Rising inequality erodes growth, not just social cohesion

Governments need to eliminate anti-competitive behaviour and eradicate cronyism

PUBLISHED : Wednesday, 03 February, 2016, 8:10am
UPDATED : Wednesday, 03 February, 2016, 8:10am

Growing inequality and an accompanying sense of unjust exclusion is attracting mounting attention. Occupy Wall Street might have seemed impotent and directionless. However inchoate the protest, it signalled growing resentment over perceived injustices bred by today’s economic order.

Closer to home, how much of the emotional and political undergrowth of Occupy Central turned on fears of a bleak economic future for all but the most privileged? Further evidence of disquiet comes from popular indignation over corporate tax avoidance by large global enterprises, and the early successes of populist candidates for US president.

Foreign Affairs, the journal of the US-based Council of Foreign Relations, devoted six articles to inequality in its first 2016 number. The World Economic Forum’s 2016 Davos get-together last month was organised around the theme of technological disruption. Inequality and exclusion featured prominently in those discussions.

Increasingly, the threat to economic growth reflected in burgeoning income and wealth disparities – along with mounting risks of disruptions to social order – should be helping to concentrate minds and spurring concrete action. But is this happening?

A strong trend of growing inequality has been apparent in dozens of countries for more than 20 years. But very limited action has been taken so far to address it.

Opinion polls suggest that large majorities of the population believe existing levels of inequality are unacceptable. Governments typically sound indignant and worried, but the majority of them are unwilling to take serious measures to alleviate the problem.

A significant degree of inequality arises from differences in opportunity, often perpetuated through the education system

They face strident opposition from strong interest groups, many of which have forged strong links with political power. Opposition from these interests tends to freeze out effective action.

The statistics on inequality tell a disturbing story. The NGO Oxfam estimates that 1 per cent of the population own almost half of global wealth. Seventy per cent of the world’s population lives in countries where inequality has risen in the past 30 years.

Some have contested these numbers, but quibbling about the data hardly invalidates the underlying concern. While inequality has risen in most countries – rich and poor – it has fallen internationally, in large measure because China and other emerging economies have pulled millions out of poverty. Some like to emphasise this to draw attention away from the core issue, but global inequality is still far greater than inequality measured nationally, even as the latter rises.

A degree of inequality is inevitable, and may provide an incentive for people to do better. But a lot depends on the severity of inequality and why it is rising. There are many reasons, from technology to the fallout from globalisation.

A significant degree of inequality arises from differences in opportunity, often perpetuated through the education system. The gap in US test scores achieved by students from rich and poor backgrounds is some 30 per cent to 40 per cent wider today than it was 25 years ago.

But there are other sources of inequality whose elimination would make everyone better off. Fixing these would take the argument away from the zero-sum, redistributive nature of much of the inequality debate. Common cause among disparate interests could coalesce around these opportunity-generating actions.

They would remove barriers and discriminatory regulations facing small enterprises, eliminate anti-competitive behaviour and eradicate cronyism. The debate does not have to simply be about tax and spend versus lowering taxes and cutting social spending. Possibilities abound for positive sum actions to reduce inequality.

This is not to deny the importance of spending to provide adequate social infrastructure that enables all segments of society to access opportunity. Expenditure reduction to make room for lower taxes has all too often meant cuts in areas like education, where opportunity is born.

Politics driven by moneyed special interests, and politicians that serve those interests, deny millions effective access to decision-making. This feeds a “them and us” mentality and drives out the social reciprocity necessary to forge a shared sense of belonging. Politics are at the centre of inequality, and they can fix it too. The pressure to do so is going to grow.

Patrick Low is a fellow at the University of Hong Kong’s Asia Global Institute