Why are the poorest countries the most unequal?

The world is finally talking about income inequality, but the conversation is very much focused on the rising inequality within rich countries, especially in the USA and Europe. A lesser known, but very important, feature of income inequality is that the countries with the widest gaps are not the richest, but the poorest. Only one of the 15 countries with Gini Index scores above 50, an official measure of income inequality, is classified as high income by the World Bank – Panama. The same is true for six countries where the bottom 40% of households earn less than 10% of Gross National Income – Lesotho (9.6%), Namibia (9.6%), Zambia (8.9%), Botswana 8.5%), South Africa (7.2%), and Suriname (7.3%), according to the World Bank.

If we map the 15 countries with the highest income inequality, it is immediately clear that inequality not only clusters in Sub-Saharan Africa and Central and South America, but that it is further concentrated in specific areas within these regions.  In the case of Africa, income inequality is clustered in the south in South Africa, Namibia, Botswana, Zambia, Lesotho, Mozambique, and Eswatini. Only Guinea-Bissau and the Central African Republic do not share borders with these countries. In Central and South America, income inequality clusters in the Central American corridor (Belize, Honduras, and Panama), and then travels into South America through Suriname, Colombia, and Brazil). These countries all score above 50 on the Gini Index (the USA is 41 and 100 represents complete inequality) and two score above 60 including South Africa and Botswana. Further, not one of the 15 countries on the list manages to share more than 15% of national income with the bottom 40% of households.

Why should income inequality be so much worse in these countries? Are there common features that predispose them to income inequality and trap them there? Does inequality leak across borders under certain conditions, creating regional clusters of inequality? Most of the countries with the worst income inequality do share certain features including heavy reliance on a single export commodity (often a natural resource), a colonial history, and low levels of human development, they also vary in terms of their levels of democracy, corruption, and gender equality. The majority are dependent on development assistance from high income countries, especially where official development assistance is more than 2% of Gross National Income, including Eswatini (4%), Lesotho (4.4%), Zambia (4.7%), Mozambique (14.2%), Guinea-Bissau (16.5%), and Central African Republic (28.4%).

Just how much financial dependence on foreign aid contributes to domestic inequality is a provocative and rarely asked question. What is most likely is that a toxic cocktail of factors is responsible for sustaining extreme income inequality in countries with a long history of exploitation by foreign entities, including lack of export diversity, low levels of investment in health and education, high gender inequality, dysfunctional tax and transfer systems, and heavy reliance on foreign aid. In countries where elites have captured the levers of power, these factors are hard to change as wealth is passed easily from one generation to the next and may even spread to elites across borders, contributing to the regional clustering of extreme income inequality.

IT ALL STARTS WITH A PUBLIC COMMITMENT TO “SHARED PROSPERITY”

If the countries affected are looking for a shortlist of investments to reverse inequality, they should start with a commitment to “shared prosperity” and set a new national target of increasing the share of national income owned by the bottom 40% to at least 25% by 2030.

How to get there? Generous investments in health and education, jobs growth, technology adoption, and taxation and social policy reforms that disproportionately benefit children and youth from the bottom 40% of households can reverse inequality. Over the long-term, export diversification and reduced dependence on foreign aid could create a more competitive economy that is more resistant to the monopoly rents that sustain domestic elites. In other words, less dependence on foreign aid could turn out to be an important ingredient in the drive to reduce domestic income inequality for this group of countries.