We've just seen that inequality in the world has been growing both in terms of income and wealth. This begs a question of why this is going on. Well, when you take a look at reports and analysis on this issue, you come across a wide variety of factors that are contributing to rising income inequality and wealth inequality in the world. Let me first provide you with the list of these factors and then we will analyze each of them individually. So the factors that are normally considered to be associated with rising inequality include technological change, trade, foreign investment, the growth of the service sector, welfare state retrenchment, the growth of wealth accumulation, in particular through capital gains, changes in taxation, and the growth of emerging economies. Let's begin with technological change. The reason why technological change contributes or may contribute to inequality is that it generates a skills gapmor a mismatch between the technological requirements of the jobs that are being created and the kinds of skills that people have. In other words, some people do have the skills to take advantage of the new jobs created by new technologically advanced industries, whereas other people lack those skills, and that, of course, contributes to inequality, at least in the short run. In other words, technology is not the great equalizer that most people assumed it to be. Now the second factor that I listed was trade. In fact, the evidence seems to indicate that trade has reduced inequality in emerging economies by stimulating economic growth. We see this in China. We see this in Indonesia. We see this in many other emerging economies in the world, in which increasing levels of trade with other economies has made it easier for companies to create jobs, and those jobs have made it easier for people to make a living in those markets. At the same time, trade has increased inequality in developed markets due to job migration from those markets to emerging markets where companies are looking for lower wages. People who lose their jobs in some rich countries in the world like United States or in Europe, may only be able to find other jobs that pay less money. Thus, widening the gap in terms of income inequality. Another factor that appears repeatedly in studies of income inequality as contributing to it is foreign investment. This is when a company in one country decides to set up a manufacturing plant, for instance, in another location. Part of the effect of foreign investment involves eliminating jobs in the home country of the firm. That type of foreign investment, by the way, is called "vertical". Foreign investment, in general, has been a net contributor to global inequality, according to the International Monetary Fund. So, there is evidence, in fact, that foreign investment does contribute to rising income inequality in the world. The growth of the service sector, financial services, retail, software development, all of these kinds of activities has also contributed to income inequality. According to Paul Osterman, a professor at MIT's Sloan School of Management, and I'm quoting, "The migration of manufacturing jobs to other parts of the world has generated a decline in the share of income accounted for by labor. Meanwhile, jobs created in the service sector have proved to be much more heterogeneous in terms of skill level, stability, and pay than those in manufacturing." Unquote. As a result of this dynamic, of course, income inequality goes up. Cuts in public services and, in general, welfare state retrenchment is also a contributor to income inequality. The welfare state reduces both poverty and inequality by making education and healthcare available, by redistributing income, and by protecting children, the elderly, and the unemployed. Austerity measures in Europe and in the United States have cut programs and hence, increased both poverty and inequality. Wealth accumulation at the top of the distribution is also something that is contributing to inequality. The share of labor in national income has dropped in Europe and the United States in favor of capital's share. High income often translates into higher savings and accumulates over time into greater wealth. Capital gains often receive better tax treatment than wage income, meaning that the rates of taxation on income from capital gains are generally lower in many countries around the world than that the rates of taxation that apply for wage income. Taxation itself is also a factor more broadly associated with rising income and wealth inequality in the world. I just mentioned that capital gains often receive favorable tax treatment. But in addition to that, in the U.S. the top 0.1 percent of taxpayers' average tax rate for income purposes was about 50 percent or over 50 percent back in the 1940s, just under 40 percent during the 1960s and 70s, but since the 1990s, that rate of taxation has dropped to under 30 percent. So in other words, the fact that rates of taxation have been coming down in a country such as United States has contributed to the increase in income and wealth inequality. I'm in Liechtenstein. This tiny principality is a very well known tax haven. It's located between Switzerland and Austria. Down there in the valley you can see the river Rhine on the other side of Switzerland. In 2008, Liechtenstein found itself in the middle of a major controversy with Germany. The German tax authorities managed to get a list of bank accounts held by German citizens. Since then, Liechtenstein has agreed to several international treaties regulating transparency and the flow of information between governments when it comes to offshore accounts, especially those in tax havens. The building here is the castle, more than 800 years old. The ruling family live in the castle today which cannot be visited by tourists. Hello. I am on the main island of Bermuda. This is a British overseas territory. And it was discovered by Juan de Bermudez in 1505. And as you can see, it is raining today which is actually very important on this island because that's the only source of freshwater. But there's another thing that rains on Bermuda, that's insurance companies. There's about 15,000 insurance companies in Bermuda. But of course, they don't really do business here. They use this jurisdiction as a place from which to do global business. Now think about the following factor as a possibility here in terms of contributing to inequality in the world. Is it the case that the mere growth of emerging economies such as China or India, Turkey, Indonesia, Malaysia, or Brazil, has that contributed to inequality? In order to answer this question, I would like to introduce you to the concept of the Kuznets curve. Simon Kuznets was an economist at the Wharton School back in the 1950s. And he proposed the following hypothesis: that inequality is highest when countries are making the transition from developing to developed. Kuznets subsequently won the Nobel Prize in Economics. Not for this theory, however, but the theory makes a lot of sense. So when a country is very poor, everybody is poor. But when a country starts to develop and is in the process of becoming a developed country, it starts that process by lifting out of poverty a few people and then progressively more and more people. While that process is going on and it could last several decades, and we see a widening of the income inequality which is not necessarily a bad thing in that case because the country is, in fact, developing. But the benefits of that development reach the entire population many decades later, as opposed to at the beginning of the process. To illustrate statistically the meaning of this concept, let's examine the following chart. Vertically, we have the Gini index, which once again captures income inequality. As the index grows, inequality grows. And horizontally, from left to right, what we have is GDP per capita, gross domestic product per capita, which is an indicator of how rich the country is. So towards the left of the chart, we have relatively poor countries that have a very low GDP per capita, and towards the right, we have countries that are richer and have a larger GDP per capita. Those numbers, by the way, are calculated as logarithms, so that we can more easily appreciate the differences here. The curve inside of the chart shows the tendency in the data, showing that it is an inverted U-shaped curve, meaning that inequality seems to be higher at intermediate levels of developments. That is to say, towards the center of the chart. And it seems to be lower toward the left or towards the right of the chart. That is to say, for the poorest countries or the richest countries. So, this kind of evidence is of course consistent with the Kuznets curve. But let's take a look at the problem dynamically because the chart that I show you was up for a particular point in time, around the year 2010. Let's now take a look at four different countries, Brazil, China, Russia, and the United States, over time dynamically. In this chart, vertically, we have the same indicator as in the previous chart. We have the Gini coefficient or income inequality. And once again, the higher that coefficient, the more inequality there is in the country. And horizontally, we have again GDP per capita, which once again is an indicator of how developed or how rich the country is. So let's take a look at China. China over time has increased its GDP per capita. And as we can see, as that process of development has been going on, inequality has, for the most part, also increased. In other words, the line goes up for the most part. It doesn't exhibit the pattern from the Kuznets curve that should be an inverted U-shape, whereby it first grows and then it starts to fall. The same goes for the United States. We can see that as the US has become a richer country over time, the Gini coefficient for income inequality has continued to increase. Russia is a case that is very difficult to analyze because, as you can see, there is quite a bit of volatility, and it jumps around a lot. The only country among these four for which there is evidence for the Kuznets curve is Brazil. In spite of some of the volatility there, we can see that as the country grew richer over time, the income inequality, Gini coefficient, first went up and then it has tended to go down. So, I'd like to bring to your attention one last important point about income and wealth inequality in the world. The global economy, trade, foreign investments, technological change, all of these trends essentially generate both winners and losers. Among the winners, at least over the last 10 or 15 years, I think we find those who possess capital. I think we also find educated workers. Strong countries are strong states in the world. And if you ask me about different parts of the state, I would say that the economy ministry which is called here in the United States the Treasury, or more broadly, rich countries, they tend to do better in the wake of all of these trends in the global economy. However, those who live on the wages that they earn by selling their labor, unskilled workers, weak states, the labor departments or the social ministries within the government, and in general, poor countries, they seem to have done not so well in this phase of globalization as a result of increasing levels of trade, foreign investment, and technological change. So to summarize, let me just give you a sense as to what has been going on, in particular with income inequality in the world. Once again in this chart, what we have vertically is the Gini coefficients. So remember once again the greater they are, the more inequality there is. And horizontally, we have time. In this particular case, we started in the year 1970, and we go almost all the way up to the present. We can see that in the world as a whole, income inequality has barely changed. It has certainly increased more or less up until 10 years ago or so, and there has been a slight decrease which I attribute for the most part to what has been going on in emerging markets. In the United States, over the entire period, what we see is a general increase in income inequality. The same thing has happened in China. Sweden, which is one of the most equal countries in the world, in terms of the distribution of income, has remained more or less stable, at least over the last 15 or 20 years. And then lastly, as I already mentioned earlier, the only country, large country in the world, where we've seen a steady decline in income inequality over the last 20 years or so has been Brazil.
