The source of inequality

Andrew Sheng says to tackle inequality, we must first understand its origins in globalisation and urbanisation, then focus on raising the income and wealth of the bottom half of society

PUBLISHED : Friday, 02 January, 2015, 5:47pm
UPDATED : Wednesday, 28 September, 2016, 8:44am

The New Year is a time to think about what we can do better this coming year. Last year, rock-star French economist Thomas Piketty's book,
Capital in the Twenty-First Century, signalled the growing sense of inequality in an age of plenty. When 0.1 per cent of the population own as much as 90 per cent of the rest of the population, something is seriously wrong with capitalism.

However bad the inequality, it is not the static status quo that is the problem. It is the dynamic expectation that the system cannot be changed for the better that causes social unrest and protests. The young protesters in Hong Kong share the same frustrations of the young in Egypt and elsewhere - they feel that the establishment is not listening to them.

Moderation gives way to extremism. If you cannot change the system peacefully, then disruption becomes the norm.

Even though they are very polarised, both sides of the spectrum - from capitalists to socialists - agree that something must be done about inequality.

Someone I listen to seriously complained that, in my last column, I raised the question of inequality, but not the solutions. Being both an idealist and a pragmatist, I admit that it is always easier to criticise than to construct. And walking the talk is tougher than just talking.

There are three solutions to inequality - the capitalist way, the socialist way, or do nothing. The capitalist feels that the solution is to reduce the role of the state (cut bureaucracy and taxes), encourage more entrepreneurship and markets.

The socialist way is to tax the rich, redistribute to the poor and needy, and increase education and infrastructure spending to improve equal access and opportunities for all.

The "do nothing" faction is supported by three parties - those who hate change of any kind, those who are agnostic that change will be for the better, and those who feel that life will change on its own. This is why most politicians preach change and do little.

The problem with both capitalists and socialists is that, to implement policy (the desire to change things), you need the bureaucracy or the machinery of the state. Herein lies the dilemma of change.

Speaking as a former bureaucrat, the bureaucracy (both the efficient and inefficient varieties) will only implement change if it thinks it will be in its own interest to do so. Bureaucracies become corrupt because officials believe they are underpaid even though they are more powerful than most. The Hong Kong bureaucracy, one of the most highly paid in the world and oft-praised for its efficiency, has just jailed one of its top-ranked former civil servants for corruption. But this also tells the average bureaucrat not to do anything - you can't be jailed for doing nothing.

Both the cause and effect of inequality today lie in globalisation, urbanisation and education. First, because talent and money is global, you can't tax the rich and the talented - they simply move offshore.

Second, both wealth and poverty are created simultaneously in urban centres. The rapid pace of urbanisation is moving large numbers of unskilled rural workers to become the new urban poor. On the other hand, the clustering of knowledge and resources in cities means that wealth is being created faster in cities than in the rural areas. In the 1980s, the value of Tokyo, as the manufacturing centre of the world, was more than California. Today, the value of California as the world's Silicon Valley is more than half the gross domestic product of Japan.

Thus, to deal with inequality, the secret is not to cap the top end of the wealth pyramid, but to raise the income and wealth of the bottom half. Priority must be given to dealing with the new urban poor, especially providing jobs for the unemployed youth.

But technology has become simultaneously disruptive in wealth creation and job destruction. The old industries like manufacturing may be polluting and resource-depleting, but they created jobs. The new knowledge-based industries like information technology and biotechnology do not create mass jobs - the few skilled workers are paid a lot. And new robotics are replacing both blue-collar workers and office staff.

A meaningful job is important to social stability. Hence, the solution to urban job creation lies in the service sector. But education today creates a mental block to higher-paid service jobs. Most graduates in emerging markets are conditioned to think they will be entitled to a cushy air-conditioned office job. In reality, a trained plumber earns more than most fresh graduates. Robots can get rid of clerical jobs, but they can't replace a good plumber, electrician or jobs that take specific skills.

Technology has made our present education system obsolete. You don't need to go to the best local university. Anyone can access lectures by Nobel laureates and top professors via Facebook and YouTube. Many business schools are being taught by academics who have never worked in businesses, preparing young people for jobs with employers who were seldom consulted on curriculums.

The job of the future is one of continual on-the-job education. Knowledge is expanding so fast that what we learn today will be obsolete within the next five years. Hence, we need to network the education bureaucracy with businesses so that our schools and universities adapt continually to rapid change. This means that employers get to choose talent much earlier and the young have work experience far earlier than through the current education process.

The successful German manufacturers and Silicon Valley technology firms have one thing in common - they integrate on-the-job training with bold imaginative design and relentless pursuit of quality.

George Orwell's dictum that "all animals are equal - some are more equal than others" is never more true. Life is inherently unequal. To be equal with the best, you need to compete with and learn from the best. Family, community and state can help, but the rest is up to the individual.

Andrew Sheng writes on global issues from an Asian perspective