Growing inequality: Decisive actions can reverse the trend

At this year's World Economic Forum (WEF), under the theme, "Creating a Shared Future in a Fractured World", Canada's Prime Minister, Justin Trudeau warned world's business leaders and his fellow politicians in simple, but stark words, "tackle inequality or risk failure".

Five years ago on the eve of WEF's 2013 summit, its founder Klaus Schwab had observed, "We have too large a disparity in the world; we need more inclusiveness… If we continue to have un-inclusive growth and we continue with the unemployment situation, particularly youth unemployment, our global society is not sustainable." Ahead of WEF's 2014 annual meeting it released a 60-page report highlighting income disparity, ranked first among the major global risks facing societies and economies.

Christine Lagarde, IMF Managing Director, told the 2014 WEF, "in far too many countries the benefits of growth are being enjoyed by far too few people. This is not a recipe for stability and sustainability".

Similarly, in an interview ahead of the 2014 Spring Joint IMF-World Bank meeting, Jim Yong Kim, the World Bank's President warned that failure to tackle inequality risked causing social unrest, "the next huge social movement is going to erupt…to a great extent because of these inequalities."

Yet, inequality of wealth and income continues to grow unabated, and even gathered pace.Two recent reports - the Paris-based Inequality Lab's World Inequality Report 2018 and Oxfam International's Reward Work, Not Wealth - highlight how global inequality has worsened in the past years, especially since the 2008-2009 global financial crisis (GFC). Despite difficulties in estimating wealth, other latest 2017 reports, such as Bloomberg Billionaires Index, UBS/PwC Billionaires Report, Allianz Global Wealth Report and Credit Suisse Report find a very similar trend.

Thus, talk about tackling inequality seems a mere lip service.

Meanwhile, the rich and wealthy call themselves wealth creators, as if by implications all the rest, especially workers, are wealth destroyers. They justify their wealth accumulation arguing that they employ millions of people even when they suppress wages of ordinary workers and jack up already indefensible executive pays. They point to their philanthropy and supports for arts and sports to deflect attention from their tax dodging through illegal tax evasions and legal tax avoidance even when they induce countries into tax competition for cuts in top marginal tax rates.

As the World Inequality Report 2018 and Reward Work, Not Wealth reveal, these very actions of the super-rich are at the root of the problem. They deprive governments of billions of dollars, forcing the governments to cut essential services and provision of public-social goods, aggravating the survival struggles of the majority of the people as their earnings stagnate or even fall.

It is thus no wonder that while the global wealth is on a super-fast lane, global household debts increased by 5.5 per cent in 2016, the highest rate of growth since 2007. Global debt rose faster than nominal economic output for the first time since 2009, and the global debt-income ratio increased by almost 1.0 percentage point to 64.6 per cent, despite total global wealth increasing by US$16.7 trillion, or 6.4 per cent in 2017.

In fact, growing inequality is not inevitable; it is created. It is the result of wholesale dismantling of regulations that restrained excesses of market, and massive transfer of public assets to the private sector through privatisation since the early 1980s. It is also the result of multinational corporation (MNCs)-led globalisation that required weakening of labour's bargaining power.

Decisive actions can reverse the trend of growing inequality as was done immediately following the Second World War (WW II). Asset or wealth redistribution through such actions as radical land reform, inheritance or wealth tax; regulations, such as anti-monopoly laws and protection of labour rights; and public policy actions, e.g., universal access to education, health and social protection were able to break the vicious circle of growing inequality created by wealth inequality.

There seems to be a growing consensus about core policy measures to tackle widening inequality. For example, the Organisation for Economic Cooperation and Development (OECD) suggests three main ways to tackle mounting inequality: promoting employment for all; enhancing access and performance in education and training at every level by investing in people's skills; and reforming tax/benefit systems to help a fair distribution of income while fostering growth. The International Monetary Fund (IMF) agrees that fiscal policy can be a powerful redistributive instrument, and suggests enhancing progressivity of taxation, universal basic income for emerging and developing countries and reduction of gaps in education and health.

The Oxfam paper has a long list of recommendations for governments and international institutions for tackling growing inequality. They include: limiting returns to shareholders; eliminating the gender pay gap; eliminating slave labour and poverty pay; enhancing labour's bargaining power by allowing them to organise; regulating MNCs and promoting fairness; using taxation system; public spending for achieving free public services; a universal social protection floor; and eradicating tax havens.

What however is missed in the discussion is agency or state capacity. Yet, the fact remains that allsuccessful post-WW II examples of long-term inclusive development are found in countries with high levels of state capabilities.The state is the only entity with the mandate and legitimacy to redistribute wealth and resources through progressive taxation and universal provision of essential services. But, relentless attack on the state by the neo-liberals has significantly diminished state capabilities over the last four decades.

Rebuilding state capabilities is much more than governance reform or having anti-corruption legislations as found in the neo-liberal agenda promoted by international organisations and donor community. It is to do with state's capacity to address critical obstacles to development and its ability to withstand resistance from vested interest or established elites, or prevent regulatory capture.

Rebuilding capabilities requires fiscal resources. Illegal transfer of funds through tax havens and international tax competition resulting in cuts of top marginal tax rates are two most critical obstacles to enhancing fiscal space. These are also two chief vehicles for the super-rich to accelerate their wealth accumulation.

Therefore, if the elites at the WEF and international organisations are serious about tackling the growing gap between super wealthy and ordinary citizens, then they must at least stop advocating for cuts of top marginal tax rates and act against tax havens.

Anis Chowdhury, Adjunct Professor, Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok during 2008-2016. [email protected]