Growing Income Disparities Challenge Business in Both Developed and Developing Cities

Income inequality, measured by the Gini index (a standard economic measure of income inequality), has been on rise in many cities, both in the developed and developing world. Over 2008-2013, the Gini index increased in 80 out of 120 of the world’s major cities. In its Outlook on the Global Agenda 2014, the World Economic Forum identified widening income inequality as the second greatest risks worldwide in 2014 (with rising societal tensions in the Middle East and North Africa rated as the top concern). There are several cities which stand out in their respective countries in terms of growing income disparities.

Cities with the Most Severely Widening Income Inequality, 2008-2013

Source: Euromonitor International

Over 2008-2013, the Gini index (the proportion of disposable income for the poorest 10% of households and income of the richest 10% of households) rose from 40.4% to 45.6% in Frankfurt am Main and from 41.0% to 45.6% in Copenhagen, among developed cities. At the same time, developing cities saw a rise from 43.3% to 45.0% in Wuhan and from 37.0% to 38.5% in Bucharest. These cities stood out the most in their respective countries. Over the review period, dynamics of the Gini index in Germany and Copenhagen remained rather flat, whilst China and Romania registered drops in their respective figures.

Reasons for the widening of income inequality in the abovementioned cities include austerity measures in Western Europe that squeeze the middle class in urban areas, tax policies that favour the rich, which often are more numerous in large metropolises, tax avoidance and hiding of wealth, as well as widespread corruption, especially in developing cities.

Threats and Challenges to Businesses

Besides social discontent and potential for political instability, rising income inequality can reinforce non-income disparities, such as access to education, employment or healthcare. Unequal development within the country creates a fragmented market with uneven opportunities for urban and rural residents and excavates gaps in the levels of purchasing power between cities and their respective countries. This can make it more difficult for consumer goods’ companies to penetrate such fragmented markets.

Narrowing income disparities has proved to be a challenging task globally. In the developed world, efforts to narrow the income gap have been focusing on tackling tax evasion and more recently on raising the minimum wage. Meanwhile, the key priority in the developing world has been fighting poverty, but as income inequality has been rising further, governments in a number of emerging economies have focused on fighting corruption. Uneven outcomes of such policies in cities and their respective countries, however, underline the need for companies to adapt their long-term business strategies in increasingly diverse consumer markets.

Cities with a notable widening of income disparities are likely to experience altering in consumer spending patterns. For example, since the start of the global financial crisis, European consumers have been shifting towards budget goods and less discretionary spending as a result of rising income inequality. Severely rising levels of income inequality can divide the population of a city into the very rich and very poor, which offers growing opportunities for businesses in both the luxury and low-cost segments.