Slumonomics

The UN's Slums of the World report notes that income inequality, as measured by the GINI coefficient, is extremely high in Latin and South America.  It notes that this index is growing fast in the largest economies in this region: Argentina, Mexico, and Brazil.  I would like to use this post to discuss the GINI coefficient in general.

The GINI coefficient (for income distribution) is used to measure what percentage of income is controlled by what percentage of the population in a given country.  The coefficient will be a low number if income in a country is spread out, while the GINI will be high if a high proportion of the income is concentrated in a low proportion of the population.  Prevalently, a low GINI coefficient is considered a good thing, while a high GINI is considered bad.  However, this is somewhat misleading because in a country where everyone is poor there will be a low GINI index, and the as soon as some people start to earn higher incomes the index will increase.  In other words, an increasing GINI index could be a result of economic growth.

Us economists are always talking about incentives.  In a society where all of the people earn exactly the same income, there will be little incentive to be innovative, industrious, etc., because people will not believe it will be possibly to make a much greater income than others.  However, in an society where people are rewarded for things like innovation and industry with higher incomes, the people will have incentives to be innovative and industrious, and also take more entrepreneurial risks, which are all essential for healthy economic growth.

Besides, if perfect income equality is the goal, it is easy to achieve.  We all need only stop working and wait until all of our incomes are zero.