Global Inequality

Good news: Global inequality is decreasing, and has been for twenty years. The reason is simple: rates of the most severe poverty have fallen dramatically. This is one of the great economic success stories of our time.

The bad news is that the most problematic manifestation of inequality – that among people within the same country – is getting worse. If you thought that the claim above sounded too simple, you were right.

For these two seemingly contradictory facts, we can thank globalization. Within developing countries, particularly in Asia, a small elite is gathering immense wealth on the proceeds of their burgeoning economies. Their poorer counterparts are leaving subsistence agriculture, moving to the cities, and taking new low-paying manufacturing and service jobs. The fortunes of both groups have improved, although much more so for the very wealthy.

In developed countries the trend is different. Manufacturing jobs are disappearing and the middle classes which previously relied on them have stagnated economically. Statistics bear this out: the income of the typical worker in the US has not increased for 30 years. Meanwhile, the incomes of professionals, managers and the creative class continue to grow.

These trends are linked. Many of the new manufacturing jobs in developing countries are those which previously supported workers in wealthy countries. At least part of those workers’ loss has been to the benefit of the world’s poor – and hence globalization is driving a convergence in incomes globally.

To summarize crudely, incomes have risen overall, and inequality, in aggregate, has fallen. While staggering poverty remains, great progress has occurred. Yet within countries, inequality has reached levels not seen for generations. And in a world where the state is the primary economic and political unit, it is the difference in wealth and opportunity within the same country that matters.

There are a number of reasons why this matters. First, rich countries have seen a reduction in economic mobility along with the rise of inequality. Most people will put up with income discrepancies if they think that everyone has a chance to get ahead, but not if they think that their lot in life is predetermined. This leads to reduced social cohesion, increased crime, and possibly poorer health. Second, economic inequality begets political inequality, distorting the political process and creating economic inefficiencies. Those at the top spend their efforts lobbying for tax breaks and special treatment, rather than on productive investments.

But most fundamentally, humans have a tendency towards fairness. Evidence for this can be seen in experiments run by economists worldwide. In one game, participants are asked to divide cash between themselves and a recipient. The recipient gets to accept or reject the offer, where rejection causes both parties to lose out. It makes little sense to reject something in favor of nothing, but it happens consistently for allocations considered ‘unfair’. Even when the players are anonymous, are unlikely to ever play again, or even when they’re separated by thousands of kilometres, a desire for fairness prevails.

Given inequality’s problematic consequences, and our apparent discomfort with gross unfairness, societies have three options: hope inequality is transient or at least bearable, wait for revolution, or put in place policies to address it.

Interestingly, a number of unexpected voices are starting to call for the latter. One high profile example is the World Business Forum – a body comprised of many of globalization’s biggest winners – which produced reports in 2013 and 2014 describing inequality as the most pressing threat to the global economy.

Of course, this concern hasn’t led to a rush of calls for increased taxes or closed tax loopholes. But it is a sign that inequality has moved beyond being a moral problem, to one which poses a tangible risk to peace and prosperity, for rich and poor alike.

Members of the World Economic Forum recognize that failing to widely share the benefits of the economic system could lead to a populist pushback against globalization. In authoritarian countries this could manifest as social unrest or revolution. Meanwhile, democratic countries could see a surge in support for protectionist policies. As the saying goes, all politics is local: rising domestic inequality will have negative consequences that falling global inequality cannot outweigh.

Economic leaders have faced a similar situation before. Following the Great Depression, communism was an attractive idea to millions of workers who felt let down by unbridled capitalism. Economists such as John Maynard Keynes and leaders such as F.D. Roosevelt recognized that this attraction had the potential to undo the capitalist project. Their responses included advocacy for progressive taxation, stronger regulation, and government intervention in the macroeconomy. Doing so, they hoped, would take the harshest edges off capitalism, prevent turmoil, and ensure that the benefits of capitalism would not succumb to popular anger and disillusionment.

Roughly seventy years later, and with the world economy once again haunted by a recent downturn, the same thinking may be needed to safeguard capitalism’s globalist success. Higher social spending, on education for instance, may be necessary to increase economic mobility. Reduced tax breaks for higher earners could be used to pay for it. Tougher financial and environmental standards would help maintain economic stability and alleviate harms. Such strategies have short term costs for the current beneficiaries of globalization. But the long term outlook for both the current winners and losers would be greatly improved. The world has made great progress in raising millions out of poverty, partially thanks to the forces of globalization. Ignoring the associated inequality puts that progress in jeopardy.


Image Credit: Dornicke via Wikimedia Commons


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