Global Inequality and Its Ills

And What to Do About It

Inequality is bad for most people not just the poor, bad for business and political stability; and it can be cured Prof Peter Saunders

Two recent books deal with inequality and some of the myths surrounding it (see ISIS reviews, SiS 63). In Capital in the Twenty-first Century [1], the French economist Thomas Piketty argues that the natural tendency of capitalism is to generate ever increasing inequality. We, lay people and economists alike, don’t realise this because we have lived most of our lives in abnormal circumstances: the destruction caused by two world wars and a depression, and the measures that were taken to recover from them. Until recently, most of us have seen our countries become more equal year by year, as well as a marked rise in social mobility.

Not surprisingly, people have come to believe that is what happens naturally in a mature capitalist economy. That has made it relatively easy for the rich and the experts who advise them to claim that if we do anything like introduce a wealth tax or a more progressive income tax we will only upset the process and end up making things worse for everyone. However, if Piketty is right, and he has evidence from two centuries to back up what he says, then that argument becomes what many always thought it was: a piece of sophistry that justifies benefiting the rich by claiming to act for the general good.

And it is only the rich who gain, not just those with incomes above the median. In The Spirit Level [2], two British epidemiologists, Richard Wilkinson and Kate Pickett, show that in a country rich enough to provide a reasonable standard of living for all, the way to improve everyone’s quality of life is to make the country not richer but more equal. The better off should demand measures that promote equality not just out of concern for those who are less well off, but out of enlightened self-interest. They should certainly not support measures that help only the top 1% of the income hierarchy, the group Piketty refers to as the centile. As for the economy itself, a recent IMF study [3] shows that increasing inequality tends to reduce growth rather than promote it. A certain amount of inequality may be needed to provide incentives, but it should not be on anything like the scale we find in countries like the US and the UK.

The international scene

Both books are about individual countries. What about the larger picture? Will capitalism, at least in the form we know it today, lead to greater inequality? Do the relatively well-off stand to gain if inequality is reduced on a global scale?

The short answer is that we simply do not know. In the first place, Capital in the Twenty-first Century is based on a detailed study of the history of France, the UK and the US. We cannot be confident that this pattern will continue over the next fifty years in those three countries, still less in the whole world. On the other hand, in the light of this study, we have good reason to doubt that the market, left to its own devices, will produce anything like a satisfactory outcome. It will make the rich even richer, which is why we can expect them to use the influence their money gives them to promote the idea, but what it will do to the rest of us is another matter.

We can, however, hazard a guess. If Piketty is right that the natural tendency of capitalism is towards inequality, and the evidence strongly suggests that it has been up until now, then we can expect it to continue in the single global economy we seem to be heading towards. That would produce a small international elite of very rich people, a larger group of professionals earning reasonable salaries but with little wealth and less security, and a majority of workers on low wages and no security at all. It would be on a global scale what can already be seen in large cities in south-east Asia, where you can walk out of a luxurious western-style hotel, cross the street, and find yourself very much back in the poor third world. There are signs of the trend in London too, with even traditionally very well paid professionals being priced out of the market for the best real estate (and, we are told, even private education for their children [4]) by multi-millionaires from Russia, China and the Gulf.

Wilkinson and Pickett’s argument is explicitly about what happens within countries that are already rich enough to provide all their citizens with their basic needs. Much of their argument applies on a wider scale as well, for as the world becomes smaller, the sorts of interactions that used to occur only within countries are more and more happening on a global scale. Workers in the US and Europe do not only feel pressure from developments in their own country; they also worry about their jobs being outsourced to India or China. Travel is easier and cheaper than it has ever been, which makes migration a more important issue than it was in the past, both for the countries to which people travel and those from which they come. The relatively low cost of shipping food thousands of miles by air means that land on which people in the third world have supported themselves for centuries is now used to produce cash crops to be sold in northern supermarkets.

It is estimated that more than 800 million people in the world today do not have enough to eat [5].  The problem is not that there isn’t enough food but that the many people are unable either to grow it for themselves or buy it in the markets. In other words, the problem is inequality.

There are many ways in which the developed world could help reduce global inequality without adversely affecting its own prosperity. One would be to make sure that the food we know is there finds its way to everyone who needs it. Another would be to provide a proper water and sanitation system for everyone who does not yet have one; the WHO estimates the capital cost of this to be about $364 billion [6]. That’s a lot of money, but it is far less than the $2 trillion that the US has spent on the war in Iraq [7] and it would be a much more effective way of reducing terrorism and limiting migration than by dropping bombs. It is not surprising if someone takes up arms against the people that destroyed their home; we would not expect them to do it against the people who brought clean water and decent sanitation to their village.

What Capital in the Twenty-first Century and The Spirit Level tell us is that the world really would be a better place if it were more equal, and that if we want it to become more equal we will have to take action to make that happen. And far from stifling growth, the necessary measures can both increase growth and help us avoid crises like 1929 and 2008. That’s really an optimistic message, providing there are governments willing to act and electorates willing to support them.

Article first published 21/07/14

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References

1. Piketty T. Capital au XXIe siècle. Éditions du Seuil, Paris, 2013. English translation by A Goldhammer: Capital in the Twenty-first Century, Belknap Press, Cambridge MA, 2014.
2. Wilkinson RG and Pickett KE. The Spirit Level. Why Equality is Better for Everyone. Penguin, London 2009.
3. Ostry J, Berg A and Tsangarides C. Redistribution, Inequality and growth. IMF Staff Discussion Note SDN14/02. International Monetary Fund. www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf 10/07/14.
4. Killik Private Education Index. A Cebr report. London, Killik & Co LLP, 2014. www.killik.com 13/07/14.
5. Food and Agriculture Organization of the UN (FAO). State of Food Insecurity in the World 2012. Rome, FAO, 2013. http://www.fao.org/docrep/018/i3458e/i3458e.pdf 13/07/14.
6. World Health Organization. Global costs and benefits of drinking-water supply and sanitation interventions to reach the MDG target and universal coverage (WHO/HSE/WSH/12.01). Geneva, WHO, 2012.  http://www.who.int/water_sanitation_health/publications/2012/globalcosts.pdf 13/07/14.
7. “Iraq war costs US more than $2 trillion.” Daniel Trotta, Reuters, 14 March 2014. http://www.reuters.com/article/2013/03/14/us-iraq-war-anniversary-idUSBRE92D0PG20130314 13/07/14.