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Despite economic growth, Colombia continues to be one of the most unequal countries in the world

Despite economic growth, the unequal distribution of income in the world and in Colombia has increased in the last 40 years. According to recent research which analyzed the Gini index, rose from 0.30 to 0.35. The Gini index measures inequality between 0 and 1, the larger the number the greater the inequality. It is currently used by the World Bank (WB) to establish income inequality

The Gini index for Colombia is 0.53, placing it as the second-most unequal country in Latin America only after Honduras (0.537). This reality explains the difficult situation of many people for paying for housing, education, transportation, and credit despite a healthy country economy.

“The Colombian case is critical because the index fell during the oil bonanza of 2006- 20014 period and with growth levels of 6.6%,” said Óscar Benavides, Universidad Nacional de Colombia Economist and Economic Sciences Ph.D. who headed the project called, “Empirical analysis of the dynamic relationships between economic growth and factorial income distribution.”

The research project is the continuation of a first project they carried out to establish the inequality trend during 40 years using the Gini index in 2011. In this second part, their goal is to analyze what happened after the housing and financial crisis of 2008.

Benavides says that after a crisis, economies most often grow and recover. However, in their research, they have seen that despite this fact, income inequality in Colombia (51.1, in 2015 according to the WB) persists, demonstrating that this is not a temporary phenomenon but a trend.

 “The Colombian case is critical because the index fell during the oil bonanza of 2006- 20014 period and with growth levels of 6.6%.

After reviewing and a comparative analysis of the figures, the researchers identified three causes for this contradictory behavior in regards to economic growth – income distribution relationship:

  • Technological innovation changed the economic growth pattern
  • Economic policies do not improve distribution
  • There is a mistaken diagnosis of the economy which leads to also mistaken corrective measures 

Pattern change in economic growth in the world

In the 40s and 50s, the economies grew due to capital accumulation (machinery, equipment, and assets in hands of workers). However, this trend changed in the last 25 and is now a product of technological development.

“Currently anybody who does technological development obtains a patent and turns into a monopoly. Therefore the most innovative are valued corporations such as Google, Facebook, and Microsoft, which explains why they are so wealthy,” said Benavides.

While 10 years ago, energy companies and banks held the first places in corporate rankings as the most valued firms in the world, in 2017 several were outranked by companies devoted to technology. As established by the World Economic Forum in the company ranking for stocks and amount of stocks in circulation. Last year’s ranking was:

  1. Apple
  2. Alphabet, groups several corporations (Google is the main subsidiary)
  3. Microsoft
  4. Berkshire Hathaway manages companies in areas such as public utilities railroads and insurance companies.
  5. Exxon Mobil
  6. Amazon
  7. Facebook
  8. Johnson y Johnson, a pharmaceutical industry giant
  9. General Electric
  10. China Mobile, telecommunications services provider in China and China and Hong Kong

The new economic behavior excludes certain population groups which are outside of the market such as informal workers; consequently, the gap between those who can have access to these innovations and those who cannot increases the Gini index. Therefore, “The growth of the economy changed but now its distribution is worse,” said Benavides.

The economic policy has not improved distribution

One of the tools countries have to correct these trends is through public policies. However, “Fiscal policy has not improved distribution and the economic load finally falls on the individuals.”

In Colombia, for instance, the tax reform of 2017 reduced the number of taxes paid by businesses to only one tax (income tax) and additionally it will decrease gradually until 2019 from 40% to 33%.

Additionally, this reform increased the taxes paid by most citizens, such as the VAT which passed from 16% to 19%, in basic products such as pasta, margarine, cooking oil, cereal, cleaning products, clothing and restaurant food.

Wrong economy diagnosis

The third element which influences the unfavorable behavior of the Gini index is that in the last few years, the diagnosis of the Economy is far from the reality. According to Benavides, this is particularly evident in Colombia where there are the following policy flaws:

  • Fiscal exemptions to large tax contributors, with measures such as reducing income tax and deductions by acquiring capital goods.
  • Regressive tax reforms, i.e. those with better income pay fewer taxes with the justification that they create employment.
  • Cartelization of legal corporations, a practice which consists of price fixing, limiting supply, or other restrictive practices in order to increase prices in a consolidated manner to avoid competition.
  • Oligopolies in sectors such as banking, which focus offerings to a reduced number of firms and also have a cartelization tendency.
  • Economic growth which does not correspond to the trend of the last years produced by sectors such as the oil industry and not technological innovation.

“It is clear that if we continue to do the same, we will not obtain different results and evidence suggests the situation is going to worsen,” said Benavides.

One of the alternatives that some countries have opted for is to correct inequality with greater government participation as the case of Scandinavian countries such as Norway, Swede, or Denmark, whose economies grow and its citizens pay more taxes progressively. In other words, those who have greater incomes and pay more, and those with less income pay less.

For the researcher, solving these profound inequality issues should be a concern of society, avoiding the surge of nationalist movements and growing concerns on market operation. Its treatment will determine the movements of the next five years.

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