse the rising trend in income inequality.
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- 1.
The actual year of the early 1990s and the early 2000s differs by country depending on data availability. In these calculations, the starting years range from 1990 to 1993 and the end years range from 2003 to 2010.
- 2.
Following UN country income classifications, the high-income group represents developed economies, and the low-income and middle-income (both lower and upper) groups represent developing economies.
- 3.
For a lucid treatment of global income inequality, see Milanovic (2016).
- 4.
It is true that theGeneral Assembly resolutionlays down a precise quantitative target only for the increase in aggregate incomes, and that there is no similar quantitative target for changes in income distribution. We can, however, take it for granted that the 5 per cent growth target established by the resolution also implies that the increment in income thus achieved should be wisely used for the benefit of the poorer sections of the population and should result in a degree of social progress which is at least in “balance” with the rise in aggregate national income (Meier 1971, p. 54).
- 5.
Kuznets himself never claimed that the decline in inequality that he observed in the later stages of development was ‘natural’. On the contrary, the major factor that Kuznets identified as reducing inequality was “legislative interference and political decisions” driven by “the growing political power of the urban lower-income groups” Kuznets (1955). See also Luebker (2007).
- 6.
Stewart argues that internally funded and locally designed antipoverty programmes are more effective in reaching the poor than social funds (Stewart 1995).
- 7.
- 8.
The IMF (Jaumotte and Tytell 2007) investigated the effect of globalization on the labour income share in developed countries as did the OECD (Bessanini and Manfredi 2012), while UNDP (Rodriguez and Jayadev 2010) and ILO (2011) and (2013) carried out several analyses on a broader set of data encompassing all countries in the world.
- 9.
Other variables used are manufacturing share, GDP per capita, openness, civil liberties and human capital.
- 10.
For the Standardized World Income Inequality Database (SWIID), see Solt (2016)
- 11.
The Globalization index is the most widely based index of globalization as it combines the major de facto indicators of globalization (trade, FDI stocks, portfolio investment and income payments to foreign nationals) with various de jure indicators (hidden import barriers, the mean tariff rate, taxes on international trade and capital account restrictions). For detailed definitions of index components and weights, see Dreher, Gaston and Martens (2008). http://globalization.kof.ethz.ch/
- 12.
Atkinson (2015) provides, in a very understandable and well-argued manner, 15 proposals to reduce income inequality in developed economies.
- 13.
This success is now however contested, following changes in domestic policies in various countries in the wake of strong adverse international conditions leading to a lower GDP growth rate (Cornia 2017).
- 14.
Lustig is using slightly different terms: primary income = market income, secondary income = disposable income and tertiary income = final income.
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van der Hoeven, R. (2019). Income Inequality in Developing Countries, Past and Present. In: Nissanke, M., Ocampo, J.A. (eds) The Palgrave Handbook of Development Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-14000-7_10
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