Martin Duys, a member of our Emerging Fellows program inspects the drivers of in-country inequality in his third blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.
When income inequality is discussed in casual conversation, people are generally referring to in-country inequality - the measure of how income is distributed amongst the population of a single country. The factors that drive in-country income inequality are multiple, interrelated, complex, and sometimes contradictory. Some factors tend to be more prevalent in advanced economies and others are more influential in emerging markets and developing countries (EMDCs). Geography, political history, and even culture also play a role.
The International Monetary Fund (IMF) has attempted to identify, measure, and rank the most important factors driving in-country income inequality. They conclude that over the past thirty years the three dominant factors have been: labour market flexibility, financial deepening and technological progress - in that order.
Flexible labour markets allow firms to reallocate resources and create conditions that encourage a certain amount of economic dynamism, but they also put tend to put the salaries of workers, and especially low skilled workers, under pressure. The primary beneficiaries of increased labour market flexibility tend to be those in the top ten percent of the income distribution. In EMDCs labour markets that are too rigid can create conditions that encourage informality resulting in increased levels of inequality. There is a strong body of evidence to suggest that labour market regulation (a legislated minimum wage, unionisation, and compulsory social security contributions) tends to improve income distribution. Labour market flexibility ranks as the most important factor in EMDCs and the second most important in advanced economies.
Financial deepening - increasing the provision and sophistication of financial services - is associated with increased inequality in EMDCs (ranked third), largely because the beneficiaries of this deepening tend to be those at the higher end of the income distribution. In advanced economies, where levels of financial inclusion are historically higher, the impact of financial deepening is not as significant, and it is only ranked fourth.
Advances in technology generate economic growth by increasing productivity. They also shed jobs through increased automation and require higher skill levels to run them. This ‘skill premium’ increases levels of income inequality as jobs shift from low-skilled workers at the bottom end of the income distribution to more skilled, better paid workers. Technology is the second most important factor in EMDCs. Although it is ranked only fourth in advanced economies, the skill premium factor which is as a direct result of technological advances, is the single most important driver of income inequality in advanced economies.
Globalisation, seen as more a reinforcer than a driver, is a fourth contributing factor. It creates circumstances that sometimes increase and sometimes decrease inequality. Trade liberalisation increases economic activity, generates economic growth, and decreases income inequality. Offshoring increases income inequality in the country outsourcing the manufacturing as it sheds jobs at the lower end of the salary spectrum, but the new jobs created in the offshore economy tend to decrease income inequality there. Although not fully understood, financial globalisation is thought to cause increased income inequality in both advanced and EMDC economies.
Many would expect education to appear on the list of the most influential factors, but the impact improving levels of education equality has on income inequality is dependent on a number of other variables that can dilute its impact. These variables include the size of the investment made in education, whether it is made by individuals or governments, and the level of return on the investment.
Although there are common themes in the sources of income inequality, there are no generalised lessons to be learned that can be taken from one successful attempt at addressing the issue and applying the same strategies uncritically elsewhere. Each country has its own unique mix of interrelated and intermingled factors and needs to be analysed and understood on its own merits.
Martin Duys, a member of our Emerging Fellows program inspects the drivers of inequality among countries in his second blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.
The factor that plays the most critical role in determining a person’s income is the country in which they live. It has more influence than the persons parents’ economic circumstances (the second most important factor) and far more than any effort they may make to improve their situation through education. Geography is more important than class, or level of education, in determining income.
Between-country inequality has never been as extreme as now. Just before the start of the industrial revolution, the average income in the wealthiest countries (at the time Holland and the United Kingdom) was roughly three times higher than the poorest. Described as analogous to the ‘Big Bang’ rates of economic growth and average incomes exploded in countries that industrialised. Now the difference in average income between the rich industrial nations and those that have failed to industrialise is a multiple of one hundred.
From the second half of the twentieth century other factors have also contributed to driving between-country income inequality. The political and institutional instability experienced in some countries after decolonisation caused economic stagnation and in some cases, decline. In the Soviet Block and other socialist countries, socialism failed to lift income levels significantly.
There are factors driving a decrease in between-country inequality. Sustained economic growth since the 1980s in China and India has had an enormous impact. In China alone, the number of people whose incomes have doubled is ten times that in the United States over the same period.
In gross terms, the gap between rich and poor countries continues to grow. China's economy would need to grow by eighteen per cent to generate the same value created by a one percentage point increase in the GDP of the United States. This is an almost impossible task for any economy no matter how ‘on fire’ it is.
An assumption of neoclassical economics has been that globalisation would improve levels of between-country inequality. Poor countries with cheaper labour forces would attract more foreign direct investment (FDI), because corporations looking to increase returns by lowering production costs would invest. The result would be increased local income levels and decreased inequality. Emerging countries would also ‘slip-stream’ on the technological advances of richer countries by copying their innovations and avoiding the need for expensive research and development. They would also be able to avoid adopting dead-end technologies that proved unsuccessful or were quickly superseded by superior technologies. Unfortunately, these assumptions have not been borne out by reality.
In what is termed the “Lucas paradox” FDI has not flowed as expected from high-income to low-income countries. Instead, it has to tended to flow from high-income countries to other high-income countries, and even from low-income to high-income countries. Technology adoption by developing countries has not been an equaliser as expected. Royalty payments for new technologies tend to flow from the poorer adopting countries to the more affluent countries that own the intellectual property.
The failure of the focus is shifting to include institutional and cultural considerations. The goal is to create an environment fertile for innovation, technology, and economic growth. Whether this new approach improves levels of between-country inequality remains to be seen.
Martin Duys, a member of our Emerging Fellows program initiates publishing a series of blog posts aimed at identifying the impacts of inequality on the world order by 2050. This is his first post in our EF blog inspecting inequality through the lens of security. The views expressed are those of the author and not necessarily those of the APF or its other members.
In 2013 Barack Obama described inequality as the “defining challenge of our time”. In 2014 Thomas Pikkety’s academic tome, “Capital in the Twenty-First Century” was translated into English and became a bestseller. In the same year Oxfam published a report claiming that the net worth of the world’s eighty-five richest people was equivalent to that of the poorest fifty percent of the global population. In 2015, in response, the World Economic Forum declared inequality, alongside climate change, as the challenge for its annual meeting in Davos. Inequality is clearly an issue on the global agenda, but is it one that could potentially lead to instability, conflict, or perhaps even war?
Income inequality is generally expressed by using an index of some kind to describe the manner in which income is distributed across a population. The Gini coefficient is the best-known example but can be difficult to understand. Comparing the share of total income earned by the top segment of a population (the top one percent, or the top ten percent) with that of the bottom fifty percent is more intuitively understandable.
Global income inequality has been steadily increasing for the past two hundred years. Only in the past thirty-five years with the rapid economic growth of countries in the Near and Far East has the trend begun to reverse. Between-country inequality has been decreasing recently, but where people are born is still the single largest factor determining their economic prospects, far more than any individual effort on their part. In-country inequality has been on the rise in most countries since the nineteen-eighties, especially in those countries that have followed a strategy of lower taxes and smaller government in order to encourage economic growth.
The trend reversal in levels of between-country inequality could be a source of increased security concern in the medium to long term. As the economies of countries such as India and China continue to grow their share of the global economy, the balance of power between nations will continue to visibly shift. Will it be possible for China to overtake the United States as the dominant world economy without their falling into what Graham Allison describes as the Thucydides Trap? An almost inevitable war between a previously dominant power and the new one.
One of the obvious consequences of between-country inequality is economic migration from poorer to wealthier countries. The effects of uncontrolled migration on the internal political climates of the destination countries have been only too obvious resulting in increased levels of nationalism and xenophobia. Whether in Germany, the United States, the United Kingdom, or South Africa the response to the presence of newcomers by locals is in many ways consistent and comparable.
There is evidence that high levels of in-country inequality may dampen economic growth prospects, but a clear symptom of in-country inequality is the rapid growth of the private security industry. It is estimated that more than fifty percent of the world’s population lives in countries where there are more people employed by the private security industry than by the national police service.
Some argue that that, although the share of the economic pie accruing to the upper echelons has been increasing, this doesn’t reflect the dramatic improvement in the lives of the lowest echelons brought about by the parallel decrease in levels of absolute poverty. The increase in stability and security that results from a general reduction in absolute poverty far outweighs any potential destabilisation caused by rising inequality.
Some level of inequality can also be seen as a motivating factor that encourages individuals to strive towards achieving the economic rewards that could result from further education, or career advancement.
The issue of inequality is very much on the agenda globally. There are some recent examples of security related issues where inequality has been a contributing factor. The Occupy movement after the 2008 global financial crisis had its roots in issues of inequality, as did the protests in Chile in 2019. The role that inequality plays in contributing to future issues of security will depend largely on whether levels of inequality continue to increase, or whether there is genuine movement from discussion to action on the issue.
Felistus Mbole a member of our Emerging Fellows program believes that reversing inequality by means of taxation or regulating markets is possible, but so difficult. The views expressed are those of the author and not necessarily those of the APF or its other members.
Global wealth inequality has been rising for the last four decades. The trend is worrying and seemingly irreversible. It is unrealistic to expect total equality in a largely market-based society. Yet, the wealthy cannot continue to get richer at the expense of other members of society. Severe inequality hurts both the poor and the rich.The pertinent question is, how will this trend to greater global inequality be reversed?
There has been a lot of focus on economic growth. Understandably, the pie needs to be big for everyone to get a piece. But if the pie is not equitably shared, it will eventually stop growing. A sure way of attaining this is by giving the majority an opportunity to contribute to growing the pie and to proportionately benefit from it.In today’s technologically driven economy, human capital is equally - if not more - valuable than physical capital in production. Unskilled labour is thus a huge disadvantage and the key reason for current income inequality. Governments can address this by creatingequal opportunities for all citizens by providing quality education, healthcare, and other public services. Generally, returns on capital outweigh wages. Highly skilled executives are,however, paid a lot more than the wealth they generate for the owners of the businesses.
Closely tied to this is the need to set a minimum wage for workers to meet their basics needs. This will be accompanied by the freedom for workers to associate and lobby for better terms and conditions of work where necessary. Workers shared-ownership of businesses with investors would also enable employees to share in the returns they generate. Representation of employees in the governance of businesses would further ensure that workers’ welfare is taken care off. These measures would collectively reduce the inequalities between workers and the owners of capital.
Taxation as a means of redistributing wealth will be a core tool for reversing inequality. Ironically, the tax rate of the top 10% richest has decreased in many countries while their wealth has multiplied several times. In such states, the promise to reduce tax rates appears to be the promise to win elections. Besides, the rich are the funders of political campaigns. Reduction of taxes has led to deterioration in quality of public services such as education and has deepened inequality. Sustained provision of quality public goods and services can only be attained through wealth redistribution measures such as progressive taxation of incomes and wealth and inheritance taxes. Governments will need to provide safety nets to guarantee minimum standards of living.
Moreover, governmentswill have to effectively regulate markets. Left on their own, markets will continue to serve the interests of capitalists and not the common good of society. It is the business of government to intervene in the economy whenever necessary. There will be a need for clear rules on what is acceptable market conduct and measures to ensure that all players play by these rules.
The inequality we see today hasn’t suddenly happened. It is the sum of decades of decisions by society. Similarly, the wrongs will not be righted in a day. Yet, action must start now to guarantee the future. Reversing the current inequality trend won’t be easy. It will require foresight – acting for tomorrow rather than today. It will take a very strong political will by governments.
Felistus Mbole a member of our Emerging Fellows program checks the responsibility of capitalism in her tenth blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.
Capitalism has been the key driver of global wealth and prosperity. Despite this, it has yielded huge economic inequality and mistrust. This is because the system which is driven by private owners operates to maximise shareholder wealth. The need to generate profits at whatever cost works contrary to the interests of other members of society and the planet. The idea of shareholder supremacy is deeply entrenched within the current corporate culture. Everything else takes secondary priority. The outcome has been huge global inequality and a looming backlash.
The cry for responsible capitalismwhich started after the Second World War is climaxing.The need to conduct business in a manner that is equitable and balances the interests of shareholders, suppliers, employees, customers and the larger society is dire. Despite their benefits, there is a sense of unfairness and being overburdened accompanied by a loathing and mistrust of enterprises. As legal personalities in society, corporates should owe responsibility to others in how they conduct their affairs. Yet this has not been the case. What will save capitalism from itself? What will responsible capitalism look like?
Responsible capitalism is not corporate social responsibility. It is not giving a tiny proportion of the wealth generated by enterprisesin the form of charity or a gesture of goodwill to society.It is the integration of the needs of the wider society into how business operates, a manner that benefits all stakeholders. Responsible capitalism isan economic system which appreciates the need for harmonious co-existence between enterprises and other members of the community.
Left on their own, markets will continue to maximise shareholder wealth at the expense of the rest of society. The 2008 financial crisis is a clear illustration of this. Responsible capitalism will take a greater role by state in regulating the affairs of markets. Governments will need to rise to the challenge by prescribing ways in which corporates should conduct themselves. The UK’s Companies Act 2006 for instance encourages responsible capitalism. These will be inform of policies that ensure fair work terms and conditions and redistribution of the generated wealth through taxation for society’s common good.To whom much has been given, much will be required.Responsible global enterprises will diligently pay rather than seek to avoid taxes to support the communities in which they operate.
Responsible capitalism will be enterpriseswhose strategic purpose is to serve society alongside their investors. This will mean fair compensation to employees and minimising of margins in pricing of goods and services to customers. Responsible corporates will be aware of the planet boundaries and mindful of the impact of their business activities on the environment.
In today’s increasingly dynamic and complex world, enterprises will have an opportunity to demonstrate their responsibility by rendering a service to society. They will use their resources to address the wicked problems facing global society for the common good. Their service to society will need to be embodied within their corporate strategies alongside delivery of value to shareholders. Responsible capitalism will take a paradigm shift in corporates’ purpose for existence from maximising shareholders’ wealth to serving society. A realisation that it is in serving society that sustainable value is created for investors. It will comprise enterprises focused on long-term rather than short-term gains.
Felistus Mbole a member of our Emerging Fellows program inspects the role of personal data in decreasing inequality through her new blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.
The one thing that defines the digital revolution we are in today is the enormous volume of personal data that is generated and collected each day. Data generation is growing at an exponential rate. This is supported by the ever-increasing computational power particularly in mobile devices. The use of smart devices is increasingly becoming part of our everyday lives. Through them, we are leaving a digital trail in almost everything we do. According to the Next Generation Data Analytics report, the big data market is expected to grow from USD 28 Billion in 2019 to USD 66 Billion by 2025. The trend is clearly upward. What does the continued generation and use of personal mean for economic inequality? Can the benefits of big data be made more inclusive?
The key drivers of the big data era are the growing number of mobile devices and related applications, and organisational shift from analogue to digital technologies. According to the World Bank, today more households in developing countries own a mobile phone than have access to clean water or electricity. Furthermore, close to 70 percent of the bottom wealth quintile in these countries own mobile phones. Businesses and governments are becoming smarter each day. They are developing algorithms which enable them to analyse big data and make predictions with a much greater level of precision than would be the case with huge national surveys. This is making decision-making easier.
Governments now have access to a mass of large-scale data sets, and new data sources on previously ‘unknown’ populations. They are using big data to cost-effectively make predictions that enable them to provide better services to their citizens. For instance, healthcare professionals can use big data to calculate someone’s chance of suffering from a given disease and thus provide timely or preventive treatment. Big data has been used to increase financial inclusion, improve education, respond to epidemics, and mitigate the impact of natural disasters. Businesses on the other hand are using data freely collected from individuals to provide services and products that are more targeted at their clients. Using algorithms, they can more accurately anticipate behaviour. They are driving our future behaviour. This form of surveillance capitalism is making data companies much more profitable and driving the inequality between them and the rest of society.
The role of technology companies in making connectivity work for everyone in future is likely to remain. Yet the reality is that business decisions on investments are driven by the need to optimise returns. Thus, despite the dividends highlighted here, a digital divide between the rich and the poorer in society who cannot afford the latest technology is likely to persist. The poor and the digitally excluded have less or incomplete data which makes them excluded from services whose design is informed by machine learning. Additionally, the algorithms can be discriminative and biased. For instance, health insurance services algorithms use historical data which could have biases. Credit scoring algorithms use residential location and type of work which could further entrench one’s economic situation. These could sustain the prevailing global inequalities.
The economy of the future will be digital. Based on the current trajectory, big data and machine learning is likely to increase. As the revolution of big data and artificial intelligence takes root, there will be loss of jobs. The poor in society who do not have the requisite digital skills to engage in this big data economy are likely to be disadvantaged and excluded economically. This could increase global inequality. The digital divide between the richer and the poor could be closed by addressing the non-digital or analogue elements behind it. Adapting the skills of workers to the digital economy, the nationalisation of data, and effective regulation of business to ensure digital inclusion would help address this digitally driven inequality.
Felistus Mbole a member of our Emerging Fellows program investigates the impact of globalization on inequality in her fifth blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.
The wind of globalization has been blowing for decades and digital technology is fuelling it. The world is more interconnected today than at any other point in history. There has been a significant increase in free trade and cultural exchange. Cross-border trade deals between both private sector players and national governments form part of everyday news. What are the economic implications of this massive level of interconnectedness? What does globalization mean for inequality?
Technology has created a connected world where opportunities are shared. Globalization is the integration of markets. National boundaries have become more porous to goods, services, capital, and people. While some boundaries remain physically closed, this does not hinder flow of capital, services, and data. Social media applications like Twitter has particularly accelerated movement of information. The last couple of decades have especially seen a marked growth in cross-border exchange of human capital. The increasing use of sophisticated technology has generated need for specialised skills which are globally limited. Organisations are able to hire such technical services globally. Supported by internet connectivity, technical service providers do not need permits to work in particular countries. They can permeate national boundaries by providing their services virtually.
Who are the winners and losers from globalization? Globalization doesn’t seem to be benefitting everyone. Currently, there are an anti-globalization campaigns and policies in countries that view themselves as benefiting the world at the expense of their national interests. Offshoring of certain aspects of business to developing countries has enabled them to participate in global supply chains, positively contributing to their economic growth. On the other hand, labour has tended to flow from the less developed to developed countries and capital in the opposite direction. Developing countries have therefore benefitted most from globalization compared to the more developed ones. The effect has been decreased inequality between the global north and south.
Nevertheless, it is only the economically productive developing countries that benefit from joining global supply chain. The less productive ones that are simply an end market for goods manufactured in other countries. For instance, India and China are big beneficiaries of globalization currently. However, many countries in Sub-Saharan Africa continue to lag. The less skilled segments of the population, both locally and globally, are being left behind economically, widening the inequality divergence. Globalization is clearly a tide that is not lifting all boats.
What does this mean? The perceived inability of globalization to create mutual benefits could lead to political tensions between countries as seen currently between the United States of America and China. Trade wars and related conflicts could emerge if these perceived imbalances are sustained. Trade has been shown to be the greatest driver of economic success and thus the convergence between developing and developed economies. Policies aimed at enhancing human capital through broadened access to quality education and healthcare, and reducing barriers to trade could reduce global inequality.
Globalization is a good thing. As the ageing economies such as Japan and parts of Europe start to fall short of the labour that is needed to drive their economies, Africa will be experiencing its demographic dividend. The world’s labour can be developed and effectively harnessed and distributed to benefit everyone. This is only possible if the wind of globalization continues to blow unabatedly.
Felistus Mbolea member of our Emerging Fellows program investigates the causes of inequality in her fifth blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.
Global inequality has been on the increase for decades. There are fewer people living in poverty today yet global society is probably more economically unequal than at any other time in history. This trend poses obvious threats such as lack of social cohesion and sub-optimal economic performance. What is driving this inequality? What does this mean for the future?
There has been a continual shift from agriculture to other sources of livelihoods, accompanied by urbanisation. The economic opportunities created by this shift require more skilled labour than agriculture. This has made it harder for the less formally educated to engage economically. If they manage to find employment in industry, the disparity between their pay and that of the more skilled is stark. The trend is likely to worsen as urbanisation increases.
The constant today is the rapidly accelerating change in technology. Currently, skill-based technology is a key driver of income and economic growth. Sadly, the poor who have less skill are not benefitting as much from this technologically driven economic growth. The inequality gap thus continues to widen. The situation is likely to be sustained into the future unless remedial action is taken. The introduction of simpler forms of technology such as use of mobile telephony presents hope.
Closely accompanying this technological change is globalisation. Technology has enabled economic integration at a speed which was unimaginable a couple of decades ago. In pursuit of greater efficiency and effectiveness, organisations can open business offices in faraway countries for both production and distribution of goods and services. Offshoring of production to low-income countries creates employment opportunities, improving incomes and decreasing income disparities across states. This could, however, generate income disparities in the target country as the more skilled get a premium on their labour. A reduction in trade barriers and emergence of regional trade agreements has also played a role in expanding globalisation. Globalisation and technology are self-enforcing. Firms and individuals who have the resources to take advantage of globalisation and technology benefit most from it. This further compounds the inequality gap.
Another driver of inequality is government policy. Countries that have reported decreased inequalities have implemented policies that promote redistribution of income through social protection transfers and progressive taxation. A significant share of national revenues in such states is spent on public services such as education and healthcare, and infrastructure. Sectors which support the livelihoods of the majority such as agriculture in agrarian economies are sufficiently funded. Such policies empower most of the citizens rather than benefiting a small minority. Although an effective driver of equality, government policy is highly subject to political will. Public corruption on the other hand acts as a tax on the poor.
What does this mean for inequality? Not much can be done to slow down globalisation or the rapid change of technology. These trends are not negative in themselves. They present opportunities for realising a more equitable and sustainable society. Technology such as digital infrastructure can be used to effectively deliver public goods such as health and education at scale. In addition, progressive taxation and a clamp on public corruption could create a more equal society.
Felistus Mbolea member of our Emerging Fellows program warns about the threats of inequality in her fourth blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.
A widely held belief is that the defining factor between the wealthy and poor members of society is their level of hard work. This is underpinned by the view that the poor can pull themselves out of their situation by their bootstraps. The proponents of this theory find it easy to justify growing global inequality. They probably feel secure in their status and are little bothered by the growing level of inequality. Are they truly secure or is this just an illusion? Let us examine the threats that growing inequality poses to society.
The global economy has witnessed growth for decades. This growth has been accompanied by increase in inequality in most regions and individual countries within these regions. If Piketty can be believed, the underlying factor to this is that the return on capital is greater than overall economic growth. While per capita growth has been sustained, there has been a more proportionate distribution of this growth among the various wealth segments. The profit share often surpasses the wage share of GDP growth.
It would appear that economic growth will be sustained despite the inequality. So why bother? This is not the case. Growing inequality is potentially harmful to social cohesion. People find it hard to connect with those noticeably different from themselves. Inequality could result in natural tensions between the various economic groups. It could lead to tensions between the rich and the poor who feel disenfranchised. It could also lead to loss of trust in the government and public institutions. The poor could begin to feel that the government has failed them or does not care about their plight. Inequality could be a threat to democracy and the rule of law as witnessed in the Arab uprising. Wealthy elites who assume power could implement policies to entrench their own interests at the expense of the poor.
Inequality also has economic consequences. Employment income is a key factor of inequality. Growing inequality means that those at the bottom of the economic pyramid in society would effectively experience a sustained erosion of their disposable income. They would not be able to invest in their personal development and that of their children through quality health and education. This would in turn decrease the quality of labour available in the economy. Their ability to contribute to the economic growth of their nations would also be impaired, further widening the inequality gap. The end result would be a degradation of the supply side that perpetuates itself in a negative feedback loop.
What does this mean? Effective engagement of all sections of society is necessary for sustained and strong economic growth. There is a need to enable each citizen to contribute to and benefit from the economic growth of their country. This can be attained through investment in public goods and services such as health, education, and infrastructure. If the national cake is not shared, it is unlikely to grow as fast as it potentially could. It could even stagnate.
Posted By Administration,
Tuesday, February 19, 2019
Updated: Wednesday, February 27, 2019
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.