Income inequality widens as crises hit poor and favour the wealthy

By Andreas Charalambous and Omiros Pissarides

Income inequality followed an increasing trajectory at a global level until the mid-1990s and a downward trend in the subsequent period. Over the last few years, the Gini inequality index registered an upward trend again.

It is particularly concerning that an increase in extreme wealth is accompanied by an increase in extreme poverty. Specifically, in the two-year period 2019-2021, the richest 1 per cent of the world population expanded its wealth by $26 trillion, while the remaining 99 per cent by $16 trillion, further widening the already existing gap.

The degree of inequality varies from country to country and region to region. In the case of large countries, it is largely due to a number of endogenous factors, such as geography or culture, structural economic characteristics, the degree of economic development, the level of education and training of the population, as well as access to professional opportunities.

The two recent global crises led to an intensification of the degree of inequality. The coronavirus pandemic disproportionately affected countries with high population density and less developed economies, which are generally plagued by limited development of their information technology sectors, as well as deficiencies in infrastructure, especially medical care.

More recently, the spike in energy and food prices, which was accelerated following the start of the war in Ukraine, affected, in particular, the poorest strata.

Conversely, inflation has benefited owners and shareholders of companies, notably in sectors which are characterised by inelastic demand. In addition, the successive interest rate reductions and quantitative easing policies, which were considered necessary to contain the negative economic effects of the pandemic, boosted asset values and the incomes of the wealthiest strata.

Most analysts believe that the envisaged reduction of inequality at a worldwide level is linked to the economic prospects of developing countries with large populations, including India. Considering that China already has a broad middle class, growth in the world’s most populous country does not seem capable of reversing the current degree of international economic inequality. At the same time, in some rich nations, such as the US, the Gini index is deteriorating, thus “burdening” large and developing economies with the onus of correcting global inequality.

In Cyprus, economic inequality compares favourably in a European context but presents a concerning widening trend. It mainly relates to new entrants in the labour market and retirees and has, in part, been boosted by the marked immigration of high-income strata from abroad. These trends should be seriously considered and addressed with targeted social measures, which do not create distortions in terms of economic development. In addition to economic impacts, income inequality creates negative emotional and psychological effects, both for the individual and for those around him/her, with adverse social ramifications.

Andreas Charalambous is an economist and former director at the Ministry of Finance. Omiros Pissarides is the Managing Director of PricewaterhouseCoopers Investment Services