Income inequalities and the rules of the game

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Yesterday I attended a seminar organized by the Growth Commission on “Ingredients for Successful Growth Strategies – Equity, Globalization and Leadership” chaired by Otaviano Canuto. As a part of the opening remarks Nobel laureate Michael Spence made it clear that inclusiveness is an integral part of any growth strategy and a necessity for achieving high levels of growth. In (on average) middle income countries where income inequalities are pronounced one finds two economies operating simultaneously:  the upper class resembles OECD economies characterized by low levels of growth, while the poorer majority live in a low-income economy with little resources to grow. As a result, the economy as a whole grows at a suboptimal level until these two groups can be remerged and the middle-class is re-established.

Having lived in Finland and Sweden for the most of my life, I cannot help but reflect on the debate on income inequalities. Back home equality of opportunity is demonstrated by free access to health care and education, strong focus on gender equality, and unwillingness to appear better than others is strongly reflected in the rhetoric (whether or not the image holds for scientific scrutiny is a different story). Equality in outcomes is yet ensured by the highly progressive tax rate. Even though income differences are on the rise, making a fortune simply by increasing the work effort is not very likely. As one of the panelists Professor Ravi Kanbur noted “Happiness is having $100 more than your brother in law”. More than that is possibly a pipe dream and not a realistic driver of supreme work effort.

In the globalized world where increased number of people move driven by economic opportunities it is becoming obvious that geographical borders are not decisive for the differences in income. Still, migrants commonly face other types of borders placing them in a labor market that differs from the one accessible for the domestic population. Even though being seemingly part of the same economy, the non-geographic boundaries put migrant workers (alongside with the domestic poor) in a situation where no work effort in the world would give them the high incomes enjoyed by the domestic middle-class. The country of equal opportunities, in this case Sweden, serves as a host for many tertiary educated Iraqis who commonly end up driving taxi in Malmo. As phrased by a stand-up comedian, how difficult can it be to drive taxi in Sweden if you need a doctorate level education to do it? Or maybe the equality of opportunity is just a politically correct discourse when it comes to migrants? Still, earning relatively better abroad than home allows migrants to send remittances that increase the possibilities for the remaining household members to acquire education and health services and possibly start a business back home, making the remittances receivers relatively well-off (and thus happier?).

Income inequalities are, to a certain degree, based on difference in effort combined with an unspecified interaction with difference in opportunity. The rules of the game are commonly not just tilted against the poor (migrants and the lower end of the domestic income scale alike), but the poor are on a totally different playing field. Providing opportunities for inclusion and playing well as a global team, while providing the opportunity for star players to excel, is likely to be a winning strategy for all. Let the world championship begin!
 

Authors

Elina Scheja

Economist, Migration and Remittances Team, Development Prospects Group, World Bank

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