# III. The Theory behind the Study: Equality of Opportunities and Discrimination Against Minorities

Rising income inequality between the rich and the poor has dominated political and economic debates in recent years. Today, 48 percent of the global wealth is owned by less than 1 percent of the world population (Oxfam 2014). High-income countries generate 55 percent of the global income but account for only 16 percent of the world’s population.<sup>8</sup> Low-income countries create just over 1 percent of the global income even though they contain 72 percent of the global population (UNDESA 2013, 25). Also, in countries where inequality has risen, income is “Extreme inequality isn’t just a moral wrong. We know that it hampers economic growth and it threatens the private sector’s bottom line.” Winnie Byanyima _,_ executive director, Oxfam International (Oxfam International 2015) concentrated increasingly at the very top of the distribution ladder (UNDESA 2013). In the United States, income disparities have become so pronounced that Americans in the top 1 percent earn on average more than 38 times more income than the bottom 90 percent, and the top 0.1 percent earns more than 184 times the income of the bottom 90 percent.<sup>9</sup> Classical economic theories had not predicted such profound income inequality. On the contrary, classical economists believed that the invisible hand of the free market and the laws of supply and demand would automatically allocate resources efficiently.<sup>10</sup> According to those theories, everyone who participates in a free economy will eventually reap the benefits of growth because benefits at the top are bound to “trickle down” to those at the lower end of the distribution. As a consequence, the economic progress of a country is simply assessed by measuring the growth of gross domestic product per capita.

The recent growth in income inequality at the global and national levels has forced governments around the world to reconsider some of those theories and look at new policies to tackle the increased poverty within their societies (ILO 2011a). Interestingly, in countries where inequality has declined, the expansion of education and public transfers to the poor seem to have played a more important role than free-market allocation (Dabla-Norris and others 2015). In Latin America and the Caribbean, for instance, an increase in public expenditure on education since the early 1990s led to rising secondary school enrollment and completion rates and became a major determinant of the fall in wage inequality (Ferreira and others 2013; López-Calva and Lustig 2010).

The rise in income inequality has generated a rich literature on the causal links between inequality and development, with many researchers suggesting that inequality has a negative effect on economic growth.<sup>11</sup> Stiglitz (2012) argues that income inequality hinders economic growth because it skews the economy toward rich households, which have a lower propensity to consume and spur aggregate demand, rather than to middle- and low-income households. Herzer and Vollmer (2012, 489) also found in their study on per capita income in 46 countries over the period 1970–95 that “inequality has a negative long-run effect on income.”<sup>12</sup> The World Bank (2013a, 54) highlights that “social inclusion matters because exclusion is too costly. These costs are social, economic, and political and are often interrelated.” Also, recent International Monetary Fund studies provide statistical evidence that income inequality (as measured by the Gini coefficient) negatively affects growth and its sustainability (Berg and Ostry 2011; Ostry, Berg, and Tsangarides 2014).

> 8 High-income countries are those with a gross national income per capita of US$12,476 or more in 2011, whereas low-income countries are those with a gross national income per capita of US$1,025 or less, according to the World Bank. See UNDESA 2013, 25, <u>http://www.un.org/esa/socdev/documents/reports/InequalityMatters.pdf.</u>

> 9 See Inequality.org, “Income Inequality,” http://inequality.org/income-inequality/.

> 10 Most notably Mill (1848), Smith (1776), and Ricardo (1817).

> 11 Surveys on this issue can be found in Bénabou (1996); Aghion, Caroli, and García-Peñalosa (1999); Bourguignon (2004); Bertola et al. (2005) and Ehrhart (2009). See also World Development Report 2006: Equity and Development (World Bank 2006), which provides a strong empirical underpinning to the claim that interventions that narrow inequality can be good for growth and long-term prosperity.

> 12 Herzer and Vollmer 2012, 489.

Anti-Discrimination Law and Shared Prosperity 6