Severe income disparity: A review of the WEF’s global risk

ABSTRACT This paper provides a discussion of one of the most persistent global risks identified by the WEF, namely severe income disparity.The report focuses on describing the systemic nature of this risk along with indicating its manifestation in both developed and emerging economies. Moreover, three distinct concepts of measuring global income inequality are presented as based on Milanovic’s research. The paper discusses numerous interconnected risks to income disparity, and provides recommendations for improvement. INTRODUCTION According to the World Economic Forum (WEF), severe income disparity between the richest and poorest citizens has become one of the most substantial risks facing the global community in the 21st century (Global Risks 2012). The WEF has emphasised the urgency to tackle income disparities because of the widening chronic gap between the rich and the poor. This aspect represents a serious threat to social stability in the global context. The risk of severe income disparity also raises concerns about persistent recession, which has an adverse effect on middle classes in developed economies (Law et al. 2014). In addition, it has been indicated that the process of globalisation has led to a polarisation of incomes in emerging and developing economies. Identified as a systemic risk, severe income disparity is defined as the unequal distribution of individual income across different participants in an economy. Income inequality also refers to the percentage of income which corresponds to the percentage of population (Armour et al. 2013). This concept is associated with the notion of fairness, and it is usually considered unfair if the rich citizens have a substantial portion of a country’s income in comparison to representatives of their population. Moreover, the causes of severe income disparity tend to vary by specific characteristics, such as region, education, and social status. It is important to explore the implications of such income disparity globally (Schneider 2013). This type of inequality is generally measured through the ‘Gini coefficient’, which provides adequate information about the way of how income distribution in a particular country deviates from the notion of perfect equity (Grabka and Goebel 2014). The objective of this paper is to explore and critically analyse the WEF risk of severe income disparity. SYSTEMIC DIMENSIONS OF THE PROBLEM OF INCOME DISPARITY The concentration of substantial economic resources in the hands of fewer individuals indicates a significant threat to stabilising global political and economic systems (Chang et al. 2013). As a result, political organisations engage in a process of addressing the demands and needs of economic elites, which are identified in different economies, both developed and developing. This occurs to the detriment of ordinary citizens, who appear adversely impacted by severe income disparity (Berveno 2014). The global financial crisis has sparked research interest in exploring the dimensions of income disparity across the world. Regardless of extensive discussions on the negative impact of income disparity in developed and emerging economies, this has not resulted in adequate solutions to the problem (Lin et al. 2014). It can be argued that world leaders and politicians unite their efforts to provide a realistic framework of how they can address the issue of income disparity (Burz and Boldea 2012). The problem of widening income inequality is systemic in nature and is linked with political influence. The poorest citizens in the world usually tend to lack access to modern economic and political systems that enforce specific laws and regulations (Pulok 2012). In developed economic systems, representatives of the low and middle classes are commonly found at the low levels of society due to unaffordable education and challenges of obtaining credit facilities. In addition, jobs with high salaries have become scarce (Chang et al. 2013). This emerges as another contributing factor to widening the gap between the richest and poorest citizens. MINIMUM QUALITY OF LIFE The discussion of a minimum quality of life has been recently initiated in the United States. The focus has been on keeping the dignity and respect of human beings intact. Yet, it can be argued that Europeans are more advanced than Americans in terms of the discussion of the issue of severe income disparity (Bergh and Nilsson 2014). The gap between the richest and poorest citizens is mostly evident in developed economies, according to the WEF report (Global Risks 2012). Although such uneven growth is considered normal in emerging markets, they are more likely to face the problem of income inequality in the near future (Shin and Shin 2013). Some may argue that income disparity is an inevitable by-product of free markets. However, there is no substantial evidence to support this claim. There is no easy solution to the issue of income inequality, but global leaders tend to suggest that balance is fundamental (Bergh and Nilsson 2014). Government intervention may appear a relevant solution to the problem. Yet, it should be considered that such intervention should not have a negative impact on market efficiency. Government intervention may be focused on increasing market access. Other individuals and groups that hold a more pessimistic view indicate that the inability to influence government policy can prevent the creation of any changes that try to alleviate the problem of severe income disparity (Global Risks 2012). DIFFERENT CONCEPTS OF INEQUALITY Branco Milanovic is one of the main researchers looking at the issue of severe income disparity. He emphasises three distinct concepts of inequality. The first concept is associated with the aspects of unweighted global inequality. It refers to the use of GDP per capita and ignores population (Milanovic 1998). This type of inequality has been progressively decreased in the last few decades. The second concept relates to population weighted global inequality where it is assumed that all people in a country receive the same income (Pulok 2012). Yet, the precise number of representative persons from each country indicates its population size. If this measure is applied, it appears that income inequality has decreased in the past several years, even though it has expanded in countries such as China and India (Bergh and Nilsson 2014). The third concept used by Milanovic is based on the principle of treating everyone in the same manner, regardless of one’s nationality. This has gradually become a global measurement of income disparity (Shin and Shin 2013). It can be suggested that by applying the proposed measure in practice, global inequality substantially increased in the period from 1988 to 1993. As a result, the poorest 5% have lost almost 25% of their actual income, whereas the richest citizens have gained approximately 12% (Milanovic 1998). ESSENTIAL FINDINGS In the United States, the sector of Accommodation and Food Services emerges as the most unequal sector in the US economy, dominated by substantial inequality within this industry (Auten et al. 2013). It has been indicated that Accommodation and Food Services demonstrated a CEO-to-worker pay ratio of 543-to-1 in 2012. The ratio of compensating fast food CEOs was approximately 1,200 times more compared to the income of the average fast food employees in the same year (Ruetschlin 2014). Such income disparity can be explained with two essential factors: high payments made to CEOs and poverty-level income received by average employees in the industry (Pulok 2012). In the table below, specific information is presented about the Gini Index, which is a standard measure of family income disparity in a country. The data is provided by the CIA, according to which the country that ranks highest in terms of income inequality is South Africa with a Gini Index of 65.0, while Sweden ranks first with a Gini Index of 23.0 (Vogel 2012). These results provide important implications into the widening gap of the richest and poorest citizens around the world. Table 1: Income Disparity in Different Countries, 2012 Overall RankCountryGini Index 1Sweden23.0 5Norway25.0 13 Germany27.0 46United Kingdom34.0 58India36.8 62Japan37.6 85Russia42.0 92Iran44.5 95United States45.0 119Mexico51.7 135South Africa65.0 Furthermore, it has been argued that the wealth of the 1% richest persons in the world amounts to approximately ?60.88tn (Wearden 2014). This is almost 65 times as much as the amount of the poorest half across the world. It has been presented evidence that over the past several decades, the richest citizens have gained adequate political influence so as to turn main policies in their favour (Auten et al. 2013). According to Wearden (2014), tax rates applicable to the richest citizens have fallen in many countries. Since the 1980s, income inequality has progressively increased, as approximately 70% of the global population tend to live in countries with extensively expressed disparity in terms of income (Herzer and Nunnenkamp 2013). Opinion polls conducted in different countries, such as the United States, the United Kingdom, India and South Africa, showed a trend that most citizens in each country hold the belief that the wealthiest individuals exert extensive social and political influence (Xu and Garand 2010). INTERCONNECTED RISKS The global risk of severe income disparity is linked with other interconnected risks, according to the WEF report. As the WEF has indicated, the widening income gap presents a threat to the economic and social stability globally (Global Risks 2012). Therefore, it can be argued that severe income disparity is closely linked with other risks, such as inappropriate governance, persistent crime and corrupt practices, food insecurity, chronic diseases, and terrorism (Fisher et al. 2013). One of the co-authors of the Risks report has stated that if the problem of income disparity remains unresolved, this would lead to greater problems with the other interconnected risks. Cassette et al. (2012) have argued that if absolute poverty is eliminated, this would significantly help global policymakers to address the issue of severe income disparity. In this situation, wealth could be used to increase the living standards of citizens around the world. Moreover, the problem of income inequality is connected to the process of globalisation in the sense that even though the world tries to stay together, it actually is growing apart (Tregenna and Tsela 2012). This problem has become quite persistent after the global financial crisis, especially in the United States, which has been identified as 45th in the world for presenting a wide gap between the richest and poorest citizens (Vogel 2012). The minimum wages received by populations also increase the risk of such evident income divisions because of concentrating more wealth into CEOs of organisations than in the hands of average employees. When access to education and health care is limited, this obviously increases the risk of income disparity because of the gap that is created between those who can afford such services and others who cannot (Cassette et al. 2012). The lack of equal opportunities for professional development of all citizens represents another interconnected risk. It can be concluded that the risks that are mostly associated with severe income disparity are macroeconomic in nature, such as fiscal crises and structural unemployment (Chang et al. 2013). The failure of global governance structures emerges as the most central risk contributing to income inequality. These interconnections between risks provide important insights into the available transmission channels between them (Wearden 2014). SUGGESTIONS FOR IMPROVEMENT The leaders gathered at the WEF should support progressive taxation. They should be also encouraged to avoid any practice that may lead to a situation where they use their high income to obtain political favours (Baldil 2013). As part of the broad strategy to mitigate such global risk identified by the WEF, it is important to respect the democratic will of all other citizens who are not considered rich. Another strategy for improvement is associated with making public all investments in organisations (Leibbrandt et al. 2012). Income inequality can be lowered in situations when more opportunity and growth is created. Global leaders should work on the emergence of an equality agenda. CONCLUSION This paper has provided an exploration of the global risk of severe income disparity, as identified by the WEF. This risk has been indicated as one of the most persistent global risks threatening social and economic stability across the world (Baldil 2013). The focus of the paper was on describing systemic dimensions of the problem of income disparity. It was argued that the problem of income inequality is present in both developed and emerging economies. Another argument introduced in the paper referred to the association of income disparity with political influence. There was a discussion of minimum quality of life, which has been initiated in the United States (Cassette et al. 2012). The income disparity gap has been presented as wider in emerging economies. Moreover, the paper focused on Milanovic’s different concepts of inequality in order to provide a relevant basis for measuring income disparity globally (Milanovic 1998). Specific interconnected risks along with suggestions for improvement have been presented in this report. The major interconnected risk has been identified as the failure of global governance (Xu and Garand 2010). In conclusion, global leaders should constantly work on implementing adequate solutions to tackle the problem of severe income disparity. REFERENCES Armour, P., Burkauser, R. V. and Larrimore, J. (2013). ‘Deconstructing Income and Income Inequality Measures: A Crosswalk from Market Income to Comprehensive Income’. American Economic Review, vol. 103(3), pp. 173-177. Auten, G., Gee, G. and Turner, N. (2013). ‘New Perspectives on Income Mobility and Inequality’. National Tax Journal, vol. 66(4), pp. 893-912. Baldil, G. (2013). ‘Physical and Human Capital Accumulation and the Evolution of Income and Inequality’. Journal of Economic Development, vol. 38(3), pp. 57-83. Bergh, A. and Nilsson, T. (2014). ‘When More Poor Means Less Poverty: On Income Inequality and Purchasing Power’. Southern Economic Journal, vol. 81(1), pp. 232-246. Berveno, O. V. (2014). ‘Influence of an Extreme Inequality of Income upon the Life Quality’. Problems of Economy, (1), pp. 304-308. Burz, R. D. and Boldea, B. I. (2012). ‘Sustainability of Economic Growth and Inequality in Incomes Distribution’. Annals of the University of Oradea, Economic Science Series, vol. 21(1), pp. 249-254. Cassette, A., Fleury, N. and Petit, S. (2012). ‘Income Inequalities and International Trade in Goods and Services: Short- and Long-Run Evidence’. International Trade Journal, vol. 26(3), pp. 223-254. Chang, J., Liu, C. and Hung, H. (2013). ‘Does Performance-Based Compensation Boost Economic Growth or Lead to More Income InequalityDoes Performance-Based Compensation Boost Economic Growth or Lead to More Income Inequality?’ Economic Record, vol. 89(284), pp. 72-82. Fisher, J. D., Johnson, D. S. and Smeeding, T. M. (2013). ‘Measuring the Trends in Inequality of Individuals and Families: Income and Consumption’. American Economic Review, vol. 103(3), pp. 184-188. Global Risks 2012, Seventh Edition (2012). World Economic Forum. Geneva, Switzerland. Grabka, M. M. and Goebel, J. (2014). ‘Reduction in Income Inequality Faltering’. DIW Economic Bulletin, vol. 4(3), pp. 16-25. Herzer, D. and Nunnenkamp, P. (2013). ‘Inward and Outward FDI and Income Inequality: Evidence from Europe’. Review of World Economics, vol. 149(2), pp. 395-422. Law, S. H., Tan, H. B. and Azman-Saini, W. N. (2014). ‘Financial Development and Income Inequality at Different Levels of Institutional Quality’. Emerging Markets Finance & Trade, vol. 50, pp. 21-33. Leibbrandt, M., Finn, A. and Woolard, I. (2012). ‘Describing and Decomposing Post-Apartheid Income Inequality in South Africa’. Development South Africa, vol. 29(1), pp. 19-34. Lin, Y. C., Huang, H. C. and Yeh, C. C. (2014). ‘Inequality-Growth Nexus along the Development Process’. Studies in Nonlinear Dynamics & Econometrics, vol. 18(3), pp. 237-252. Milanovic, B. (1998). Income, Inequality, and Poverty during the Transition from Planned to Market Economy. Washington: The World Bank. Pulok, M. H. (2012). ‘Revisiting Health and Income Inequality Relationship: Evidence from Developing Countries’. Journal of Economic Cooperation and Development, vol. 33(4), pp. 25-61. Ruetschlin, C. (2014). Fast Food Failure: How CEO-to-Worker Pay Disparity Undermines the Industry and the Overall Economy [online]. Demos Organization. Available at: http://www.demos.org/publication/fast-food-failure-how-ceo-worker-pay-disparity-undermines-industry-and-overall-economy [Accessed: 20 August 2014]. Schneider, M. P. (2013). ‘Illustrating the Implications of How Inequality is Measured: Decomposing Earnings Inequality by Race and Gender’. Journal of Labour Research, vol. 34(4), pp. 476-514. Shin, K. and Shin, D. (2013). ‘New Evidence on Determinants of Income Inequality’. Journal of Economic Theory and Econometrics, vol. 24(2), pp. 125-162. Tregenna, F. and Tsela, M. (2012). ‘Inequality in South Africa: The Distribution of Income, Expenditure and Earnings’. South African Ministry of Cooperative Governance and Traditional Affairs, vol. 29(1), pp. 35-61. Vogel, R. D. (2012). Civic Revolution: Targeting the Dictatorship of Wealth [online]. Available at: http://combatingglobalization.com/articles/Targeting_the_Dictatorship_of_Wealth.html [Accessed: 20 August 2014]. Wearden, G. (2014). Oxfam: 85 Richest People as Wealthy as Poorest Half of the World [online]. The Guardian. Available at: http://www.theguardian.com/business/2014/jan/20/oxfam-85-richest-people-half-of-the-world [Accessed: 20 August 2014]. Xu, P. and Garand, J. C. (2010). ‘Economic Context and Americans’ Perceptions of Income Inequality’. Social Science Quarterly, vol. 91(5), pp. 1220-1241.