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Rising income inequality: A threat to the global economic order?


Published: Sunday, Feb 26, 2017



Posted : 26 Feb, 2017 00:00:00



Rising income inequality: A threat to the global economic order?

Muhammad Mahmood

"We have reached a tipping point. Inequality can no longer be treated as an afterthought. We need to focus the debate on how the benefits of growth are distributed"- OECD Secretary- General.

The issue of rising income inequality has now become an important topic of public discussion and academic discourse in developed and developing countries. There is now sufficient empirical evidence available to indicate that the situation is getting worse. The economic crisis stemming from the global financial crisis (GFC), now a decade on, has affected the lives of millions of working men and women and still continues to do so.

The rise of economic nationalism that we are witnessing in developed countries has some of its roots in the unequal gains accruing to high and low income groups (e.g. lower skilled workers) from the sluggish economic recovery. Given that the crisis was global in scope its after effects can be felt in almost every country, including Bangladesh. It threatens to undo the global economic order that has evolved over the Second World War.

The latest OECD Income Inequality Update (November 2016) provides a glimpse of the worsening income inequality situation. While summing up, it states that income inequality remains at record historical high levels in many countries. One common measure of income inequality is wages. The OECD report states that median wages in its 35-member countries are still below the levels that were in 2007. For the bottom 10 per cent of wage earners, the wages outcome is even worse. They experienced a decline of 3.6 per cent since 2007 while wages for the top 10 per cent actually rose. The gains of very limited economic recovery when experienced in these countries have gone more to higher income households than to those with middle and lower incomes.

In fact, there are suggestions that the middle income wage earners are steadily moving downward towards lower income wage earners group thus swelling the number in the lower income bracket. This further exacerbates an already worsening income inequality situation not only in OECD countries but also in other countries of the world. In effect it appears that no country is immune from this phenomenon.

Weak economic recovery, which helps sustain high income inequality, appears to be the culprit, according to the report. While there are signs of decline in unemployment albeit from very high levels, the long term unemployment remains high; in particular, the youth continues to experience high joblessness and inactivity. More importantly the crisis has resulted in not only affecting the number of jobs but also their quality. Many reabsorbed workers could only find low quality jobs with much poorer working conditions and many of these jobs are also very insecure. Overall, such trends contribute further to maintaining high levels of income inequality.

The Gini Coefficient (the standard statistical measure of income distribution) as estimated for 2014 ( latest available OECD data) indicates that among OECD countries Chile (0.465) and Mexico (0.459) are the most unequal countries to be followed by the USA (0.394) while Iceland (0.244), Norway (0.252) and Denmark (0.254) are least unequal countries. To put Bangladesh in perspective, our Gini coefficient now stands at 0.46. Lower values of the Gini Coefficient indicate more equal income distribution and higher values indicate the opposite.

Thomas Piketty of the Paris School of Economics  (and author of Capital in the Twenty-First Century) prompted a revolution in our understanding of long-term trends in inequality, by revealing the incredible rise of the top "one per cent" as the big story in rising inequality. Recently, he and his colleagues Emmanuel Saez and Gabriel Zucman have released updated and revised estimates of the share of income going to top earners in the USA. They found that the average pre-tax income of the bottom 50 per cent of US tax payers has been flat (adjusted for inflation) since 1980 at US$16,632 and stagnating thereafter at US$ 16,197 in 2014. And the share of national income going to this group declined from 20 per cent in 1980 to 12 per cent in 2014. They further highlighted the growing income disparity by pointing out that the top one per cent earned on average 81 times more in 2014 than the bottom 50 per cent in 2014 relative to 21 times in 1980.

There are reasons to believe that these figures are under estimates and point out that a very large proportion of very wealthy in the USA have inherited a huge amount of wealth. Most of these people do not have an income from the wealth they have accumulated necessitating a tax return while allowing the value of the wealth only to appreciate. The USA now is nearly the most wealth unequal country in the world. Out of 141 countries, the USA now stands as the 4th highest wealth unequal country.

A team of economists from the University of California- Berkley and Harvard University further confirm the Piketty et al study. They found that rising income inequality has eroded the ability of children now growing up in the USA to earn more than their parents. In fact their study found that only half of the children born in the 1980s grew up to earn more than their parents did, after adjusting for inflation. That is a drop from 92 per cent of children born in 1940s. This fall is very perceptibly observable among children born in the middle class. Growth has done very little for the middle class in the USA.

The economists further say that rising concentration of income among the richest US citizens explains 70 per cent of the decline in absolute mobility from the baby boomers generation to millennials while a slowdown in economic growth explains the remaining 30 per cent.

It appears that countries that have very high income inequality cluster around Southern Africa and Latin America. Overall income inequality is relatively low in most developed countries, in particular Scandinavian countries in Europe.

In most instances the situation is much worse in developing countries; South Africa now is the worst example of income inequality with a Gini coefficient of 0.65. Other developing countries that have high income inequality as measured by the Gini coefficient are Ecuador (0.59) and Columbia (0.58).

The Gini coefficient for Bangladesh is 0.46 and for India is 0.51. Overall income distribution has increasingly become uneven in most developing countries including Bangladesh. Both anecdotal and empirical evidence suggest that income inequality in Bangladesh, which was at 0.36 in 1984-85, has been rising since the 1990s. Growth acceleration and trade expansion seem to have done little to halt this trend. It appears that both income and wealth have increasingly been concentrated among the top five per cent of income earners in Bangladesh. This is also the period that has coincided with Bangladesh vigorously pursuing a policy of export-led growth taking advantage of a more open global trading environment while maintaining a largely protectionist economy itself.

While the entrepreneurial spirit of our readymade garment exporters has been acclaimed around the world, it is also true that this exclusive group has accumulated wealth without precedent in Bangladesh. The fact is combination of export led growth with high protection for import competing industries has singularly contributed to the generation of huge economic rents and concentration of massive amount of wealth amongst the top five per cent. The income share of the top five per cent has grown from 18.3 per cent in 1983/84 to 24.6 per cent in 2010, while the income share of the bottom five per cent of the population fell from a 1.2 per cent to 0.8 per cent during the same period. As a result, the gap between these two income groups widened over the years.

Furthermore, this has also created an enabling environment in Bangladesh to foster what is often described as crony capitalism. Crony capitalism typically thrives with the tacit support of powers that be. The problem is that once crony capitalists take hold of the economy, it becomes nearly impossible to dislodge them. Bangladesh as one of the least developed countries has significantly benefited from the open global trading environment but that benefit appears to have mostly flowed to the very upper income bracket. The positive story coming out of the Bangladesh scene is that while the rich have indeed got richer, the poor have also gotten better off in the past 25 years, with some exception for people in lagging regions (e.g. chars, coastal regions, flood-prone areas).

 Rising income inequality can result in decreasing access to health care and education in developing countries like Bangladesh. This can seriously hinder efforts to reduce poverty. It also hinders the expansion of a wider consumer base in these countries. Income inequality will continue to rise if mitigating measures such as the reform of the taxation regime, social protection and transfer payments, a well functioning public health care and education system are not put in place with serious efforts to reduce corruption.

There is now clear evidence available that in recent times income inequalities have increased in much of the world. This is simply because income inequalities within countries have increased. While gross domestic product (GDP) per capita has been increasing in countries around the world, at the same time income inequalities have also exacerbated. These trends in income distribution are dismal and show no sign of abating. In developed countries an aging population will put further strains on public expenditure and this along with high unemployment, budget cuts and economic slowdown will likely contribute to further income inequality in the future.

Rising income inequality is a source of social and political discontent and can pose a serious challenge to economic growth potential. We have already seen how economic grievances of the poor arising out of rising income inequality have been exploited to capture political power by the far right in the USA which now tremendously embolden politicians of the extreme far right leaning in Europe vying to capture political power in various European countries.

They are coming up with outlandish populist solutions to a set of complex economic problems. The medicine they prescribe is likely to kill the patient. President Trump's success in saving a couple of thousand jobs here and there is statistically insignificant in relation to 145 million working people in the USA and cold comfort for eight million unemployed. These are ominous signals and to stem the further rise of these reactionary forces will require to address the issue of poverty which is closely linked to rising income inequality.

Growing income inequality is not an inevitable fact of life as most Scandinavian countries have already demonstrated. A well-crafted tax and transfer policies can achieve both income redistribution and economic growth. Also to address the issue of income inequality effectively requires addressing the underlying inequities of opportunities. That will entail public investment in broadening the opportunities for skill development and learning and also public investment in a universal health care system. Above all, labour laws ensuring safe working conditions, a minimum living wage and collective bargaining rights will significantly improve income redistribution.

Those are tall orders for Bangladesh which has been on a steady path of growth acceleration with poverty reduction. The challenge of containing the collateral damage of rising inequality cannot be minimised.

(Dr. Mahmood is a Senior Fellow of the Policy Research Institute of Bangladesh. He can be reached at Muhammad.mahmood47@gmail.com)