By Andreas Charalambous and Omiros Pissarides

Income inequality refers to the gap between rich and poor within a country. Inequality arises due to a number of factors, including the level of education and training of the population, access to professional opportunities, the degree of economic development and adaptability, the structural characteristics of an economy, as well as certain endogenous factors (e.g. geography and culture).

Inequality affects the distribution of resources, with adverse economic and political consequences. As early as 2,400 years ago, Plato stated that the income of the richest should not exceed five times the income of the lowest paid. Today, this is not the case in most countries.

Although inequality continued to expand for decades, it recorded, based on a study by the World Bank, a reduction during the period 1993-2008 in more than a third of the countries. In the following years up to 2013, inequality declined even further, with two-thirds of the countries posting increased rates of equality, according to the Gini index. This progress was primarily attributable to economic progress in the most populous countries of the world, namely China and India. At the same time, the Gini index indicated a deterioration in developed countries, especially in the USA, which, compared to European countries such as Denmark and Norway, lags considerably behind in this area.

In recent years, progress has been reversed, due to two main factors:
Firstly, the coronavirus pandemic is disproportionately affecting countries with high population density and poor sanitation conditions. In India, the initial epicentre of the pandemic was the Dharavi area, which is home to more than a million people at a density nearly 30 times that of New York. At the start of the pandemic, there were fewer than 2,000 ventilators in 41 African countries, compared to 170,000 in the USA.

In Bangladesh, there are fewer than eight hospital beds per 10,000 inhabitants, just one eighth of the corresponding ratio in the EU.

Secondly, the spike in energy and food prices, which accelerated after the start of the war in Ukraine, affects the poorest most adversely. At the same time, inflation has benefited business owners in the same sectors where demand is largely inelastic.

According to Oxfam, while millions of people are faced with extreme poverty and the problem of basic survival, the number of billionaires increased by 573 in 2021. The total wealth of all billionaires on the planet amounts to $13 trillion or 14 per cent of global GDP, while billionaires in the energy and food sectors have increased their fortunes by $450 billion over the last two years.

Beyond the purely economic impact, income inequality creates emotional and psychological effects, contributing to despair and a growing awareness of lack of opportunity, which inevitably lead to dangerous paths with social implications.

Andreas Charalambous is an economist and a former director in the finance ministry.
Omiros Pissarides is the managing director of PricewaterhouseCoopers Investment Services.