Income inequalities may restrict growth in developing countries

New Delhi, Oct 28 (UNI) Even as developing countries are now major drivers of global growth, income inequalities are widening within these countries, a U N official said.

The share of high income countries' contribution to the global cumulative growth in GDP, which was 85 per cent from 1960 to 1973, declined to 78 per cent from 1973 to 2001, and further to 63 per cent from 2001 to 2005, United Nations Development Programme Administrator Kemal Dervis said.

''If GDP is measured at purchasing power parities (PPPs), developing countries are now by far the largest contributors to global growth,'' he adds.

The share of global trade captured by developing countries, primarily due to highly-populated countries like China and India, is now 37 per cent, compared with 29 per cent in 1996, Mr Dervis said.

''While another group of developing countries, greater in number but smaller in population, is being left behind in the growth story.

These countries are today farther away economically from the richest countries than ever before.'' Cross-country inequalities in mean income, which have grown relentlessly over the last two hundred years, continue to widen, he adds.

The UN official says the ratio of PPP GDP per capita in the 10 richest countries to PPP GDP per capita in the 10 poorest increased from about 21 in 1960 to 34 in 1990, and increased further to 47 in 2001 and to 50 in 2005.

Though income inequality is not growing in all countries but it is going up in many countries, both developed and developing. Most notably, Mr Dervis said, it is increasing in several of the large and rapidly expanding developing countries, including India and China, suggesting that many are being left behind from sharing in the benefits of rapid growth.

While the patterns of income distribution within countries vary, one notable feature common to both developed and developing countries where inequality is going up is the accumulation of income at the very top, he added.

On the effects of inequality on growth and economic performance, the UN official says in principle, some level of inequality may benefit growth, both through incentives that reward talent and hard work, as well as the accumulation of income that stimulates investment.

On the other hand, it is conceivable that high inequality may alienate people from productive economic activity if it is linked to discrimination or perpetuation of privileges.

He says empirical evidence seems to suggest that very high levels of inequality are detrimental to growth because they discourage the establishment of political and economic institutions that are conducive to growth and investment.

Secondly, the evidence also indicates that the interaction of inequality with underdeveloped markets and weak institutions, which happens in many developing countries, can also hinder growth.

Mr Dervis said there has been evidence of a dramatic fall in pro-poor growth. He added that since 1990 it takes roughly three times as much growth to achieve the same rate of poverty reduction observed before 1990 in a typical lower middle-income country.

Growth that is not inclusive is also generating less employment recently than it has in the past, he said.

The UN official said these cross-country and within-country divergence trends may impose economic and political limits on long term growth and on the further integration of the global economy.

It is highly questionable whether the processes of globalisation and market integration that, along with new technologies, have been the sources of accelerated world economic growth, can continue without concerted effort to deal with divergence and inequality.

UNI