RED ZONE: Income inequality

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G-20 Finance Ministers and Central Bank Governors pose for the family photograph in October. Photo: AFP/Getty Images

Income inequality has always existed and periodically flared up as an economic and social issue. Today the growing gap in incomes between the rich and poor has become incandescent. From the biggest developed economy, the U.S., to the biggest developing one, China, income inequality will be one of the prominent global socio-economic issues of 2014. While the problem takes different forms in different countries, income inequality’s steady rise threatens to create a populist backlash in many countries that leaders are obliged to confront.

Income inequality’s negative consequences — ranging from poverty to social exclusion and to demographic impacts – have the potential to ripple through national established economic structures and reshape the 21st century. In the long run (and if it continues to go down the increasing path it’s on) inequality might well prove to be the harshest and longest-lasting effect of the 2008 global financial crisis. Five years since the meltdown it seems to be shaping up as such.

In the U.S., income inequality will be among the economic issues at the forefront of the national debate in a mid-term elections year. President Barack Obama indicated in several economic speeches in late 2013 that he considers it “the defining challenge of our time.” The U.S. is the developed economy in which the disparity between the rich and the rest is more acute. This is leading to the decay of the so-called American Dream.

Poverty in Europe has been rising markedly (and is predicted to continue to do so) as a consequence of sky-high unemployment and is the driving force of the Continent’s growing inequality. The euro crisis has corroded a large chunk of the region’s social-welfare provisions. With youth unemployment at record levels in many European countries, the problem could likely become entrenched.

In Latin America there are signs that countries which experienced years of growth such as Brazil and Mexico are now reversing the modest declines in income inequality that growth brought. Poverty remains a great challenge for the region as well. Michelle Bachelet, newly elected as Chile’s president, campaigned on redressing persistent inequality in the world’s top copper exporter. According to the Organization for Economic Cooperation and Development (OECD), Chile and Mexico are the two most unequal countries. In 2010, in the 33 OECD member states the richest 10% of people earned 9.5 times the income of the poorest 10%.

The political opportunity that tackling income inequality provides comes in the form of national debates about viable remedies. Otherwise, social tensions may spill out onto the streets, as has been seen in parts of southern Europe. More violent displays are perhaps in train. Meanwhile, the global dimension of inequality is likely to become increasingly relevant. The interconnection of the world’s economies was highlighted in the global financial crisis, and with it the rise of global income inequality. While economies are at different points of the economic cycle, different countries will have different positions, but like financial stability, sustainable economic growth is now a policy issue that transcends borders.

Will the politicians step up to the challenge? Branko Milanovic, an economist for the World Bank who focuses on issues of income distribution, doesn’t believe so. He sees income inequality remaining a polarizing issue among politicians. “It’s up to the public to put pressure to the policy-makers so they confront the problem,” he told Blouin News. “The public will play a big role as a political force,” he says. 2014 will be a year for it to do so.