Income inequality has risen in most countries in the world over 2006-2011, driven by rapid population ageing, rising unemployment and government spending cuts in advanced economies, and urban/rural and skills divides in developing countries. Rising income inequality is changing consumer spending patterns and creating substantial opportunities for adaptable businesses, although it can also undermine a country’s business environment and growth potential.
- Income inequality, as calculated by the Gini index (a standard economic measure for income inequality), varies largely around the globe. Developed economies tend to have lower income inequality levels, mainly thanks to their effective income redistribution policies. In developing countries, income inequality remains relatively high due to greater disparities between regions, genders, ethnicities and education. In 2011, Norway had the lowest Gini coefficient of 25.6% in the world, while South Africa was the country with the most unequal income distribution, at 63.6%;
- During 2006-2011, income inequality has increased within most countries around the world, mainly due to population ageing and high government debts in developed economies as well as a lack of government policies and high levels of corruption in developing and emerging countries. Russia’s Gini index, for example, rose significantly from 41.6% in 2006 to 47.3% in 2011. However, countries such as Brazil and the Philippines saw a fall in income inequality levels over the same period;
- Rising income inequality within countries leads to a change in spending patterns, creating good business opportunities at opposite ends of the economic spectrum, especially in the luxury and budget goods sectors. It can, however, affect a country’s social stability, limit the expansion of the middle class and the country’s economic growth potential. In Indonesia, the share of social class C – the middle social class segment – contracted from 17.4% of the population aged 15+ in 2006 to 14.8% in 2011;
- Economic slowdown and fiscal austerity measures as a result of the financial crisis in the eurozone and the USA could spell greater income inequality in advanced economies in the future. Greece, for example, is expected to see its Gini index reach 38.4% by 2020, up from 37.6% in 2011;
- The middle class in developing and emerging economies will nonetheless continue expanding in absolute terms as a result of economic and population growth. China’s social class C is forecast to reach 186 million people by 2020, up from 178 million in 2011. This will stimulate discretionary spending and provide many opportunities for marketers of non-essential goods and services such as household durables, transport and communications.
Global differences in income distribution
There are large variations in income distributions within countries worldwide:
- Income inequality is relatively low in developed countries, particularly in Europe, due to strong income redistribution policies through the tax and benefit systems. High taxes and expansive social welfare structures maintain egalitarianism in Scandinavian nations, while Eastern Europe is still shaped by its equality-based communist past. In 2011, Norway’s Gini index stood at 25.6%, making it the most income-equal country in the world;
- Among developed economies, the USA has one of the highest income inequality levels, with its Gini coefficient reaching 47.4% in 2011, compared to only 34.4% in Germany;
- Countries with the most unequal income distribution are clustered in southern Africa and Latin America. Due to its history of racial inequality under the Apartheid regime during 1948-1994, South Africa has the highest income inequality in the world, with a Gini coefficient of 63.6% in 2011. Other countries with very high 2011 Gini indices include Ecuador (59.2%) and Colombia (58.3%);
- In most developing countries, income inequality remains relatively high due to the existing income gap between gender, ethnicity, regions and educational/skills levels. In many countries. A lack of adequate government policy and resources to help the poor also contribute to poor distributions of income. In 2011, China’s Gini coefficient stood at 51.6%, significantly higher than India’s 39.9% but slightly lower than Brazil’s 51.7%.
Gini Index in Selected Countries: 2006-2011
Source: Euromonitor International from national statistics
Note: A society that scores 0% on the Gini index has perfect equality, where every inhabitant has the same income. The higher the number over 0%, the higher the inequality, and a score of 100% indicates total inequality, where only one person receives all the income.
Income inequality is on the rise in most countries
The income gaps between the rich and the poor have been rising in most countries since 2006 as a result of rapid population ageing, fiscal austerity, rising unemployment and the global economic downturn of 2008-2009:
- Many developed countries have seen a worsening income distribution as continued population ageing burdens public health expenditure, while mounting government debts as a result of the global economic downturn of 2008-2009 reduced state resources to assist the poor. The median age of the world’s population increased from 28.2 years in 2006 to 29.4 in 2011;
- In the developing and emerging world, income distribution has become more uneven in many countries as the benefits of rapid economic growth are unequally distributed, especially true in natural resources-rich nations where export revenues are controlled by a small elite. During 2006-2011, Indonesia and Russia saw the highest increases in income inequality levels worldwide, from a Gini coefficient of 33.0% and 41.6% in 2006 to 37.7% and 47.3% in 2011, respectively;
- While Latin America remains the most unequal region in the world, it has also seen some of the greatest reductions in income disparity during 2006-2011, in part due to the growing popularity of socialist and welfare-focused governments. Bolivia, for example, saw its Gini coefficient decline from 59.2% in 2006 to 55.5% in 2011.
Rising income inequality impacts consumer spending patterns
Growing income disparities create opportunities for business in the luxury and budget goods sectors but can limit the growth of the middle class segment:
- Rising income disparities around the globe split consumers into two primary groups, the rich and the poor, thus providing more opportunities for both luxury and budget goods. Countries such as China and Russia, for example, are now among the fastest growing markets for luxury goods in the world;
- Growing income disparities impede the growth of the middle class, an important consumer segment for discretionary (non-essential) goods. In Russia, for example, the share of social class C to total population aged 15+ contracted significantly from 16.3% in 2006 to 13.5% in 2011. In China, social class C accounted for 15.8% of population aged 15+ in 2011, slightly down compared to 16.2% in 2006;
Distribution of Social Class in Selected Countries: 2011
Source: Euromonitor International from national statistics
Note: Social Class data refer to the number of individuals whose incomes fall within a specified range of the average gross income of all individuals aged 15+ in that country or region. Social Class A: +200%; Social Class B: between 150% and 200%; Social Class C: between 100% and 150%; Social Class D: between 50% and 100% and Social Class E: less than 50% of the average gross income.
- Nonetheless, the middle class continues to expand in absolute terms in most developing and emerging economies as a result economic and population growth. Businesses in the non-essential goods sectors will therefore continue benefiting from the middle income groups. India’s social class C, for instance, grew by 3.9% during 2006-2011 to reach 101 million people in 2011.
Implications of rising income inequality on business environment and economy
Growing income inequality will likely pose key challenges to a country’s business environment and growth potential:
- Rising income inequality is a source of social and political unrest as it can lead to social discontent and higher crime rates, in turn undermining investor confidence and adversely affecting the business environment and a country’s economic growth. Across a number of Arab states, high unemployment and growing inequality has fuelled political and social unrest from early 2011;
- Higher income inequality can also result in non-income disparities such as health and education, thus hindering a government’s effort to reduce poverty. High incidence of poverty remains a severe problem in some Sub-Saharan African and South Asian countries;
- A widening income gap can impede the development of a country’s consumer markets as purchasing power becomes concentrated among a small elite. In Kenya, for example, the richest 10.0% of households (decile 10) spent on average 14.3 times more than the poorest 10.0% of households (decile 1) in 2011.
Income inequality is set to rise in most countries around the globe in the future:
- By 2020, South Africa would remain the country with the most unequal income distribution in the world. Slovakia will overtake Norway to become the country with the lowest Gini coefficient in the world, at 26.5% by 2020;
- Between 2011 and 2020, Pakistan is forecast to see the highest increase in its Gini coefficient in the world, from 38.9% to 41.7% as a result of a high poverty rate and a growing rural-urban divide. Other countries to see significant increases in income inequalities are Norway, South Korea, India and Canada. Meanwhile, income distribution in Latin American countries, including Brazil and Mexico, will continue to improve;
- In developed economies, rapid population ageing will continue putting pressures on public expenditure, while high unemployment, budget spending cuts and economic slowdown are major factors contributing to greater income disparities in the future. The implementation of a fiscal austerity plan in the United Kingdom in 2010 in order to cut the country’s large budget deficit (8.4% of GDP in 2011) has added to an increase in income disparity going forward, with the country’s Gini coefficient forecast to rise from 33.7% in 2011 to 35.0% by 2020;
- In the developing and emerging world, income inequality will continue increasing unless the social security system is reformed and corruption and poverty continue to be reduced. Despite robust economic growth, China’s Gini coefficient is forecast to reach 52.1% by 2020, up from 51.6% in 2011;
- Global consumer expenditure is expected to continue growing strongly by 30.8% in real terms during 2012-2020, backed by robust economic growth in developing countries. A continued expansion of the middle class in populous emerging economies such as China and India will offset its contraction in some developed markets, creating more opportunities for discretionary consumer spending.