Income Inequality and Market Size in Emerging Markets

A basic characteristic of emerging markets is a high level of income inequality. Most countries have small elites that dominate politics and business and control a large share of financial income and assets. Income concentration creates a chasm between the elites and the general population, significantly reducing the market potential for business, and thereby reducing investment, employment, and consumption.

The chart below shows the share of income held by the top 1% for emerging market countries and a selection of developed markets, using 2022 data from the World Inequality Lab (WIL). Latin American countries, India, and the United States stand out for high income concentration, while European countries and Asian “Tigers” (Korea and Taiwan) are more equal. These elites of top 1% earners are sophisticated and increasingly globalized in terms of their attitudes, customs, and where they get educated, invest, vacation, and? retire. They also typically are highly educated and enjoy much better health and longer lifespans than the rest of the population. Particularly in Latin America, where the elites often have generational ties to European nations, the chasm between elites and the population is growing wider, made ever easier by borderless communication technologies and ease of transport. Eastern European countries are different from both emerging markets and developed countries. They are homogeneous populations with scarce immigration and have a legacy of broad educational achievement and equitable? income distribution from the communist past.

The next chart shows the share of income held by the top 10% of earners. In most EM countries, this group controls around half of total income and almost all financial assets, and it represents the bulk of total consumption. Once again, the highest concentration is in Latin America and the lowest in Europe and East Asia.

The next two charts illustrate further the degree of wealth concentration by looking at the ratio of income of the top 1% and top 10% relative to the bottom 50%. The high concentration of income in Latin America compared to other emerging markets and in the United States compared to other developed countries is made more evident. Mexico stands out as an extreme case of income concentration, based largely on ethnicity and integration into the modern economy.

One consequence of income concentration is that many middle-income EM countries (i.e., Latin America, China) and the United States underconsume relative to the size of their populations. The chart below shows the percentage of the population that can be considered to be consumers, assuming USD 12,000 per capita income as the threshold. What we see in all of these middle-income countries, as well as the United States, is that a large part of the population never really enters the consumer economy unless it has the support of generous welfare support or abundant credit. However, unlike in the United States, both welfare and easy credit conditions tends to be temporary in emerging markets, only available in boom times.

High income concentration significantly reduces the consumption potential of most emerging market middle-income countries. For example, assuming that China, Brazil, and Mexico have a similar income distribution as Korea, their population of consumers would increase by almost 100 million for China, and around 20 million for both Brazil and Mexico. On this basis, in the chart below, which shows total potential consumers, Brazil would surpass France and Mexico would jump well ahead of Korea.

Of course, realizing such a shift of income in any country will never be easy, as inequality as deep rooted historical and social causes. Also, the losers from redistributive policies will fight tooth and nail to retain what is theirs. Talk about income redistribution to promote consumption has been prevalent in China for over a decade with scarce results, as elite groups, business lobbies, the bureaucracy, and regional interests impede change. In Brazil, Lula would love to raise taxes on the rich but faces fierce opposition. Any initiative of this sort in Brazil would trigger more capital and human flight from an elite that is already with one foot out of the door, comfortably ensconced in their homes in Florida, Texas or Lisbon with ready access to their foreign bank accounts.