Income Inequality in Developing Countries, Past and Present

This chapter deals with income inequality in developing countries. It gives a historical overview on how income inequality has been addressed in developing countries and discusses contemporary issues of income inequality, especially in the context of growing globalization. Globalization and especially financialization and to a certain extent skills based technical change, have been important exogenous drivers of inequality. These drivers have in various cases strengthened existing patterns of inequality through a stubbornly high wealth inequality and through intergenerational transfers of inequality due to skewed access to higher-level education. The adverse effect of financial and trade globalization, on income inequality during the past three decades have been exacerbated by national policies that had a negative impact on income distribution. Monetary policies that emphasized price stability over growth, labour market policies that weakened bargaining position of labour vis-à-vis employers, and fiscal policies that prioritized fiscal consolidation at the expense of benefits and progressive taxation, all contributed to increasing income inequality. However, national policies, including a strengthening of institutions to deal with inequality can play an important role on reducing income inequality. Several countries have managed to use fiscal policies to mitigate a high primary income inequality down to lower levels of secondary and tertiary inequality. Additionally, the right mix of macroeconomic, fiscal, labour market and social policies (policy coherence) can reverse the rising trend in income inequality.