Income inequality get the attention of everyone involved in the challenging task of designing and implementing effective policies to reduce inequality.
The implications of inequality goes beyond the scope of economics , it also deal with sociology, anthropology and politics , which means that inequality arise and stay on because a variety of factors. Thus, inequality matters because :
a.- It diminish the legitimacy of economic growth . A recent report of the International Development Organization , (IDO)March 2014),shows that 85 of the wealthiest people in the world, own as much wealth as the poorest 50% of total world population.
b.- It make weaker, the social contract and democratic values ,that any community need to get along within diversity and usually biased opportunities. From the politicians point of view, inequality imply voters willing to support policies which they would not be willing to support otherwise (lower inequality). Thus, inequality allows voters to get captured which is also a threat to democracy.-
c.- It is a cause for instability, as long as social issues becomes in charge of the inefficient State to be solved. Most of the countries with higher inequality( Gini coefficient above 0,5, leaving aside Africa, (IDO report ),) are from Latin America,(11 countries) where the inefficient State, is still considered to be part of the solution for this problem. Thus, it is also a threat for economic freedom and growth.-
d.- The increase in inequality in the last 30 years , has been driven by the top1% of wage incomes,(The Equality Trust Research Digest: trends & Measures, (ETRD)2011),who get the highest return on their human capital endowment. This means, that there is an additional explanation for inequality, dealing the quality of education and the access to it when it is restricted only to a few.
What is the best approach to solve inequality?. Given that inequality may move up or down overtime, empirical evidence suggest that:
a.- Countries with more economic freedom have lower inequality(Western and Eastern European countries, USA ,Canada and Japan) ,but those with lower economic freedom , have higher inequality. This is the situation in the majority of Latin America economies. It follows, that more economic freedom is a necessary condition to reduce inequality.
b.- Although a necessary condition, economic freedom seem to be insufficient to solve by itself inequality. Economic growth may create jobs, but it does not guarantee that all of them to be the “better pay kind of jobs”. Efficient Complementary policies are also relevant. UK income inequality, increased by 32% , and in the USA increased by 23% between 1960 and 2005 ,however for the same period, decreased by 12% in Sweden which applied such complementary policies. (ETRD)2011).However, the same study show that after 1980, all three countries experienced increases in inequality. So , those policies also requires evaluations.-
c.- The first best approach to reduce inequality is better quality of education, coupled with wider access to such a quality ,to all qualified students( Japan, Finland), because it helps to reduces the loopholes between growth and good quality jobs.-
Every year, New York watch the hispanic parade on october 12.It is the day Latin america citizens celebrates the discovery of this land by Christopher Columbus. This time 8000 people showed up with their traditional dances and colorful dresses.
The hispanic community has become increasingly important in the United States in the latest years,which it is clear in their voting share (30%)as a proportion of total voters .This share may still be even higher in the future following the birth rate trend.
But, what is the meaning of October 12?.Well, 522 years later , two civilizations crossed its destiny in this land, to build up a new world, specially for all those who came later on in the XVI century.
In the begining, there was not many chances for anyone in here other than to produce for the Spaniard Kingdom at that time.The State ,was built for the unique aim of managing the rents arising from those productive activities which were more profitable.Some researchers have written that to set the model for the State to do its task, it was followed the same model the natives had before they were displaced by the new conquerors.It did not provide incentives for entrepreneurships activities ,and it has the same hierarquy, which became known centuries later as bureaucracy.-
Almost two hundred years later ,in the north ,first Irish inmigrants ,then british,germans and all of those who wanted to live inspired by freedom, also became part of this new world.They spread the seed of freedom to the colonies in the south, which started to claim independence, after their neighbors in the north got its own .
What about the State? Unfortunaletly it did not work the same process.In latin America there are still strong beliefs about the State ability to manage growth and economic progress, but not that much because of its efficient actions , but because it represent the source of power some groups hardly would quit.
There is a question not to often mentioned concerning to how come that those starting 250 years later in the north, became wealthier and powerful than its southern counterpart with such disadvantage?.They did not have engineering heritage,neither a culture to look up to.A probably difference is in the different role theirs founding fathers gave to the State.-
October the 12 should be an inspiring day to reflect about the difference does it makes, to be really independent with no other limitation ,than the one which set the boundaries with others´s will within a community, instead of being independent but with a constraint, the one which is set by the state and its framework , to impose its will on a community.This is the case in education programs,public health services,and in some Latin America economies, it is also still the case about its economics policies.-
The evidence suggest that those economies with more economic freedom ,are capable of getting better income distribution, than those which have less economic freedom.