Countries With the Widest Gap Between Rich and Poor

May 20, 2014 by 247alex

178494022The United States of America — the land of opportunity — has the fourth most uneven income distribution in the developed world. Chile has the most unequal distribution of income, while Iceland tops the list as the most egalitarian.

The Gini index measures how much an economy deviates from perfect equality — where everyone has the same income. A score of zero indicates perfect equality, and a score of one indicates extreme inequality. Based on index figures for Organisation for Economic Co-operation and Development (OECD) countries, these are the least equitable countries in the developed world.

Gini index scores can be measured before, as well as after, taxes and transfer payments. According to Chad Stone, chief economist at the Center on Budget and Policy Priorities (CBPP), a Washington, D.C.-based think tank, the economy alone determines pre-tax and transfer payment inequality. “It’s the whole economy. It’s the fact that different people have different skills,” Stone said.

Chye-Ching Huang, senior tax policy analyst at CBPP, explained that tax policy can have a large impact on inequality. “Some countries do quite a lot in terms of various taxes and transfers to reduce inequality and other countries do quite little,” Huang said.

One measure of how fiscal policy can effect income inequality is the difference in Gini index scores before and after tax and transfer payments. By this measure, the U.S. ranks as the fourth-worst country in the OECD for reducing income inequality. Other countries that fare poorly include Chile and Israel, the OECD’s most and fifth-most unequal nations.

CBPP’s Huang told 24/7 Wall St. that “reduction [of ] inequality and increased income in the bottom and middle leads to things like higher education of the workforce,” which in turn improves an individual’s ability to improve his economic status.

However, the relationship between education and inequality is not always clear. While countries that have low income inequality have educated workforces, the opposite isn’t necessarily true. The U.S. and Israel, two of the most unequal countries, were among the largest spenders on education as a percent of GDP in 2011. “There’s something there that could happen over multi[ple] generations that can’t be seen in a single year snapshot,” Huang said.

Similarly, statistics on social spending differ considerably among highly unequal countries. Chile and Mexico, the two most unequal countries, respectively spent 10.2% and 7.4% of GDP on social services, less than nearly all other OECD countries. On the other hand, two other countries with high inequality levels, Spain and Portugal, were among the largest spenders on social services in the OECD.

Different sources offer different conclusions regarding the effects of inequality on economic growth. According to an International Monetary Fund (IMF) report, “Inequality continues to be a robust and powerful determinant both of the pace of medium-term growth and of the duration of growth spells.” Meanwhile, a Center for American Progress report found that inequality’s impact on growth was inconclusive.

Despite these differences, however, both reports argue that there were substantial reasons why the U.S should seek to meaningfully address inequality, including fairness and preserving opportunities for ordinary Americans to get ahead.

To determine the countries with the most uneven distribution of income, 24/7 Wall St. reviewed post-tax and transfer Gini index scores published by the OECD. We also consulted the CBPP’s report, “What Do OECD Data Really Show About U.S. Taxes and Reducing Inequality?”, which reviewed the same OECD data. We also considered data on GDP growth, education, job growth, gross fixed capital formation, as well as social and family spending, all from the OECD. Figures are from the most recently available year.

These are the countries with the widest gap between the rich and poor.

10. Japan
> Gini index – post tax & transfer: 0.336
> Social spending, pct. of GDP: n/a
> Chg. in Gini after tax & transfer: 0.152 (11th smallest)
> Job growth, 2013: 0.7% (16th lowest)

Before taxes and transfers, Japan’s Gini index was relatively high, roughly on par with that of the U.S. While after taxes and transfers the gini index score fell from 0.488 to 0.336, it remained 10th highest among all OECD nations. Japan’s population was relatively well educated — 46.4% of the population between 25 and 64 years old had a tertiary degree, among the most worldwide. Inequality is just one problem facing the Japanese economy, which has suffered from years of falling prices, little economic growth, and a growing debt burden. In an effort to bolster the country’s finances, Japan recently increased its nationwide value added tax to 8%, which triggered a massive rush by consumers and businesses to make big purchases ahead of the tax hike.

9. Greece
> Gini index – post tax & transfer: 0.337
> Social spending, pct. of GDP: 22.0% (17th highest)
> Chg. in Gini after tax & transfer: 0.185 (10th largest)
> Job growth, 2013: -4.0% (the lowest)

Greece’s GDP growth was negative every year from 2011 to 2013, as the country continued to reel from its debt crisis. Despite defaulting on its debt in 2012, the Greek government continued to spend some money on its people. Social spending accounted for 22% of the nation’s GDP, in line with the OECD average. After taxes and transfers, the country’s Gini index fell from fourth-highest in the OECD to ninth-highest. However, employment has decreased substantially in recent years, falling nearly 8% in 2012 and then roughly 4% in 2013.

8. Spain
> Gini index – post tax & transfer: 0.338
> Social spending, pct. of GDP: 27.4% (8th highest)
> Chg. in Gini after tax & transfer: 0.169 (14th smallest)
> Job growth, 2013: -3.1% (2nd lowest)

Like several countries with high income inequality, Spanish residents had relatively low educational attainment rates. Only about 54% of Spaniards between 25 and 64 had at least an upper secondary education as of 2011, less than all but a few OECD nations. Recent economic problems may do little to help improve inequality. Spain was one of the countries at the epicenter of the eurozone crisis, and it still has a long way to go on its road to recovery. More than one quarter of the workforce is unemployed in Spain, nearly the worst in all of Europe. After remaining virtually unchanged in 2011, Spain’s GDP contracted by 1.6% in 2012 and by an additional 1.3% last year.

7. United Kingdom
> Gini index – post tax & transfer: 0.341
> Social spending, pct. of GDP: 23.8% (13th highest)
> Chg. in Gini after tax & transfer: 0.182 (12th largest)
> Job growth, 2013: 1.3% (8th highest)

The U.K. had the OECD’s third-highest Gini index before taxes and transfers, well above that of the U.S. After taxes and transfers, however, the country’s Gini index fell to 0.341, well below the equivalent index score for the U.S., although still seventh highest in the OECD. As of 2009, the country offered considerable government support to families, totalling 4.2% of GDP, more than all but one OECD country. In recent years, however, the U.K. government has pursued fiscal policies to trim the country’s budget deficit. One such policy is the implementation of a hard cap on welfare payments, set to take effect next year.

6. Portugal
> Gini index – post tax & transfer: 0.344
> Social spending, pct. of GDP: 26.4% (9th highest)
> Chg. in Gini after tax & transfer: 0.178 (13th largest)
> Job growth, 2013: -2.6% (3rd lowest)

Portugal’s social spending as a percentage of GDP totalled 26.4%, among the highest out of the OECD countries. However, the country was still among the most unequal in the developed world, even after taking into account taxes and transfer payments. Portugal’s bailout in 2011 did not improve the country’s economy much. Employment shrank in each of the last two full years, by 4.2% in 2012 and by 2.6% in 2013. Also, only 17.3% of its residents attained tertiary degrees, among the lowest in the OECD. This might not be particularly surprising, as the Portuguese government spent $5,843 per student in 2010, among the lower per-student expenditures in the OECD.

5. Israel
> Gini index – post tax & transfer: 0.376
> Social spending, pct. of GDP: 15.8% (4th lowest)
> Chg. in Gini after tax & transfer: 0.125 (5th smallest)
> Job growth, 2013: 2.7% (2nd highest)

Israel was among the top spenders on educational institutions in 2010, spending 7.4% of GDP, more than all but a handful of nations. The government’s interest in education seems to have paid off, as residents are generally quite well-educated. Nearly half of residents between 25 and 64 years old had attained a college degree as of 2011, higher than all but two other OECD countries. However, taxes and government programs had a relatively weak impact on inequality. The nation’s Gini index dropped just 0.125 after taxes and transfers, considerably less than in most other countries. Additionally, government social spending totalled just 15.8% of GDP, lower than most OECD countries.

4. United States
> Gini index – post tax & transfer: 0.380
> Social spending, pct. of GDP: 20.0% (11th lowest)
> Chg. in Gini after tax & transfer: 0.119 (4th smallest)
> Job growth, 2013: 1.0% (14th highest)

Despite being one the world’s wealthiest nations with the third highest GDP per capita in the OECD, the U.S. still had one of the developed world’s largest income gaps. The U.S. spent the most of any member nation on education per student, at more than $22,700 annually as of 2010. The U.S. also had the fourth highest percentage of adults between 25 and 64 years old with a tertiary degree, at over 42%. Despite this, the country has struggled to keep workers in the labor force. In each of the last two years, labor force growth has been less than 1%, as Americans exited the workforce and the population continued to age.

3. Turkey
> Gini index – post tax & transfer: 0.411
> Social spending, pct. of GDP: n/a
> Chg. in Gini after tax & transfer: n/a
> Job growth, 2013: n/a

Although still considered an emerging economy, Turkey has struggled in recent years with slowing growth and rising debt levels and other structural problems in the country’s economy, including high levels of inequality. A number of factors likely contribute to the country’s high inequality. For one, just 14% of the country’s population ages 25 to 64 had a tertiary degree as of 2011, the lowest in the OECD where 31.5% of adults had such an education. Turkey has also struggled to fight poverty. According to the OECD, the number of children, young adults, and elderly residents living in poverty rose between 2007 and 2010. Government corruption and political turmoil are also concerns. Last summer’s mass protests against Prime Minister Recep Tayyip Erdogan in Istanbul’s Taksim Square captured the world’s attention and bred concerns about the country’s future under Erdogan.

2. Mexico
> Gini index – post tax & transfer: 0.466
> Social spending, pct. of GDP: 7.4% (the lowest)
> Chg. in Gini after tax & transfer: n/a
> Job growth, 2013: 1.1% (11th highest)

The Mexican government set aside the equivalent of just 7.4% of the nation’s GDP for social programs, among the smallest budgets for social spending in the OECD. Total public spending on Mexican families equaled just 1.1% of GDP in 2009, less than half the average for the OECD. Low educational spending likely also did not promote income equality in Mexic. Nearly all educational institutions — from primary schools to research and development ones — were also relatively underfunded, spending less than $3,000 per student in 2010, the lowest in the OECD. Another factor driving up inequality may be the high levels of corruption in Mexico. Mexico was tied with Argentina as the most corrupt country in Latin America last year, according to Transparency International.

1. Chile
> Gini index – post tax & transfer: 0.501
> Social spending, pct. of GDP: 10.2% (3rd lowest)
> Chg. in Gini after tax & transfer: 0.025 (the smallest)
> Job growth, 2013: n/a

Chile was the least equitable country in the OECD, with a Gini index score of 0.501, even after accounting for taxes and transfers. The history of Chile’s economy has been shaped largely by Augusto Pinochet’s dictatorship. While the Chilean government has been relatively stable since returning to democracy in 1990, and residents have among the highest standards of living in Latin America, social services were still a relatively small expense in the country. Total social spending amounted to just $1,733 per capita in 2010, less than in every country reviewed except for Mexico. Chile’s GDP growth has actually been fairly strong in recent years. GDP grew 4.2% in 2013 from the year before, the highest growth rate among OECD countries.

Essential Tips for Investing: Sponsored

A financial advisor can help you understand the advantages and disadvantages of investment properties. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Investing in real estate can diversify your portfolio. But expanding your horizons may add additional costs. If you’re an investor looking to minimize expenses, consider checking out online brokerages. They often offer low investment fees, helping you maximize your profit.