Center for International Policy

A 150-to-1 Ratio Is Far Too Lopsided for Comfort

By Raymond W. Baker and Jennifer Nordin
International Herald Tribune
February 5, 1999

Here is an indicator that should worry us. It has to do with a widening gap between the world's rich and poor.
For years, the measure of difference between the top and bottom 20 percent of the world's population has been obtained by comparing total GNPs of countries with the highest and lowest per capita incomes. The 1993 ratio of 60 to 1 is often cited, even though by 1998 the ratio had risen to 74 to 1.

But these comparisons do not take into account levels within countries. For example, the 1998 ratio has all of Brazil's population in the top category and none of China's in the bottom.

The way to make the comparison is to find the person in the worst position and add upward to encompass the bottom fifth of the world's population, and then add downward from the richest persons to obtain the top fifth.

In the past two years, adequate surveys of income or consumption shares by quintile groups within countries have become available from the World Bank. This permits assembling the richest and poorest brackets from wherever people may reside. If you use 1998 figures to compile these groups, you get a staggering disparity of 135 to 1.

Even this is almost certainly too low. In most countries, receipts accruing to the wealthy are typically understated. And in many countries published figures are two years old.

Looking ahead to 2000, the World Bank expects poverty in Asia - people living on $1 a day or less - to double. And of course population growth is highest in the poorest countries.

Considering the shortcomings in the present data and likely trends in the next two years, we can expect to start the next century with income disparity between the top and bottom 20 percent groups of perhaps 150 to 1, if we are not there already.

Such disparity matters for at least three reasons, beyond humanitarian considerations.

After the current downturn has run its course, long-term growth can rapidly accelerate, driven by 40 years of astounding technological advances. But the chasm between rich and poor limits the market for advanced products. Henry Ford understood 80 years ago that if he was going to sell more cars, workers had to be able to buy them. He doubled wages to $5 a day

A world linked by low-cost transportation and communication, particularly television, cell phones and the Internet, cannot be expected to remain compatible with a 150-to-1 income gap between major groups. A billion people living in dire poverty alongside a billion in widening splendor on a planet growing ever smaller and more integrated is not a sustainable scenario. Whether it is the rich who must pause or the poor who must catch up is likely to be a defining issue in the future.

George Soros is not alone in warning of tension between democracy and free markets. Free market economics, in the absence of adequate regulation and corrective policy, allows massive inequality in access to education and medical care and accepts resulting discrepancies in standards of living. To maintain peaceful coexistence, income gaps should be narrowed rather than democracy jeopardized.
Three immediate steps would help in what will be a long process of moderating evident extremes.

First, cancel or substantially lighten the $160 billion and $202 billion in official foreign debt of low- and middle-income countries, respectively, conditional on matching internal social spending. Economic growth would be spurred and solidified.

Second, developing and transitional economies urgently need vast improvement in tax collection systems.

Third, the illegal portion of flight capital that flows out of poorer countries (and is aggressively sought by richer countries) needs to be swiftly curbed, with the United States and Europe taking the lead.

A global quintile disparity of 150to 1 is fraught with risks for rich and poor alike.