Sunday, November 23, 2014

The Inequality Nightmare

ABU DHABI – “The poor cannot sleep, because they are hungry,” the Nigerian economist Sam Aluko famously said in 1999, “and the rich cannot sleep, because the poor are awake and hungry.” We are all affected by deep disparities of income and wealth, because the political and economic system on which our prosperity depends cannot continue enriching some while it impoverishes others.

During hard times, the poor lose faith in their leaders and the economic system; and when times are good, too few enjoy the benefits. The GINI coefficient, a measure of economic inequality, has been rising for many years in developing as well as developed countries, including the United States. In Europe, inequalities have intensified as a result of rapidly rising unemployment, especially among young people. Some have reacted by rioting; others have backed far-right xenophobic political parties; many more seethe quietly, growing ever more resentful of politicians and the system they represent.

The problem is starkest in the world’s megacities, which account for around 80% of global GDP. But even in the most developed cities, disparities can be marked. For example, as you travel on the London Underground just six miles (or 14 stops) east from the heart of government at Westminster to Canning Town, the life expectancy of the inhabitants at each successive stop falls by six months.

But inequality is most acute in emerging economies where urbanization has been fastest. By 2030, an estimated 2.7 billion more people will have migrated to cities, almost entirely in developing countries. Many will encounter hopelessness and exclusion there, rather than the good jobs and better life for which they came.

Megacities like Mumbai, Nairobi, and Kinshasa are essentially small cities surrounded by huge slums – pockets of wealth in a sea of despair. None resembles the likes of Tokyo, New York, or London, which, despite areas of deprivation, are notable for a more equitable distribution of wealth.

Such disparities are equally apparent at the national level, especially in some of Africa’s resource-rich countries. While demand for private jets is booming, 60% of the population lives on less than $1.25 a day. As the world overall grows richer, the benefits continue to flow overwhelmingly to a tiny elite.

As a result, efforts to promote more inclusive growth have become crucial, not only for moral reasons, but also to ensure the survival of the global economic system. This involves more than wealth distribution. It means bringing people – or representatives of specific ethnic, religious, or regional groups – into public-policy decision-making, in order to allay their sense of marginalization or perpetual failure. It means creating real jobs to draw workers away from the informal economy, so they can benefit from workplace protections (and pay taxes). And it means framing policies that are appropriate to conditions on the ground.

Every country will have its own specific priorities, and the range of possible policy measures is quite broad. It might include a social safety net, promotion of gender equality, support for farmers, improvement of access to financial services, or countless other initiatives.

But two overriding sets of policies appear to apply in almost all cases, according to a recent World Economic Forum debate on how best to spread the wealth. The first seeks to ensure that poor children have access to a reasonably good education as a means to reduce intergenerational poverty. The second set of policies, which are particularly relevant in resource-rich countries, aims at guaranteeing all citizens – and especially the poorest – a share of revenues from what are unquestionably national assets.

Such policies have been shown to work in places like Brazil, whose pioneering Bolsa Familia (or family allowance) policy provides cash transfers to poor families on the condition that their children attend school, eat properly, and fulfill other criteria to improve well-being. Mexico’s “Opportunity” program performs a similar function. Oil-rich Alaska pays dividends from its resource revenues to all of its citizens, a model that several developing countries are seeking to emulate.

Although economists continue to debate the advantages and disadvantages of such schemes, they are not particularly complicated to set up. The challenge lies in forging partnerships and agreeing goals. Governments, businesses, non-governmental organizations, and individual citizens, rich or poor, all have a role to play. If we ignore the dangers of wealth disparities for much longer, the consequences will be far more distressing than a few sleepless nights.

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    1. Commentedphilip meguire

      Hopelessness and exclusion in Third World megacities have been the case for at least 3 generations. The horrible life of favelistas is easy for us First World intellectuals to observe. The grinding poverty and the "idiocy of rural life" Marx sneered at are much less evident, but terribly real to the millions fleeing them for the favelas. Rural poverty can be even more unequal than its urban variety, but is easier to ignore.

    2. Commentedphilip meguire

      Wealth can only be created or destroyed. Once created, it cannot be redistributed. If it is redistributed by force, it will sooner or later be destroyed, because wealth cannot be divorced from human understanding and tender loving care. Mugabe's treatment of Zim's white farmers is a glaring case in point.
      Gini coefficients have been rising for a generation. Only two things can be done about that in the short run.

      1. Impose a marginal income tax rate of 70% or more on incomes above a certain level. That will make very high incomes disappear in fairly short order. 1946-63, the USA taxed all incomes over about 3M/year at a marginal rate of 91%. As that top rate declined over the past 50 years, Gini coefficients rose. Please understand that confiscatory taxation does not enrich the public purse.

      2. Raise the economic position of the poor by paying all legal residents of a country so much money per year, regardless of income. In the USA, I advocate abolishing the standard deduction, the personal exemption, the EIC and the Child Tax credit, and paying all legal residents of the USA $4400/year. This, plus food stamps and section 8 vouchers, would end poverty in the USA. The cost of this program would be US$1.4 trillion, or about 10% of nonimputed nominal GDP. This program would be partly self-financing, because all cash welfare benefits would be subject to the income tax, unlike at present.

    3. CommentedSanford Russell

      Donald Kaberuka states bluntly “…the political and economic system on which our prosperity depends cannot continue enriching some while it impoverishes others.” But the system can continue “enriching some” for a long, long time unless the impoverished “others” act politically. And those others won’t act - not even when actions would benefit them - in the absence of strong, charismatic and independent populist leaders. Raise your hand if you qualify.

    4. CommentedFetewei Tewoldemedhin

      this particular issue is going to affect Africa and other developing countries more than it does the rest in the near future, i see two reasons for this ... first, while developing nations have formulated policies to tackle poverty and accelerate development, they still have had a concrete thought on what that development means and to whom... second they hasn'T been a deep thought on the future in which new 'developed' nation will be given to a new generation of more informed and egalitarian minded youngsters soon to take over responsibility for their future and developing nations must heed this facts before coming up empty and get mired in ever toxic struggle of income inequality.

    5. CommentedD. V. Gendre

      I would argue that the income and wealth inequality in due to a disruption of money flows. So a mere focus on a redistribution of wealth might be politically correct these days and win elections but unfortunately it won't help much in the long run.
      Since the Great Recession Reserve Banks all over the world are flooding the money markets with liquidity but this money hardly flows to where it is most needed. This indicates a severe disruption of the flow and it has many reasons. But why are Politicians and economic authorities (Reserve Banks) blind to this disruption? They base their monetary policies on wrong gauges like price indexes and employment rates. First of all Reserve Banks can hardly create jobs and therefore to base a policy on something you can't control is useless. Even more so if these statistics are "doctored". Since the Great Recession all the structural damages of the global economy came to surface but none of the Politicians is addressing the right issues. So no matter how much you flood the markets with liquidity the money will not flow to where it is most needed since the disruption has mainly structural reasons. Unemployment will remain critical for a long period and the focus on a doctored statistic isn't helpful. Since 2008 the money flows mostly to asset prices like stocks. Beneficiaries of rising stock prices are the ones who own them, so the already well-to-do. This inflates then other asset prices like art, high-end property, luxury etc. Basically what the well-to-do consume most. This explains the dramatic inequality of income and wealth since 2008. Economic theory would argue that if the producer of jewelry earns more money it will flow to his employees and so forth… But with the structural damages this won't happen and the monetary flow stays disrupted. This leads to the second issue of monetary policy: The focus on inflation indexes. Stock prices are never part of inflation gauges for monetary policy. Quite the opposite is true. Stock prices are seen as the thermometer of the economy, the higher the better. But a thermometer which you can't calibrate (or is not calibrated) is completely useless. If stock markets would be part of inflation Reserve Bankers and Politicians would have realized long ago that there is something wrong with the money flow. To restore the money flows a mere redistribution of income or wealth will not address the real problem. It is just kicking the can down the road and money will only drip to those who need it.

    6. CommentedGary Palmero

      The inequality issue in the United States faces significant challenges. Most labor is now commodity labor as big data, technological improvements and outsourcing have lowered the efficacy of many jobs or eliminated them all together. The ownership of capital and the ability to deploy it effectively tends to distinguish winners from the others. Political leaders have not devised effective strategies to harness this issue to the benefit of more players. Income producers will have to rely more on capital and less on the fruits of their labor to maintain and increase their living standards. The problem with the United States is that most of the population is capital starved (have limited savings for income and capital appreciation investment).
      Trying to solve the problem of inequality by direct income transfer (usually through a political agency exerting power) results in underinvestment and threatens the social process. We have to stop thinking like this is the mid-20th century and prepare for the mid-21st century.

    7. CommentedJose araujo

      One man one vote, should be our garantee for equality, or at least a garantee against inequal policies.

      Yet, we see that governments are engaged and promote inequal pocilies, and that raising inequality isn't even on the political agenda.

    8. CommentedChris Baulman

      A minimum income floor would do better than a universal payment - it just wouldn't go to those already above the floor.

    9. CommentedJames Goodman

      That is certainly an ideal approach for creating workable policies that reduce inequality. However, a crucial ingredient in such large-scale cooperation between public and private organizations is a culture of civic virtue, which sadly is quite lacking in many highly unequal societies. To promote a greater willingness to put the public interest before personal interest in such endeavors, one must first promote a greater willingness to offend and confront the status-quo norms that maintain rising inequality.