Felistus Mbole a member of our Emerging Fellows program warns about the increased inequality in her second blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.
Economic inequality is growing globally. The richest one percent of society owns 45% of global wealth and are on track to owning two-thirds of the world’s wealth by the year 2030. In 2017, the wealth of the world’s poorest 50% was equal to that of only 42 billionaires compared to 380 of them in 2009 according to OXFAM. What does this mean for society? Is this level of inequality sustainable?
Society largely comprises owners of capital and the providers of labour. Governments regulate the relationship between these two parties and provide public goods and services. Today, the global economy is larger today than ever before. The growth is far from proportionately distributed. The incomes to workers have not increased as fast as returns on capital, widening the inequality gap. The situation has worsened since the 2008 financial crisis. This trend will be sustained based on the current trajectory.
Income is a key component of economic inequality. Since around 1980, income inequality has been increasing in almost all regions globally but at different rates. The same variances are also evident within the regions and countries. The core twin drivers of this change have been education and technology. The gap between skilled labour and unskilled labour wages has been growing for decades. Advancement of technology has led to increased demand for skilled labour, putting a premium price on it. Variances in levels and types of education can account for as much as 60% of the difference in wages. A higher level of education leads to increased productivity and indirectly to faster diffusion of technology through innovation. Both factors contribute to faster economic growth. The higher the divergence in levels of education, the greater the income inequality.
The World Inequality Report looks at the proportion of the national wealth held by the top ten percent of society. It ranks Europe as the most equal society today at 37% and Middle-East the least equal at 61%. Sub-Saharan Africa, Brazil, and India are in-between at 55%. The rate of growth in inequality is decreasing in Europe but rising in the USA. It has remained relatively constant in Sub-Saharan Africa, Brazil, India and Asia in the last three decades. The rapid increase in income inequality in the USA is due to massive educational inequalities and a non-progressive tax system.
Is growing inequality sustainable? Based on the current trajectory in the use of technology and divergence in access to education, inequality could rise to alarming levels. It could lead to precarious levels of distrust between the wealthy and the poor. Globalisation will allow capital to flow across tax jurisdictions. It is likely to make redistribution of income through heavy taxation untenable. Advanced inequality could result in polarisation of society into wealthy elites and the poor in future. It could lead to a highly dissatisfied class within society and cause political, economic and social upheavals.
How can this potentially volatile situation be avoided? Public and social institutions, and policies shape inequality. Progressive tax systems and public investments in human development such as quality education and healthcare have shown promise to minimise further widening of the economic inequality gap. Their impact is amplified by creation of employment opportunities. Strong labour unions and government regulations are crucial in ensuring that these factors work in harmony to decrease inequality.
Two key questions beg answers: Will governments be able to develop and implement the right policies? Would higher taxation levels be acceptable to capitalists whose core motive is to maximise returns on capital? The time to fix inequality is now rather than when political, economic, and social catastrophes set in. Tackling inequality will require the political will of governments and the good will of capitalists.
© Felistus Mbole 2019