Opinion | Why America’s growing wealth gap spells trouble for the rest of the world

Since the 1980s, inequality has increased within rich countries even as poor countries get richer quicker. This reversal of a historical trend might have contributed to the rise of nationalism in the West – and harmful trade policies

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A homeless encampment in Oakland, California. The rise in inequality in America has been so sharp that it is no longer clear the American poor are better off than the rich in the poorest countries. Photo: Bloomberg

Published: 3:00am, 12 Sep 2019Updated: 8:51am, 12 Sep 2019

At the beginning of classes every autumn, I tease my students with the following question: is it better to be poor in a rich country or rich in a poor country? The question typically invites considerable and inconclusive debate. But we can devise a more structured and limited version of the question, for which there is a definitive answer.

Let’s narrow the focus to incomes and assume that people care only about their own consumption levels (disregarding inequality and other social conditions). “Rich” and “poor” are those in the top and bottom 5 per cent of the income distribution, respectively. In a typical rich country, the poorest 5 per cent of the population receive around 1 per cent of national income.

Data is a lot sparser for poor countries, but it would not be too much off the mark to assume that the richest 5 per cent there receive 25 per cent of national income.

Similarly, let’s assume that rich and poor countries are those in the top and bottom 5 per cent of all countries, ranked by per capita income. In a typical poor country (such as Liberia or Niger), that is around US$1,000, compared to US$65,000 in a typical rich country (say, Switzerland or Norway). (These incomes are adjusted for cost-of-living, or purchasing-power, differentials so they can be directly compared.)

Now, we can calculate that a rich person in a poor country has an income of US$5,000 (US$1,000 x 0.25 x 20) while a poor person in a rich country earns US$13,000 (US$65,000 x 0.01 x 20). Measured by material living standards, a poor person in a rich country is more than twice as well off as a rich person in a poor country.

This result surprises my students; most of them expect the reverse to be true. When they think of wealthy individuals in poor countries, they imagine tycoons living in mansions with a retinue of servants and a fleet of expensive cars. But while such individuals certainly exist, a representative of the top 5 per cent in very poor countries is likely to be a mid-level government bureaucrat.