High social inequality limits economic development

1 october 2018

One of the UN sustainable development goals combined two important challenges for the global economy: reducing inequality between countries and reducing social inequality within countries. The experts of the Analytical Center analyzed both problems and concluded that the social and inter-country inequality did not decline during 25 years.

“During the period under consideration, purchasing power parity GDP per capita increased significantly, and absolute poverty in many countries and worldwide as a whole reduced significantly. At the same time, the gap between rich and poor groups in the countries has increased", said Viktoria Pavlyushina, Deputy Head of the Research Department of the Analytical Center. "The poorest countries are at the boundary of the transition from a pre-industrial type of economy to an industrial one: the share of people employed in agriculture there is about 60%. In more developed countries, workers move from agriculture to industry and the services sector, where employment exceeds 45% of the total number of working people.”

The experts reviewed the overall successful process of integration of the Central and Eastern European countries into the European Union. From the point of view of the growth ratio of “old 15” and “new 13”, it passed through two stages. In 2000–2008, the growth rates of the new EU members were significantly higher than the growth rates of the EU core. According to experts, there was a synergy of three factors. First, in the early 2000s, these countries overcame a transformational crisis and entered the growth trajectory under the influence of the fundamental factors of a market economy. Secondly, the opening of markets and accession to the EU played a significant role in accelerating their development. Thirdly, the EU has made significant financial investments in equalizing the development.

“According to our analysis, income inequality in the world did not decrease during a period of strong economic growth, and global economic growth did not change the key parameter — the share of the 10th decile of the population in income in developed and some developing countries,” added Ms. Pavlyushina. Studies have shown that internal social inequality did not disappear by itself with economic growth. It requires special attention. The nature of social inequality in the world is determined by historical factors that some countries managed to overcome with the help of intensive development (China and South Korea) based on institutions that correspond to the current structure of the economy. Worldwide, the absolute poverty began to decline according to very strict criteria, but its scale is still high, and relative poverty creates sharp social contrasts in some cases.

“Under conditions of a recession, the growth of poverty is a worrying sign, and the problem of inequality cannot be resolved without reducing it,” Ms. Pavlyushina concluded. "High social inequality limits the development of the consumer market and constrains domestic demand. Therefore, the need to reduce inequality must be taken into account in the country's development strategies.”