Inequality is growing in most countries. This can be illustrated by examining what has been happening to countries’ Gini coefficient. The Gini coefficient measures income inequality, where 0.00 represents perfect equality, with everyone in the country earning the same, and 1.00 represent perfect inequality, with one person earning all the country’s income. (Note that sometimes it is expressed as the ‘Gini index’, with 100 representing perfect inequality). In virtually all countries, the Gini coefficient has been rising. In the OECD countries it has risen by an average of 0.3% per annum over the past 25 years. The OECD average is now 0.31.
But despite the fact that the Gini coefficient has been rising, its value differs markedly from one country to another, as does its rate of change. For example, Finland’s Gini coefficient, at 0.26, is below the average, but it has been rising by 1.2% per annum. By contrast, Turkey’s Gini coefficient, at 0.41, is above the average and yet has been falling by 0.3% per annum.
The most unequal of the developed countries is the USA. According to OECD data, its Gini coefficient is 0.38, well above the values in the UK (0.34), Japan (0.33), Germany (0.30) France (0.29) and Denmark (0.26). What is more, inequality in the USA has been increasing by an average of 0.5% per annum since the mid 1980s.
According to the United Nations’ Human Development Report 2010, the USA’s Gini coefficient is even higher, at 0.41 (see Table 3 of the report). But this is still below that of Russia, with a figure of 0.44, a figure that has markedly worsened over time, along with those of other former Soviet countries. According to the report (page 72):
The worsening is especially marked in countries that were part of the former Soviet Union – which still have relatively low Gini coefficients because they started with low inequality. Transition has eroded employment guarantees and ended extensive state employment. Before the fall of the Berlin Wall, 9 of 10 people in socialist countries were employed by the state, compared with 2 of 10 in Organisation for Economic Co-operation and Development economies. While the privileged elite (the nomenklatura) often attained higher material well-being, the measured differences in income were narrow.
The Gini coefficient for Russia is the same as the average of the 39 developing countries with the lowest level of human development &nbash; and developing countries are generally much less equal than developed ones. Of course, some developing countries have an even higher Gini coefficient: for Angola the figure is 0.59; for Haiti it is 0.60.
The following three webcasts look at aspects of the growing inequality in Russia.
Webcasts
Gap between rich and poor widens in Russia BBC News, Jamie Robertson (29/5/11)
Corruption slows Russian modernisation BBC News, Emma Simpson (29/5/11)
Corruption and poverty in Russia’s far east Al Jazeera (28/2/11)
Articles
Russia’s rich double their wealth, but poor were better off in 1990s Guardian, Tom Parfitt (11/4/11)
Russia’s growing wealth gap BBC News, Jamie Robertson (28/5/11)
A Country of Beggars and Choosers Russia Profile, Svetlana Kononova (16/5/11)
Rich and poor, growing apart The Economist (3/5/11)
Data
Distribution of family income – Gini Index CIA World Factbook (ranked by country in desending order)
Society at a Glance 2011 – OECD Social Indicators OECD: see particularly the Excel file 6. Equity Indicators: Income inequality (click on No if prompted about a linked workbook)
Russia Distribution of family income – Gini index Index Mundi
Chart of the week: inflation stoking inequality in China and India Financial Times, Andrew Whiffin (24/5/11)
List of countries by income equality Wikipedia
Reports
Growing Income Inequality in OECD Countries: What Drives it and How Can Policy Tackle it? OECD Forum on Tackling Inequality (2/5/11)
Human Development Report 2010 United Nations Development Programme
Questions
- Explain what is meant by the Gini coefficient. How does it relate to the Lorenz curve? What does a figure of 0.31 mean?
- Why has income inequality been growing in most countries of the world? Has the process of globalisation dampened or exacerbated this trend?
- What specific factors in Russia can explain the growing inequality?
- How is privatisation likely to affect income distribution??
- Why is it difficult to quantify the extent of inequality in Russia?
- What maxim of taxation has been used in setting income tax rates in Russia?
- What role does corruption play in determining the degree of inequality in Russia?
- What policy measures, if any, could realistically be adopted in Russia to reduce inequality? What constraints are there on adopting such policies?
What is the future of the Royal Mail? One thing for certain is that it needs an injection of money, which has led the government to consider either privatisation of the Royal Mail or selling it. Over the past years, we have seen continued strikes by the postal service in response to proposed changes in working practices. Mr. Cable commented that:
‘Royal Mail is facing a combination of potentially lethal challenges – falling mail volumes, low investment, not enough efficiency and a dire pension position.’
However, there are concerns that the privatisation or sale of the Royal Mail could lead to higher prices, job losses and further pension problems. The transfer of the Royal Mail to the highest bidder could shift the pension deficit, currently standing at £13.3 billion, to the taxpayer, potentially costing each taxpayer £400. The choice for the public is stark: either lose the right to send a letter anywhere in the UK for the same price or take on postal workers’ pensions.
Expecting massive opposition from the Communication Workers Union (CWU), Ministers are looking to pursue an arrangement similar to that of John Lewis, whereby staff are given shares in the company. This will give the staff an incentive to perform well to improve the performance of the company and hence increase their future dividend. Read the following articles and then try answering the questions that follow.
Royal Mail is to be privatised, government confirms BBC News (10/9/10)
Royal Mail sell-off is confirmed BBC News, Hugh Pym (10/9/10)
Royal Mail privatisation backed Press Association (10/7/10)
Royal Mail sale could cost £400 per home as taxpayers set to fund £13.3 billion pension deficit Mail Online, James Chapman (10/9/10)
Royal Mail pension plan challenged by regulator BBC News, Ian Pollock (30/7/10)
Ministers consider offering 20 per cent of shares in Royal Mail to staff Telegraph, Christopher Hope (10/9/10)
Cable to privatise ‘inefficient’ Royal Mail Independent, Cahal Milmo and Alistair Dawber (11/9/10)
Royal Mail revolution needed, say bankers Telegraph, Louise Armitstead (10/9/10)
Questions
- What are the problems that the Royal Mail is facing? Why have they occurred?
- What are the arguments for and against privatisation of the Royal Mail?
- How might privatisation lead to job losses and higher prices?
- What type of business arrangement does John Lewis have? Explain why this may improve overall performance of the company?
- If the pension deficit is passed on to the government, why will it cost the taxpayer? Is such an arrangement (a) efficient (b) equitable? Explain your answer.
Anyone who lives in the South West can argue that they get a raw deal. Not only are the average salaries in this region lower than in the rest of the United Kingdom, but their water bills are 40% higher than those elsewhere in England and Wales. South West Water is the only provider of water in the South West and hence there are no other competitors that households or businesses can switch to, despite the extortionate prices.
Many households and businesses in the region are struggling to cope with the unfair bills, as people are forced to sacrifice other things in order to find the money. Furthermore, it can be argued that these higher bills are actually used for the benefit of everyone else in the United Kingdom. Since privatisation, South West Water are responsible for cleaning and maintaining over one third of the UK’s beaches and the prices they are charged by SW Water reflect this £2 billion cost. Moreover, with a relatively low population, this large cost cannot be spread across many people. Instead, the small population has to pay larger bills. A hairdresser, who does use a lot of water, is finding herself crippled by water bills of some £2,500. And this bill will pay to clean the beaches in the South West so that people living elsewhere can benefit from the beautiful surroundings.
There is now wide recognition of how unfair this scenario is and proposals have been suggested, ranging from a government grant (hardly likely given the state of public finances) to a levy on other regions’ bills to compensate SW Water for their clean-up costs. However, no decision has been made about how to progress and so for now, residents of the region must just simply grin and bear it, while sacrificing expenditure on other areas and seeing residents from across the UK benefit from their sacrifice.
P.S. If you hadn’t guessed it, yes I do live in the South West!
Why is water so expensive in the South West? BBC News (13/7/10)
North Devon MP Nick Harvey tackles unfair South West Water charges Barnstaple People (14/7/10)
Questions
- What is privatisation? Assess the advantages and disadvantages of the privatisation of water some 20 years ago.
- Does South West Water have a monopoly?
- Which of the 3 proposals is the most beneficial to those a) living in the South West, b) businesses in the South West c) the government and d) the rest of the country?
- Which proposal would you recommend and why?
- Is it fair that those in the South West should pay disproportionately more to clean and maintain beaches, which are used by everyone?
- Is the concept of market failure relevant in this case? Explain your answer.
Whether or not you admit it, most people are aware of what’s happening in the X factor. With massive viewing figures, the X Factor remains one the most highly viewed entertainment programmes, so it’s hardly surprising that demand for advertising slots is so high especially when people are waiting for news about the contestants. The X Factor pulls in £8000 per second from TV adverts and it is estimated that the charge for a 30 second advertising slot is a staggering £190,000, expected to rise to £250,000 for the live final. It looks like the recession has had little impact on those wanting to sponsor the X Factor.
Nevertheless, there has been some controversy this week. Every Monday morning we see stories about the contestants and this week was no exception. But, it wasn’t so much about the contestants this week, but rather it concerned the voting. Following the episodes over the weekend of 7th and 8th November 2009, both the ITV and Ofcom, the telecommunications regulator, received thousands of complaints as Simon Cowell gave his support to ‘Jedward’ over Lucie Jones, even though in earlier episodes, he had said he would ‘leave the country if they won’.
However, Ofcom has said that the X Factor won’t be investigated, as the regulator only investigates voting irregularities and the treatment of contestants and not the outcome of the programme. Meanwhile, speculation is rife that Simon Cowell either wants to keep Jedward on the show, because of their viewer ratings, or that by voting Lucie off, the public will rebel and vote Jedward off this week and Simon will avoid looking like the bad guy.
Who knew that the world of entertainment could be analysed using economics!!
Ofcom won’t investigate X Factor ITN (11/11/09)
750 complain to Ofcom over Lucie’s X Factor exit Wales Online (12/11/09)
£8k a second bonanza for X Factor ads as ITV chiefs cash in on Jedward mania Mail Online (11/11/09)
Watchdog rules out X Factor probe BBC News (10/11/09)
Thousands complain to ITV and Ofcom over X Factor ATV Network News, Doug Lambert (10/11/09)
X Factor: Simon Cowell is an evil genius and we love him Telegraph, Liz Hunt (11/11/09)
Simon Cowell’s evil genius rules The X Factor Guardian, Marina Hyde (13/11/09)
Resistance is futile in the face of this master of psychology Independent, Matthew Norman (12/11/09)
Jedward: X Factor twins John and Edward help ITV rake in advertising Telegraph (11/11/09)
The X Factor becomes the ‘British Superbowl’ as advertising fees soar Tines Online, Dan Sabbagh (11/11/09)
The Ofcom site can be found at:
Ofcom (Home Page)
Questions
- What is the purpose of regulation? What are the advantages and disadvantages of legal restrictions?
- What is the role of Ofcom? How does it regulate telecommunications and what other regulators are there?
- Why is the price for an advertising slot during the X Factor so expensive? What does this tell us about price elasticity and income elasticity of demand?
- Ofcom is not going to investigate X Factor. What are the main reasons behind this decision? Do you think this was the right decision?
- If a judge’s decision can increase advertising revenue, then from a commercial point of view does that make it the ‘right’ decision?
The east coast mainline from London to Edinburgh is a ‘premium route’. This means that it is one of the lines in the UK that is profitable. When the franchises come up for renewal on such lines, potential operators bid to pay the government for the franchise. National Express won the eight-year franchise in 2007 for a total of £1.4 billion, paid in annual rising instalments.
Although the east coast mainline is still profitable, the recession has meant that passenger numbers have been insufficient for National Express to make its annual payments to the Department for Transport and still be left with a profit. As a result, the government will take the franchise into public ownership later this year. This specially created nationalised company will then operate trains on the route until a new franchise is awarded to a private company at the end of 2010.
So why has this proved necessary? Is it all down do the depth of the recession? Or was the £1.4 billion cost of the franchise unrealistically expensive? Would the answer be for National Express to merge with another operator, such as the First Group? Or should the government be prepared to waive, or at least reduce, the franchise payments until passenger numbers are growing fast enough? Or is it time to rethink the whole UK model of rail privatisation and perhaps return to a nationalised rail system? The articles below consider the issues.
National Express loses East Coast line Independent (2/7/09)
National Express goes off the rails on east coast line Times Online (4/7/09)
Q&A: the future of National Express and the east coast mainline rail service Guardian (1/7/09)
East Coast main line: Q&A Telegraph (2/7/09)
Runaway train: The crisis in the rail sector Scotsman (5/7/09)
First Group sets sights on East Coast Business7 (3/7/09)
National Express’s decision to quit East Coast franchise is a lose-lose for nearly everyone Telegraph (4/7/09)
Focus turns to rail franchise system Financial Times (2/7/09)
Rail network: red signals ahead Guardian (2/7/09)
Have we reached the end of the line for privatisation? Observer (5/7/09)
Privatisation has been a train wreck: Ken Livingstone Guardian (2/7/09)
New Capitalism: Old Capitalism except taxpayer money is at risk: Iain Macwhirter Sunday Herald (5/7/09)
Questions
- Consider the relative merits of temporary nationalisation of the east coast mainline services with providing temporary support for National Express.
- Should profitable rail franchises be awarded to the highest bidder? Similarly, should loss-making franchises be awarded to companies bidding for the lowest subsidy?
- Discuss the arguments for and against a complete re-nationalisation of the railways.
- With reference to the final article above, explain what is meant by a Special Purpose Vehicle and whether it was an appropriate means for National Express to fund its £1.4 billion franchise. What dangers are associated with this and other new forms of ‘no-risk capitalism’? Is there a ‘moral hazard’ in this form of capitalism?