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Income inequality is today perceived by many as the root cause of poverty all around the world. Many governments have declared fighting income inequality to be a priority. Of course, too much economic inequality could potentially lead to social upheaval, causing criminality, social resentment, and cultural backwardness. However, none of this shows that economic inequality causes poverty, or that markets cause economic inequality.
The truth is that there are two kinds of income inequality. There is income inequality that is created by the private sector and which is a characteristic of developed economies. This kind of income inequality is a positive and healthy inequality, because it is based on the two fundamental elements that create economic growth, the rule of law and private property. But income inequality also results from corrupt regimes that extract wealth from the population and hoard it within the government class. The difference is that the first kind of inequality goes hand in hand with wealthy countries. The second kind does nothing to lessen poverty.
Development and Inequality
The United States, the United Kingdom, Canada, the Scandinavian countries, and Japan, just to name a few, are examples of developed countries. Yet each of these countries has a considerable degree of income inequality. Interestingly, we can see similar dichotomies in Africa as well.
According to the United Nations Development Programme, South Africa is the most unequal country in Africa and yet it is the wealthiest country in the continent as well. Indeed, South Africa, Botswana, and Namibia are the most unequal countries in Africa, with a Gini coefficient higher than 0.60: 0.65 for South Africa, 0.62 for Namibia, and 0.62 for Botswana. But these countries are the richest and least conflict-prone in Africa. If income inequality is such a predicament, then how come are these countries the wealthiest? These three countries also have in common a higher index of property rights and a higher index of the rule of law. These characteristics are more established in these countries than in Africa overall.
Since people in these areas have relatively well-established legal property rights, they can create capital and increase their labor productivity. As a matter of fact, income inequality naturally and logically expands to a considerable degree in societies that value the rule of law and private property, because when the government is restrained from intervening in the economy, individuals maximize their economic output, since they have the freedom to decide how they want to manage their own resources. We cannot expect individuals to have the same economic outcomes if they manage their resources differently. The economic productivity of a society is to some extent based on how resources are managed. If an individual manages his resources in an efficient way that generates him a substantial profit, his income will be higher than that of one who did not manage his resources adequately.
Inequality in Poor Countries
Income inequality can also grow in a society where there is no rule of law, where access to private property is significantly limited, and where resources are mismanaged. This has been the case of the Central African Republic. The Central African Republic has one of the lowest human development indexes in Africa, because its degree of income inequality is preventing its economy from flourishing. The lack of rule of law and an effective administration of justice impedes access to private property that is legally and physically secure. The high degree of corruption that reigns in the Central African Republic disincentivizes the layman from creating wealth and improving his living standard as well as that of his fellow men. As a consequence of this ongoing corruption, income inequality has greatly expanded poverty in the Central African Republic. As a matter of fact, the poverty rate is at a staggering 71 percent, which means that more than two-thirds of Central Africans live in absolute poverty. These indicators show that in fact income inequality in the Central African Republic is not caused by the private sector, but by the corruption that is ruling their government. The members of the Central African government are richer than two-thirds of the population. As we can observe in figure 1, of the four major unequal countries in Africa, the Central African Republic has the lowest income per capita. The Central African Republic has an average income per capita of $458.5, South Africa of $6,561.86, Botswana of $7,494.295, and Namibia has an average per capita income of $5,294.517.
Figure 1
Source: World Bank, author’s computation.
There are two kinds of income inequality. South Africa, Botswana, and Namibia reflect the positive income inequality that a society creates as it innovates and develops. Negative income inequality is created by the public sector. It relies on corruption and the concept of rent seeking. In countries like the Central African Republic, where income inequality is created by the public sector through a lack of justice and an absence of private property, those who work for the government become much wealthier than the rest of the population. And this kind of income inequality generates overall a national decline. This has been exactly the case for the Central African Republic. Income inequality is not inherently a product of injustice. Everything depends on the conditions under which it takes place.
