FE Today Logo

The case against unconscionable and growing inequality

Anis Chowdhury | December 03, 2019 00:00:00

The recent outrage, manifested in various unrests such as the "Yellow-vest" protest in France and "Abolish the Super-Rich" campaign in the US, is not about inequality per se. The street protests from Latin America to Lebanon are about horrifying growing inequality which is growing by the day. Inequality was at the heart of the Occupy movement protests world-wide.

Even in a mostly egalitarian society, not everyone has the same income or wealth. Some inequality is inevitable or even desirable for nudging inherent human incentive to thrive. But inequality beyond certain levels is fundamentally unfair.

Thus, what ordinary citizens resent are reprehensible levels of inequality. They are angered when inequality is not only unacceptably high, but also rising. The recent Brexit vote, and the rise of populism (especially on the right) in the US and Europe are clear manifestations of a growing discontent among the working and middle classes. President Obama described "dangerous and growing inequality" as "the defining challenge of our time".

ABSOLUTE AND RELATIVE INEQUALITY: Take the case of two people in a country in 1980, one person with an income of $1.0 a day and the other $10 a day. With the kind of economic growth this country experiencing, the first person's income is now $10 a day, while the second person's is $100 a day. Even though the income of both persons increased in the same percentage, the 'absolute' inequality between them has gone up staggeringly from $9.0 to $90 while the 'relative' inequality between them has remained the same - 10 times.

Although there is no theoretical or empirical reason to favour one concept over the other, they imply different policy responses. The recent outrage indicates that people perceive absolute differences in incomes as an important aspect of inequality.

INEQUALITY IN HISTORICAL PERSPECTIVES: Research at the United Nations University (UNU-WIDER) finds that both relative and absolute inequality increased substantially and steadily throughout 1975-2010 in North America, Europe, Central Asia, South Asia and sub-Saharan Africa. In Latin America, East Asia, and the Pacific, relative inequality fell while absolute inequality rose.

When measured at a global level, one survey finds that "today's global income inequality levels are much higher than they were in 1820, irrespective if measured in absolute or in relative terms." Thus, as Oxfam notes, today "seven out of 10 people live in countries in which the gap between rich and poor is greater than it was 30 years ago".

Globally, except for the period 1929-1950, absolute within-country inequality increased continuously, displaying large increases after 1950, and growing at a much faster rate in the post-1970 period. Relative within-country inequality in 1929 was roughly the same as in 1820; displayed a strong decrease between 1950 and 1970, and a sharp increase from 1975 onwards.

The World Inequality Report 2018 revealed that the richest 1% of humanity captured 27% of world income between 1980 and 2016. In contrast, the bottom half got only 12%. In Europe, the top 1% got 18%, while the bottom half got 14%.

OXFAM's Reward Work, Not Wealth reported that 82% of the wealth created in 2016 went to the richest 1% of the world population, while the 3.7 billion people in the poorer half of humanity got next to nothing, resulting in the biggest increase in billionaires in history - a new one every two days. Billionaire wealth increased by US$762 billion between March 2016 and March 2017.

RISING INEQUALITY INEVITABLE? Nobel Laureate Simon Kuznets, studying long time-series data, hypothesised that economic development first leads to a rise and later to a decline of income inequality. The increase happens due to shift from agricultural sector where there is little variation in income to industrial sectors with large differences in income. As economies experience growth, mass education provides greater opportunities which decrease the inequality and the population gains political power to change governmental policies.

However, the experiences of East Asian economies during their early phase of industrialisation challenge Kuznets' hypothesis. These economies grew at the fasted rates globally from the mid-1960s to mid-1980 with inequality either falling or remaining roughly unchanged. More recent experiences of declining inequality in most Latin American and Caribbean countries during the boom period of 2003-2011 also indicate that rising inequality is not an inevitable outcome of the growth process.

RISING INEQUALITY DESIRABLE? Kuznets' hypothesis also implies that rising inequality is desirable. This is because the rich save more of their additional income than the poor. Therefore, if income is distributed more in favour of the rich, there will be more savings and hence investable funds to propel growth.

The East Asian economies also proved this wrong. China, Japan, South Korea and Taiwan implemented drastic land reforms that reduced inequality as growth took off. On the other hand, Latin American and Caribbean countries had historically very high inequality-- associated with colonialism, slavery and land ownership - stagnated.

MISLEADING: There is an attempt to mislead the discourse by the wealthy, claiming that the current experience of rising inequality is "inclusive". They point to growing global middle class even as inequality has been rising, and lowering barriers to wealth acquisition. Some apologists call this "the Great Enrichment" when per capita incomes surged by a factor of 10. Others term it as "positive-sum wealth production" to be contrasted with "zero-sum wealth extraction". They decry "the perception that billionaires make money for themselves at the expense of the wider population" as incorrect, attributing billionaires' fortunes to the strong performance of their companies and investments. They also highlight their philanthropic contributions and patronage of the arts, culture and sports.

But as historian Rutger Bregman - who chided billionaires at the 2019 World Economic Forum (WEF) for avoiding tax - has argued that societies should not rely on the generosity of the rich. "Philanthropy is not a substitute for democracy or proper taxation or a good welfare state."

Inclusive inequality or 'great enrichment' is a myth. Anthropologist Jason Hickel has exposed the great enrichment's slavery, colonisation and violent displacement of indigenous people. Today, more than half of humanity still lives on US$7.40/day or less, barely adequate for a decent life.

SCOURGE OF SHOCKING INEQUALITY: Some of history's greatest thinkers, e.g., Plato and Aristotle and classical economists, e.g., Adam Smith and Karl Marx have emphasised the undesirable effects of inequality on the social fabric. High and rising inequality is not only socially unfair, but also has negative implications for political stability, crime and corruption. It undermines democracy.

As New York Times columnist Farhad Manjoo writes, extreme wealth "buys political power, it silences dissent, it serves primarily to perpetuate ever-greater wealth, often unrelated to any reciprocal social good." A recent Oxfam study has showed the many ways politics has been captured by the Latin American super-wealthy, including many new ethno-nationalist, racist and intolerant religious leaders who have substantial financial backing.

Nobel Laureate Joseph Stiglitz contends that economic inequality "translates into political inequality, which leads to rules that favour the wealthy, which in turn reinforces economic inequality"; rising inequality subverts democracy.

It is now also understood that high and rising inequality is bad for sustained economic growth and poverty reduction.

The 2018 World Inequality Report warns, "if rising inequality is not properly monitored and addressed, it can lead to various sorts of political, economic, and social catastrophes".

Anis Chowdhury, Adjunct Professor at Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.


Share if you like