Inequality matters for both ethical and instrumental reasons. On the ethical front, the way social, economic and political benefits are shared in a society is a reflection of how fair a society’s institutions are to those living in it. If the society is structured in a way that seems to systematically favour those belonging to a particular region, class, ethnic or other groups rather than those who work hard, are most productive or need the most help, then there is cause for concern. Worse, if vulnerabilities are transmitted across generations because a society does not sufficiently allow poor or marginalised groups access to resources or opportunities that enable them to thrive, then fairness becomes truly elusive. As much as inequalities will always exist because not everyone is equally able to take advantage of available opportunities, there should be a reasonable chance that a person born without advantages can, through their efforts, excel.
On the instrumental front, there is a growing body of literature that suggests inequality has a negative impact on poverty reduction, economic growth and the stability of a country. First, in more unequal societies, economic growth tends not to reduce poverty as quickly as in more equal societies. According to the World Bank (WDR, 2006), countries that are more unequal experience less poverty reduction for a similar level of economic growth. In a simulation carried out by Ravallion and Ferreira (2008), with a 2 percent growth rate and poverty rate of 40 percent, a low-inequality country (with a Gini index of about 0.30) would halve its headcount poverty index in 11 years. Under similar circumstances, a high inequality country (with a Gini index of about 0.60) would take about 35 years to halve the initial poverty rate. The reason for this is largely to do with the fact that for the same poverty rate, if the people below the poverty line are very far below it (condition of greater inequality), it is harder to push them above it compared with a case where they are very close to the line (condition of less inequality).
A second type of relationship between poverty reduction, inequality and economic growth has to do with the type of growth and how it is distributed. Different types of economic growth (meaning growth driven by different sectors, such as agriculture or services, or by different regions of a country) may have a different impact on poverty reduction because of the nature of inequality in the country and the degree to which growth changes or reinforces that distribution. For example, Ravallion and Chen (2007) found that poverty reduction in China was mostly driven by growth in the agrarian sector, which in turn reduced inequality more than growth in other sectors.
Various studies comparing local units within a single country have found that greater inequality leads to greater violence. The argument is that persistent inequality between different groups (ethnic, religious, geographical, etc.) can create bonds among those who are disadvantaged and allow them to unite in violent activity. A reduction in inequality within the country therefore reduces the grievances of these marginalized groups and their ability to unite.