Growing inequality has become a feature of the global economy at least since the 1980s when market-fundamentalism triumphed over state activism. Despite politicians and business leaders sharing concerns about growing inequality, the trend continues unabated, and even seems to have gathered pace.
According to the World Inequality Report 2018, the top 1% richest individuals in the world captured twice as much growth as the bottom 50 per cent individuals since 1980. But, income growth has been sluggish or even zero for the middle-class, i.e., individuals with incomes between the global bottom 50 Per cent and top 1% groups.
The globe's 500 richest people, as measured by the Bloomberg Billionaires Index, have become US$1.0 trillion richer in 2017 as the value of their wealth increased by 23 per cent, taking their combined fortunes to US$5.3 trillion. According to the UBS/PwC Billionaires Report 2017, there are now 1,542 dollar billionaires across the world, after 145 multi-millionaires saw their wealth tick over into nine-zero fortunes in 2016.The latest Credit Suisse Report found that the world's richest 1% people increased their share of the globe's total wealth from 42.5 per cent at the height of the 2008-2009 global financial crisis to 50.1 per cent in 2017, or US$140 trillion. Its estimates show that the lower half of global adults collectively owns less than 1.0 per cent of global wealth, while the richest 10 per cent of adults owns 88 per cent of all wealth and the top 1% accounts for half of all global assets. The Report noted, "The share of the top 1% has been on an upward path ever since [the financial crisis], passing the 2000 level in 2013 and achieving new peaks every year thereafter."
Ironically, the world's richest people have increased their wealth, while earnings of billions of poorer people stagnate causing global inequality to hit a 100-year high. No wonder that global household debts rose by nearly 5.0 per cent in 2017 despite total global wealth increasing by US$16.7 trillion or 6.4 per cent, according to the Credit Suisse Report.
BANGLADESH SCENARIO: Inequality has also worsened in Bangladesh since the late 1980s, as the share of wages in total personal income steadily declined. The income share of the poorest 10 per cent is only 3.85 per cent compared to 26.92 per cent for the richest 10 per cent in Bangladesh; the income share held by the highest 20 per cent is 41.48 per cent.
The extent of wealth inequality in Bangladesh is likely to be much greater considering the size of the shadow economy and money stashed away in off-shore tax havens such as Panama or Swiss banks.
DRIVERS: The Credit Suisse Report attributes this inequality trend to the asset price inflation which saw financial assets growing at a much faster pace than non-financial assets, benefiting the top wealth holders. Many observers believe that unconventional monetary policy response of the world's major central banks to the financial crisis contributed to the asset price inflation. For example, Kevin Warsh, a former board member of the US Federal Reserves, holds the view that quantitative easing (QE) as a policy works purely through an "asset price channel" enriching the few who own stocks or other financial products, and not the 96 per cent of people who receive the majority of their income through labour.The European Central Bank (ECB) has also acknowledged that QE fuelled asset price inflation, disproportionately benefiting the rich and wealthy.
An IMF's study found that fiscal consolidation has typically had significant distributional effects by raising inequality, decreasing wage income shares and increasing long-term unemployment. Another IMF study found that on average, capital account liberalisation is followed by a significant and persistent increase in inequality.
The Global Inequality Report observed that the rising inequality is largely driven by the unequal ownership of capital. Very large transfers of public capital to private ownership in nearly all countries since 1980 resulted in negative or close to zero public wealth (public assets minus public debts) in rich countries, even when national wealth has increased substantially. That is, over the past decades, countries have become richer, but ironically governments have become poor, constraining governments' ability to address inequality with increased public provisioning of essential services.
On the other hand, net private wealth rose from 200-350 per cent of national income in 1970 to 400-700 per cent today in most rich countries. But under the influence of the neoliberal agenda, marginal tax rates for the super-rich have persistently fallen. The IMF's recent Fiscal Monitor identified the decline in progressivity of tax structure or failure to tax the rich at a higher marginal rate as a contributory factor to rising inequality.Tax cuts at the top has also created perverse incentive for the chief executive officers (CEOs) to pay themselves heftily through stock options. An earlier IMF study noted that neoliberal agenda that promoted privatisation of important government functions or constrained government spending through limits on the size of fiscal deficits and on the ability of governments to accumulate debt has also contributed to rising inequality trend.
DISTRACTORS: There are attempts to mislead or distract. For example, the Allianz Global Wealth Report 2016, has described the trend as "inclusive inequality", pointing to growing middle class even when inequality rose. It argues that millions of people were lifted out of low-income into middle-income groups, drawing them to share growing wealth. Therefore, by implication, the current trend cannot be bad!
The Credit Suisse Report also has similar distractions. It argues that whole distribution of wealth is shifting as the world becomes a wealthier place, progressively lowering the bar to upward movement - increasing inequality boosts the speed at which new millionaires are created.
Josef Stadler, the lead author of the UBS/PwC Billionaires Report 2017, and UBS's head of global ultra-high net worth, claims that "the perception that billionaires make money for themselves at the expense of the wider population" is incorrect. According to him 98 per cent of billionaires' wealth found its way back into wider society and the world's super-rich employed 27.7 million people. He also points to the philanthropic contributions of super-rich, and their support for arts, culture and sports to justify their wealth accumulation, and apologetically defended the increase in the billionaires' fortunes attributing it to the strong performance of their companies and investments. So, how can this be bad?
WHY INEQUALITY MATTERS? There seems to be growing consensus that growing inequality is bad for sustainability of growth and progress. For example, IMF research has shown that inequality can undermine progress in health and education, cause investment-reducing political and economic instability, and undercut the social consensus required to adjust in the face of shocks, and thus it tends to reduce the pace and durability of growth. It also finds that greater inequality in incomes may lead to excessive borrowing by low- and middle-income households, which eventually triggers a crisis, a sequence of events that characterised the run-ups to both the Great Depression and the Great Recession.
Wealth is a key component of the economic system; it is an important source of finance for future consumption, particularly in retirement, and for reducing vulnerability to shocks such as unemployment, ill health, or natural disasters. Wealth also enhances opportunities for informal sector and entrepreneurial activities. Thus, growing wealth inequality makes the economy more vulnerable and less dynamic. It affects disproportionately both the young and those in retirement which over-burdens the State.
The writer, Adjunct Professor at the Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok during 2008-2016. [email protected]
