High Inequality a Potential Blow to Economic Growth in the BRICS

By Ariel Gandolfo

According to a new Oxfam report, in 2014 the richest 1% of the world’s population owned 47% of the world’s wealth. By 2016, this same elite will own more than half, meaning that 1% of the world’s population is as wealthy as the other 99%. But is such dramatic inequality necessarily bad for a society?

Yes: research shows that less equal societies experience slower and less sustainable economic growth, and that extreme inequality undermines social trust and national cohesion. These consequences can fuel instability and conflict and discourage long-term investment in national development. The new research has large implications for governments and international development agencies, especially in light of rising inequality in some of the world’s largest emerging economies.

In the BRICS countries, which have experienced solid economic growth over the last few decades, new data indicates that in addition to GDP, inequality is on the rise. The Gini coefficient measures the percent of national income (different from total wealth) earned by the top twenty percent of income earners, meaning that a score closer to 1 indicates more inequality as the upper quintile earns a disproportionately large share of salaries and wages. According to their own data, the BRICS countries report Gini coefficients of: Brazil: .5, Russia: .42, India: .37 (urban) and .28 (rural), and China: .47. In South Africa, one of the world’s most unequal nations, the Gini coefficient of .65 signifies that the richest twenty percent earns sixty-five percent of the national income. An Oxfam report on inequality in the BRICS group has similar findings, shown below.

Inequality as measured by the Gini coefficient in the BRICS countries and OECD average, for the early 1990s and late 2000s. Source: Oxfam

Inequality as measured by the Gini coefficient in the BRICS countries and OECD average, for the early 1990s and late 2000s. Source: Oxfam

The Oxfam report notes that income inequalities in all of the BRICS nations are well above the Organization for Economic Cooperation and Development (OECD) average, and compared to the U.S., with a Gini coefficient of around .4, every BRICS country except India is more unequal.

Of the BRICS, Brazil alone has lowered inequality since the 1990s through social programs supporting its poorest and most vulnerable communities, according to a University of Pretoria paper. National healthcare and education systems still have a long way to go before the poor have equal access and quality, but the aforementioned programs have at least helped to alleviate the most drastic effects of poverty and hunger, and other BRICS nations – where social spending accounts for a much smaller portion of GDP than in OECD countries – may see fit to adopt similar measures in order to bolster the conditions and opportunities for the poor and middle classes.

In order to further reduce inequality, governments of the BRICS and other emerging economies may do well to promote skills training programs to help members of the poor and middle classes – especially youth – compete in the job market. Additionally, by expanding access to credit, the governments can promote financial inclusion and entrepreneurship. These two areas of focus are particularly important as IMF research finds that the wage difference between skilled and unskilled workers is a large contributor to income disparity, as is unequal access to bank credit and other financial products.

Thus far the BRICS have enjoyed stable economic growth that has enabled millions of people to leave poverty and join a growing global middle class. The need to address rising inequality, however, is pressing.  A new IMF report finds that making the rich richer by just one percentage point lowers a country’s GDP growth over the next five years by 0.08%, while making the poor and the middle class one percentage point richer raises GDP growth by as much as 0.38%. For these nations to foster inclusive economic growth and maintain social stability and rising living standards, curbing inequality should be a priority that governments disregard at their own risk.

Ariel Gandolfo is a researcher with the Project on US Leadership in Development at CSIS.

2 thoughts on “High Inequality a Potential Blow to Economic Growth in the BRICS

  1. Pingback: Inequality and its Consequences | From the Periphery

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