Extreme Inequality and Economic Growth: Russia and BRICS

Recently, the problem of inequality has played an increasing role in the resolution of the improvement of human potential in developed Western countries. Since 2010, inequality indicators have even been included in the calculation of the index for development of human potential. In accordance with Amartya Sen’s “Human Development” theory, which forms the basis for the conceptual framework of this index, human development (that is, the increase in work performance, and thereafter, economic growth) is measured not only by personal income but also by the level of inequality. It is believed that inequality not only reflects the quality of human capital assets but it also, starting from a certain critical level, becomes an obstacle for its development and a deterrent against economic growth. However, the question is not of any inequality, which is on its own an important incentive for development and rivalry, but rather of extreme cases – of extreme inequality.

Formed in the 1990s, awareness of the necessity to lower extreme inequality has in recent years noticeably grown in Russia both within the academic community and among governing authorities. The reduction of the level of inequality and the creation of equal opportunities for various groups is becoming one of the priorities of the government.

The discussion of the problem of inequality is generally limited to a description of the situation on a macro level. This includes data on the distribution of income in the country as a whole or between the most and least affluent sectors of the population. In this article we will look at the problem of inequality in a country not only on a macro level, but also between separate groups within the population. The latter is in fact a relatively new area of research in Russia, primarily due to insufficient necessary statistics. There is very little work that analyses the level of inequality among separate groups of the population (on the level of education, occupations, employment, etc.). Not only do these indicators reflect more profoundly and objectively the structure of income inequality and the corresponding opportunities for improvement (and expansion) of human potential, but are also more tangible for the individual citizen.

The problem of inequality in Russia is extremely acute: a level of income inequality such as ours is not present in any other European country.  According to data for 2013, the Gini coefficient in Russia, which reflects the variation in the actual distribution of income based on 10%-20% groups of the population in situations of hypothetical equality, was 42% (image 1). Even higher inequality indicators characterize a number of countries in Africa and Latin America. For example, the Gini coefficient in South Africa is 58% and in Brazil – 55%.

IMAGE 1. Gini coefficient and specific weight of income by deciles of the population, %

Note: percentage of total income (“bottom decile” – group with the lowest income, “top decile” – group with the highest income)

Screen Shot 2015-05-15 at 12.58.43 PM

One can say that inequality in Russia is not simply high, but extreme. According to the above research by World Bank, inequality becomes extreme as of the 30%-40% level of the Gini coefficient. Inequality is classified as extreme when it is not only profound (profound inequality is not necessarily synonymous of extreme inequality), but also when, at a certain level, it plays a discouraging rather than stimulating role in the economy and brings upon negative social and economic consequences.

In this context, inequality becomes not only a social problem but also a significant obstacle for economic growth. A large quantity of research is dedicated to the negative impact of increasing inequality on economic growth. The statistic analysis of T. Persson and G. Tabellini showed that the increase in the portion of income of the top 20% of the population by 0.07% lowers the average pace of economic growth by 0.5% a year. Such studies are rare in Russia. According to the research results of A. Shevyakova and A. Kiruta, the reduction of extreme inequality in Russia by 1% the GDP growth rate increases by 5%. Based on their calculations, “with optimal redistribution of income, reducing the differentiation coefficient to 7-10, GDP growth between 2000-2007 could have been in fact been 30-50% greater. With a 10% yearly growth of actual income, a positive natural increase of the population by 3.3 ppm could have, in theory, been possible”.

Negative social consequences of extreme inequality are a danger firstly because the result is a “poverty trap”: people understand that there is no escape due to the lack of strong “lifts”, and this discourages them from an active performance. In other words people “throw in the towel”, and an array of negative events takes place: an increase in suicide, cardio-vascular disease, violent crimes, etc. Inequality therefore becomes an obstacle in the development of human potential not only due to the unequal distribution of wealth and deficit of necessary resources for personal development, education in the lower strata of the population (and in Russia – also the lower strata of the middle class), but also due to the “psychological” factor. That is, inequality discourages people from investing the time and means necessary for personal development instead of acting as a positive incentive (towards economic growth) in order to raise wealth and status in society. This situation leads to inertness and dependency, the increase in budget expenses with a simultaneous decrease in economic returns and labour activity. All of these are factors that slow down the economic development of a country. No other social problem has consequences like those of inequality.

The Gini coefficient is rather high in some economically developed countries as well, such as the USA and Great Britain (41% and 36%, respectively). It seems that this questions the negative impact of inequality on economic growth, but only at first glance. Several studies are dedicated to this question, but perhaps the most successful answer was suggested by R. Barro. He showed that the nature of the impact of inequality on economic growth varies in countries with different income levels: in countries with low income growth, inequality decreases the pace of economic growth, whereas in countries with a high income growth, a high level of inequality is not an obstacle for economic growth. Furthermore, individual vertical “lifts” work better in Anglo-Saxon countries.

In poor countries, inequality is extreme in regards to incentives for productivity and social growth. If the poorest stratum does not see the possibility of moving up the social ladder to the next level of wealth within a generation, they are likely to see the actual socio-economic system as unfair and will begin to claim social protection, rather than possibility of a market increase of their own income. In such circumstances, inequality plays the role of an “incentive” and could lead to a decrease in the economic growth rate of a country.

In terms of inequality indicators, Russia is closest to China, Argentina and Venezuela. The Gini coefficient in Russia is the same as in China (42%) –there is a huge difference between the social framework and the rate of economic growth. In Argentina and Venezuela, the Gini coefficient is slightly higher (45%). Furthermore, in these Latin American countries, the GDP level is approximately the same as in Russia (in 2008 in Russia – 14.8 thousand USD, Argentina – 13.3 thousand USD per capita PPP by 2005 prices). Russia is closer to these countries not only by level of inequality but also by its structure. The income distribution between 10%-20% groups of the population is practically identical, except that in Russia, the bottom 20% of the poor are slightly “richer” (image 2).

IMAGE 2. Specific weight of the population’s income by quintiles, %

Screen Shot 2015-05-15 at 1.04.59 PM

Note: percentage of total income (“quintile 1” – group with the lowest income, “quintile 5” – group with the highest income)

It is necessary to take into consideration the fact that the method of calculation of inequality of the Russian Federal State Statistics Service and that of OECD greatly differ. The calculation of the level of inequality in Russia by the western model could lead significantly to its reassessment. Therefore, it is possible that we have already caught up to Latin American countries such as Mexico and Brazil.

The problem of extreme inequality is closely related to the existing legitimacy in the country, regarding the level of inequality in the eyes of the population. Individual studies show that the modern level of inequality appears non-legitimate by a majority of Russians. Almost ¾ of Russians (71% of the population) are demanding its reduction, yet only 9% are adversaries for inequality (ESS poll, 2008). However, in comparison to people of other European countries, Russians are much more “tolerant” to income inequality (image 3), especially if the actual level of inequality in the country is taken into consideration.

IMAGE 3 Comparison of the level of inequality and the demand of the population for its reduction
Screen Shot 2015-05-15 at 1.07.45 PM

Note: the national average value varies “the government should take measures to reduce the income difference between people” (1 – “completely disagree”, 5 – “completely agree”). Countries that do not particularly differ from Russia statistically are indicated by colour.

Of all the countries represented in the sample (image 3), the highest Gini coefficient, representing the concentration of income, is in Russia (42.3). Nonetheless, the demand to reduce inequality among Russians is significantly lower than that of the group of countries where income inequality is lower (France, Bulgaria, Portugal, Hungary, Greece, etc.). One can therefore say that Russians are rather tolerant towards inequality.

According to the results of surveys and in-depth interviews, inequality reduction does not lead to the understanding of income levelling, but rather to the provision of equal opportunities to earn money (quite an Anglo-Saxon approach). Thus, the level of income inequality in Russia remains extreme and non-legitimate. The simple knowledge of the level of inequality and its reception by the population is not sufficient for the correct selection of mechanisms for its regulation. It is necessary to understand the structure of inequality on a micro level.

Author: Salmina Alla Aleksandrovna – PhD in Sociology, Researcher, Laboratory for Comparative Studies of the mass consciousness of the Expert Institute of the National Research University “Higher School of Economics”. 

Leave a comment

Your email address will not be published. Required fields are marked *

eight × 2 =