Home > Uncategorized > Income inequality between North and South in relation to global income inequality

Income inequality between North and South in relation to global income inequality

from Robert Wade and RWER issue no.92

The bottom line is that North and South are coherent blocs in important ways. The income gap between the North-South blocs is – persistently – larger than the income gaps within them. If we plot the share of world population living in countries arranged by average income we see a pronounced bimodal distribution, with not much population in between.

Countries of the North enjoy common economic benefits from their superior position in the world hierarchy, making for common interests in protecting their position from challengers. They translate common interests into political treaties, such as free trade agreements (e.g. NAFTA), political federations (eg European Union), and security agreements (eg NATO); and into common agreements linking groups of northern countries with regions of the South (e.g. Lome Convention, a trade and aid agreement between the European Economic Commission and 71 African, Caribbean and Pacific countries, signed in 1975). The seven leading economies of the North have concerted their actions through the G7 summits, claiming to be the top table of governance for the world (though not replacing the UN Security Council on security issues); and supported by tiers of other G7 coordination forums.

Countries of the South have broadly similar income levels and are subject to broadly similar pressures from the world economy. But they are much less organized in collective action organizations than countries of the North – whether regional or cross-regional (e.g. G77, and G24 which coordinates developing countries in the World Bank and IMF, with a tiny budget). For example, the Chiang Mai Initiative was created after the Asian financial crisis of 1997-99 to organize currency swaps within Northeast and Southeast Asia, so as to reduce the reliance on emergency financing from the western-dominated IMF. But it has barely functioned, owing partly to deep suspicion between the two countries with the biggest foreign exchange reserves, China and Japan (Wade 2013).

We can see the North-South difference in the contrast between G7 and G20. The G7 includes only the major northern economies, which share high rank in GDP and in GDP per capita, with a correlation coefficient of around 0.7 – suggesting strong common interests and relatively high ability to concert their actions. The G20 (formed at finance minister level after the Asian financial crash of 1997-99 and at summit level after the North Atlantic financial crash of 2008-09) includes 11 developing countries, and the corresponding correlation coefficient is around 0.3 – suggesting much less common interest among the member states (Vestergaard and Wade, 2012a; 2012b).

. . . The North-South dualism is the starting point for understanding key trends: read more

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