Wednesday, December 5, 2007

Inequality: nothing new under the sun

A study on inequality in ancient societies argued that ...[o]n the average, income inequality in today’s countries is not very different than it was in distant times. However, the extraction ratio – how much of potential inequality was converted into actual inequality – was significantly bigger then than now. This ratio measures how powerful and extortionary are the elite, its institutions, and its policies.

More on the extraction ratio:
...inequality extraction ratio, indicating how much of the maximum inequality was actually extracted. The median ratio in the ancient sample is 94% -- a huge share of the surplus was actually extracted by the elite. In contrast, China’s present inequality extraction ratio is 47 percent, while that for the United States and Sweden are only 41 and 28 percent, respectively.

Which begs the question: What current forces drive the extraction ratio down? What makes us different from ancient societies?

The autors do point to the observation that ...[o]nly in today’s extremely poor countries do actual and maximum feasible inequality lie close together (2003 Nigeria, 2004 Congo D. R., and 2000 Tanzania).

This may have some important implications for modern development policy:
Thus, the social consequences of increasing inequality under conditions of economic growth may not entail as much relative impoverishment or perceived injustice as the recorded Gini might suggest. This logic is particularly compelling for poor and middle-income countries where economic growth pushes up the maximum feasible inequality sharply. This rise in maximum feasible inequality tapers off later, as a society’s average income rises farther above subsistence, so that the inequality extraction ratio will be driven more and more by movements in the Gini itself.

This is good news in a globalised, growing and richer world.

But will the poor billions continue to tolerate higher (Gini-type) inequality, even if they do have access to more resources? Will relative deprivation not increase the pressure on the system?

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