Political Economy: Conditioning Markets to Reduce Income Inequality

Political Economy: Conditioning Markets to Reduce Income Inequality

It is now very much old news that economic inequality has risen dramatically in the United States and many other developed democracies over the past 30 years. This dramatic increase has produced a flurry of discussion over how severe the increase has been, how much of a problem inequality really is and what can and should be done about it.

While inequality is resurgent as an issue in U.S. politics, it has a much longer and more prominent history in middle- and low-income countries. This is likely due to the fact that inequality in developing countries has historically been much higher than in the developed world. The highest levels of inequality in the world, for example, are in Latin America and Africa. And in these contexts, economic inequality takes on additional importance because it is coupled with low average incomes and in many places extreme poverty. It’s harder to argue that income inequality is not an important problem where inequality exists alongside abject poverty.

Just to drive the point home, the richest 20 percent of households in Peru took home nearly 53 percent of all income produced in that country in 2010, compared to 3.9 percent for the bottom 20 percent. Interestingly, those numbers aren’t all that different than the United States. But in Peru, income inequality is coupled with a situation in which nearly 34 percent of people are living on less than $4 per day. When the rich are doing well and the poor are clearly impoverished, it is easy to realize that the economic pie needs to get bigger and that, whatever size the pie is, it needs to be distributed more equitably. This is reality for much of the developing world.

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