I was just wondering if an optimum level of inequality exists for developing countries. I don't know that much about economics (I've had six months' of economics study) but I'm very curious.
I know lots of top economists say high inequality is bad but those are usually in the US or UK and not in developing countries. I thought maybe an initial 'spurt' of inequality may boost growth? I know Deng Xiaoping created some inequality in China, which eventually led to rapid growth. A similar thing happened in India. I also thought that maybe inequality shouldn't be looked down upon as maybe it reflects a higher standard of living in countries. Assuming migration laws stay relaxed, countries with higher standards of living should have higher inequality as poor people flock to them, right? South Africa has a high GINI whereas Malawi has one way lower. Paul Collier also says that developing countries should develop market economies to catch up with the rest of the world but this will further increase inequality, right?
But the evidence suggests the complete opposite of what I think. Africa as a continent is the second most unequal continent in the world and the poorest. Why do you think that is? Do you think decreasing inequality will benefit the region? A Kuznets curve suggests that a country may have to go through mass inequality before reaching a stable level, but the African continent defies this as it's highly unequal yet still underdeveloped. What do you think causes this?
Income is the return of factors, such as labor, human capital and physical capital, that you own and exchange with other agents in the economy. Income inequality in different countries may arise for different reasons and thus it is difficult to have one answer for all.
You mentioned that income inequality in China and India might have led to rapid growth in the 1980s and 1990s respectively. At that time, both China and India transitioned from a closed, planned economy, in which factor returns and resource allocations are determined by the government, to an open market economy, where factor returns and resource allocation are determined by the market. In the market economy, market price provides important incentive for agents to work harder to earn more. Moreover, people have different endowment in human capital and other resources. Given the market pricing mechanism, the market economy reform would increase the income of the people that work harder and have more endowment. As a consequence, the income inequality rises over time. On the other hand, the working incentive and efficient resource allocation the market provides would naturally lead to higher growth compared to the planned economy. Not only that, when China and India opened up in the 1980s and 1990s, they were integrated into the global industry chain by attracting FDI and learning know how, which again helped growth. The income inequality in China grew for almost three decades and started to decline after 2012, when the economy came to the Lewis turning point, such that the abundant rural labor was almost exhausted and the wage income gap between urban and rural labor started to narrow down.
The income inequality in Africa is a different story. In most African countries, the income inequality may arise from social division. Many African countries have abundant natural resources, such as minerals, gas and oil. Unfortunately, in many African countries, there is a deep division between different population classes or ethnic groups. The elites in the country not only control the political power but also control the economic resources, including the above mentioned natural resources, while the bottom poor are not only poorly educated but also own little resources and therefore have difficulty climbing up to upper-level class. I once did a field study in Djibouti. In this country, most officials have their own business. They could be government officials in the morning and businessmen working for their own business in the afternoon. The family of the president monopolizes many resources and product markets in the economy. The children of these political elites generally receive education in Europe and take decent and high-level positions when completing their studies. The poor living in slums are either unemployed (unemployment rate is around 30%) or have limited income and thus could not provide good education opportunities to their children, who will generally keep living in the slum with little human capital. So the income inequality in Africa mainly comes from the long-lasting and locked division between elite class and grassroot class.
The income inequality in developed countries is another story. Kuznets found the inverted U-shape curve relationship between income and inequality in the 1970s, which was rather optimistic about the long run evolution of the inequality. However, since the 1970s, income inequality in many developed countries, including the U.S., monotonically increases over time, violating the Kuznets curve. There are many reasons behind this. One reason could be the globalization accompanied with the opening up of large economies, such as China and India. If we consider the world as one production unit, when China and India opened up and were integrated into the global industry chain, that means the global supply of unskilled labor was suddenly increased by many times. As a result, the wage income of unskilled labor in developed countries is depressed, and the incomes of skilled labor and capital, which are complements of unskilled labor, increase in developed countries. Moreover, the improvement of production technology in developed countries leads to the substitution of labor by machines, which also helps increase the income of skilled labor and capital and depress the income of unskilled labor.