Split By Decision

Tsang Wing-On is perhaps the least threatening criminal to disturb the public peace in Hong Kong. In January, the 78-year-old entered a convenience store brandishing a fruit knife and told the clerk to call the police. When officers arrived, Tsang promptly surrendered and confessed. The welfare recipient, whose $460 monthly payments had been cut off, committed the "crime" because he believed a guilty plea and the ensuing jail sentence would allow him to obtain things he could no longer afford: regular meals and a warm place to sleep.

Tsang isn't alone. One in three elderly Hong Kongers lives in poverty. In the 10 years since Hong Kong's return to Chinese sovereignty, official statistics show that the number of "working poor"—defined as those who earn less than half the median income—has nearly doubled. This, in a city that boasts a $27,000 per capita GDP, a booming stock market, a covey of billionaires and an economy that has grown by about 8 percent annually over the past three years. "Look at all the old people collecting cardboard from garbage dumps for recycling," says John Sayer, head of Oxfam Hong Kong. "It's scandalous."

Tsang's plight underscores an increasingly worrisome global paradox. In the sixth year of synchronous growth, the global economic pie has expanded at an unprecedented rate. But the rich are eating most of the new slices. What's more, they're using their power to ensure the baker keeps delivering the pies to their gilt-edged doors before venturing into poorer neighborhoods. The stunning growth of China and India, as well as the still-steady growth of the G7 nations, isn't lifting all boats equally. Around the globe, from the most developed economies (like the United States' and Hong Kong's) to those rapidly catching up, income inequality is on the rise. "People are still transitioning out of poverty," says Thomas Piketty, a professor at the Paris School of Economics and coeditor of a new book on income inequality. The proportion of the world's population living on less than $2 a day fell from 67 percent in 1981 to 47 percent in 2004, according to the World Bank (though there is a record number of total poor in Asia—some 1.9 billion, or 60 percent of the population). There are also more wealthy people than ever before: the number of high-net-worth individuals worldwide (those with more than $1 million in assets, excluding their primary residence) rose 8.3 percent globally in 2006 to 9.5 million, according to Capgemini's World Wealth Report. Yet the middle class within nations is shrinking. "In spite of the massive reduction of inequality between countries, there has been a significant rise of within-country inequality," says Piketty.

The rich-poor divide is most striking in the places that have embraced turbocapitalism most wholeheartedly—namely, the United States and China. China's rich-poor divide now resembles Latin America's, according to an Asian Development Bank study released in August. The country's Gini coefficient—a ratio income for the poorest and richest sectors of society that ranges from zero to 1, with 1 representing the highest degree of inequality—soared from 0.41 in 1993 to 0.47 in 2004 and is now thought to be above 0.5 (in the United States, the coefficient is 0.46). But the growing wealth gap is not solely a function of the uncontrollable forces of globalization and technological change, which are most often blamed for it. Inequity, it turns out, is at least in part controllable, and policy decisions made by increasingly right-leaning, market-friendly governments have exacerbated it in recent years. The list of global billionaires is now filled with resource magnates who were effectively anointed by the state. Less progressive tax regimes, privatization policies that have funneled public resources into private hands and a lack of basic protections for labor have all helped tilt the balance in favor of the wealthy in emerging markets like China and Russia. It is no accident that while income gaps are growing all over the world, they are far less wide in India (due to lingering trade protections) and Germany (due to welfare benefits) than in the United States and China.

Orthodox economics holds that rising income inequality is an unavoidable and not entirely unwelcome byproduct of globalization and trade. But led by Japan, Asia's miracle economies took flight after World War II while narrowing their respective rich-poor divides. Meanwhile, the United States saw a compression of incomes amid relatively consistent growth —dubbed the Great Moderation—thanks to an entente between corporate America and labor, and government policies that provided safety nets for the working class.

Yet over the past decade, a variety of forces have changed the growth dynamic. The integration of China and India into the global trading system effectively added 2 billion workers to the world's labor force, thus placing downward pressure on the real wages paid workers. Intensifying competition, rapid adoption of new technologies and freer capital flows are "diminishing their bargaining power," says the Asian Development Bank's chief economist, Ifzal Ali. In this increasingly interconnected system, the returns accruing to those with skills and education have risen. "If you are well educated and well connected, the global economy gives you an ever-greater market for your insight," says Robert Reich, the former U.S. Labor secretary and author of "Supercapitalism." "The top 10 or 20 percent is pulling away from the rest because of education, job skills and connections."