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Do nations just get the inequality they deserve? The ‘Palma Ratio’ re-examined

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  • José Gabriel Palma

Abstract

This paper aims to re-examine inequality in the current era of neo-liberal globalisation, with an emphasis on both highly unequal middle-income countries that have already implemented full-blown economic reforms (like Latin America and South Africa), and on OECD countries (like the US) now intent on replicating the inequality heights of the former. i) How do those middle-income countries end up having such unequal distributional outcomes? ii) Since oligarchies all over the world would gladly reproduce the same conditions, why until recently have only a few been able to get away with this degree of inequality? And iii) Why are there suddenly so many new entrants to the high-inequality club, especially from the OECD? In other words, how did Reagan and Thatcher and the fall of the Berlin Wall trigger a new process of "reverse catching-up", by which now it is the highly-unequal middle-income countries showing the advanced ones the shape of things to come? One might even argue that in the US not only is the 1% catching up with their Latin counterparts (who are used to appropriating between a quarter and a third of overall income), but that new developments such as Trump may be part of the same phenomenon: it is now the South that seems to show the North 'the image of their own future'. And regarding that future, it is tempting to say "welcome to the Third World"! We are all indeed converging in this neo-liberal era but, somehow unexpectedly, this convergence is towards features that so far have characterised a number of middle-income countries - e.g. huge inequalities due to mobile élites creaming off the rewards of economic growth, and 'magic realist' politics (that may lack self-respect but not originality). I also discuss why Piketty's persistence with the neo-classical theory of factor shares - a pretty much obsolete 1950s-style approach to the distribution of income - prevents him from bringing our understanding of current distributive affairs forward as much as he might. His neo-classical analysis not only does not 'fit the facts' (he has to resort to questionable parameters), but also leads him into a methodology and social ontology that assumes that particularly complex and over-determined processes (like the distribution of income) are just the simple sum of their parts. Therefore, their account can be reduced to the algebraic description of individual constituents (e.g., inequality as basically an endogenous outcome of r>g - and that would be all). I also outline an alternative narrative regarding why inequality is becoming so extreme in formerly more enlightened affluent societies. I conclude that in order to understand current distributive dynamics what really matters is to comprehend the forces determining the share of the rich — and in terms of growth, what they choose to do with it!

Suggested Citation

  • José Gabriel Palma, 2016. "Do nations just get the inequality they deserve? The ‘Palma Ratio’ re-examined," Cambridge Working Papers in Economics 1627, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1627
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    2. Diego Martínez-Navarro & Ignacio Amate-Fortes & Almudena Guarnido-Rueda, 2020. "Inequality and development: is the Kuznets curve in effect today?," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 37(3), pages 703-735, October.
    3. Gilberto González-Parra & Benito Chen-Charpentier & Abraham J. Arenas & Miguel Díaz-Rodríguez, 2022. "Mathematical Modeling of Physical Capital Diffusion Using a Spatial Solow Model: Application to Smuggling in Venezuela," Economies, MDPI, vol. 10(7), pages 1-16, July.
    4. Palma, José Gabriel, 2018. "Por qué la economía ortodoxa transfirió su obsesión por un concepto (mercado) a la de un ritual (matemáticas)," Estudios Nueva Economía, Estudios Nueva Economía, vol. 5(1), pages 7-20.
    5. José Gabriel Palma, 2016. "Why are developing country corporations more susceptible to the vicissitudes of international finance?," The Economic and Labour Relations Review, , vol. 27(3), pages 281-292, September.
    6. Claudia Suárez‐Arbesú & Nicholas Apergis & Francisco J. Delgado, 2023. "Club convergence and factors of income inequality in the European Union," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 3654-3666, October.
    7. Daniel Oviedo & Luis A. Guzman, 2020. "Revisiting Accessibility in a Context of Sustainable Transport: Capabilities and Inequalities in Bogotá," Sustainability, MDPI, vol. 12(11), pages 1-22, June.
    8. ANA CECILIA PARADA ROJAS & Humberto Ríos Bolívar & JORGE OMAR RAZO DE ANDA, 2019. "Mining Of Classification Trees To Analyze A Multidimensional Phenomenon," Proceedings of International Academic Conferences 9010809, International Institute of Social and Economic Sciences.
    9. ANA CECILIA PARADA ROJAS & Humberto Ríos Bolívar & Jorge Omar Razo De Anda, 2019. "Mining Of Classification Trees To Analyze A Multidimensional Phenomenon," Proceedings of International Academic Conferences 9110842, International Institute of Social and Economic Sciences.
    10. Ahmet Faruk Aysan & Dilek Demirbas & Mustafa Disli & Monica Parra, 2021. "Resilience and Path Dependency: Income Distribution Effects of GDP in Colombia," Working Papers hal-03365148, HAL.
    11. Zhu, Le & Shi, Fei, 2022. "Spatial and social inequalities of job accessibility in Kunshan city, China: Application of the Amap API and mobile phone signaling data," Journal of Transport Geography, Elsevier, vol. 104(C).

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    More about this item

    Keywords

    income distribution; inequality; ‘Palma Ratio’; homogeneous middle; ideology; neoliberalism; ‘new left’; institutional persistence; Latin America; Chile; South Africa; United States.;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Kaleckian
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • N16 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Latin America; Caribbean
    • N30 - Economic History - - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy - - - General, International, or Comparative
    • N36 - Economic History - - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy - - - Latin America; Caribbean
    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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