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relationship between income inequality and quality of life

Income Inequality by Country

Is there a relationship between income inequality and quality of life in different countries?

 

Overview

Income “Inequality” is incessantly being used by Presidents, Popes, and high level political and financial leaders throughout the world, as a rallying cry equating “rising income inequality” with injustice, and calling for government intervention to stamp out this “greatest evil”.

But is the vision of the world upon which these conclusions is based accurate?  Or is it based on a politically motivated, gross over simplification of a complex question by those seeking power over the lives of others?

This article analyzes the relationship between “income inequality” and multiple other measures of a country’s economic status to see what the relationship is, if any, between these various indicators of people’s quality of life

The Data

Compared to other measures

The following Excel spreadsheet compares “income inequality”, as measured by the Gini Coefficient, to a variety of other measures of a country’s economic well-being, including:  Economic Freedom, Corruption, Productivity (as reflected in per capita GDP), and Economic Prosperity for multiple countries with varying political and cultural systems.  The countries were selected to try to show some of the extremes of inequality and its relationship to the other measures of well-being, including countries frequently used as good examples of government management. 

 

Table:  Inequality by Country

Country

Income Inequality

Economic Freedom

Government Corruption

Productivity

Economic Prosperity

 

low  numbers mean low inequality

high numbers mean high freedom

low numbers mean high corruption

average per person production thousands of dollars

country rank out of 142 countries

Sweden

23

73

9.2

41.2

6

Slovenia

24

63

6.4

27.9

53

Czech Republic

25

72

4.6

27.2

38

Denmark

25

76

9.3

37.9

23

Hungary

25

67

4.7

20.1

83

Norway

25

71

8.6

54.9

1

Slovakia

26

66

4.3

24.6

67

Germany

27

73

7.9

40.0

9

Romania

27

66

3.7

13.4

82

Switzerland

29

82

8.7

46.4

2

Estonia

31

76

6.5

23.1

65

France

31

64

6.8

35.8

22

Korea

31

71

5.4

33.2

19

Italy

32

61

3.9

30.3

52

Spain

32

67

6.1

29.9

44

United Kingdom

32

75

7.6

37.3

28

Greece

34

56

3.5

24.0

80

Poland

34

67

5.3

21.2

49

Israel

38

68

6.1

34.8

29

Japan

38

72

7.8

36.7

5

Russia

42

52

2.1

17.9

50

Nigeria

44

54

2.4

2.8

112

United States

45

76

7.1

53.1

24

Singapore

46

89

9.3

64.6

3

China

47

53

3.5

9.8

7

Mexico

48

67

3.1

15.6

27

Hong Kong

54

90

8.4

52.7

18

Botswana

63

72

5.8

16.4

96

 

Chart Notes:

  • Income Inequality – based on Gini Coefficient, 0=perfect equality, 1 (100%)= maximum inequality, from CIA World Factbook
  • Economic Freedom – based on Heritage Foundation Index of Economic Freedom, 100=high freedom, 0=no economic freedom.  (Other indices of freedom are listed HERE)  The index divides countries into five groups based on their score as follows:

    • Free                               100-80
    • Mostly Free                     80-70
    • Moderately Free              70-60
    • Mostly Unfree                  60-50
    • Repressed                         50-0
  • Government Corruption – based on Transparency International’s Government Corruption Index, 10=low corruption, 0=high corruption
  • Productivity – based on the International Monetary Fund productivity per person, US dollars PPP or Purchasing Price Parity which equates different currencies based on their ability to purchase equivalent products in local markets
  • Economic Prosperity – based on the Legatum Prosperity Index, by the Legatum Institute, country rank out of 142

Observations

Whether the Gini Coefficient is a valid or useful measure to consider in evaluating the problem of poverty in the world is open to debate as discussed in Measuring Income Inequality.  It has been used for this analysis because it is used by virtually every political leader in the world as the basis of their criticism of the world’s economic system.  The following are a few selected relationships, or lack thereof, that appear instructive.

Countries with low Gini income inequality (23-29):

Sweden, Slovenia, Czech Republic, Denmark, Hungary, Norway, Slovakia, Germany, Romania, Switzerland

Economic Freedom

  • Only Switzerland is “Economically Free”.  The rest are “Moderately Free” or “Mostly Free”
  • So Gini income inequality isn’t related to Economic Freedom in countries with low inequality

Government Corruption

  • Ranges from very low corruption (Denmark, 9.3) to moderately high corruption (Slovakia, 4.3)
  • So Gini income inequality isn’t related to Corruption in countries with low inequality

Productivity

  • Only Norway is very high with a score of 54.9, while Romania is very low with a score of 13.4
  • So Gini income inequality isn’t related to Productivity in countries with low inequality

Economic Prosperity

  • Norway and Switzerland are on the top, ranking number 1 and 2, but Romania and Hungary are at the bottom, ranking 82 and 83. 
  • So Gini income inequality isn’t related to Economic Prosperity in countries with low inequality

Countries with high Gini income inequality (42 to 63)

Russia, Nigeria, United States, Singapore, China, Mexico, Hong Kong, Botswana

Economic Freedom in countries with high Gini income inequality

  • Hong Kong and Singapore are Economically Free, while Russia, Nigeria, and China are Mostly Unfree
  • So high Gini income inequality isn’t related to Economic Freedom in countries with high inequality

Government Corruption in countries with high Gini income inequality

  • Russia, Nigeria, China and Mexico are very corrupt, while Hong Kong and Singapore are some of the least corrupt in the world
  • So high Gini income inequality isn’t related to Government Corruption in countries with high inequality

Productivity in countries with high Gini income inequality

  • Nigeria has the lowest with an average per capita GDP of any country in the study at $2,800, while Singapore has the highest with an average of $64,600
  • So high Gini income inequality isn’t related to Productivity in countries with high inequality

Economic Prosperity in countries with high Gini income inequality

  • Singapore has very high economic prosperity with a rank of 3, while Nigeria is the worst in the study with a rank of 112
  • So high Gini income inequality isn’t related to Economic Prosperity in countries with high inequality

Lesson

The most striking observation in this study is the lack of any relationship between income inequality as measured by the Gini Coefficient and the other measures of economic wellbeing.  It isn’t related to economic freedom, government corruption, productivity or economic prosperity!  No pattern emerges such as “all countries with low inequality are economically prosperous” or “all countries with high inequality are economically free.” 

Income Inequality, as measured by the Gini coefficient is a statistical mirage that appeals to people desire for a simple solution to complex problem of poverty

For a more detailed consideration of the differences in income inequality Norway, Russia, Nigeria, China, Hong Kong, Singapore, and the United States, see Income Inequality in Key Countries.

Recommended

Inequality  a gateway to inequality, what is it, why it exists and why it matters?

Income Inequality, Fair or Unfair  all income inequality is not the same; recognize the difference between good and bad income inequality

Income Inequality in Key Countries  why income inequality differs in key countries around the world

The Income Inequality Mirage  how the way income inequality is measured misleads people


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