Global Trends by Martin Khor

Monday 1 February 2016

The rise of the rich-poor gap

The increase in inequality of income and wealth has become a top global issue that must be tackled to avoid economic crisis and political chaos.


Inequality of income and wealth has in recent times moved from an academic topic to the top levels of the global agenda.

Unfortunately, the issue is still in the realm of policy discussions.  The needed actions have yet to be taken. 

On the ground, however, the rich-poor gap, the excesses of the wealthy and the stagnating or deteriorating position of the middle and lower classes, have stirred much controversy  and protests, and a shift in political affiliations, seen particularly in the Western countries.

At the recent annual Davos gathering of the World Economic Forum, more media publicity was given to an Oxfam report on inequality than the views of the global elite inside the Forum’s halls.

The richest 62 billionaires own as much wealth as the poorest half of the world’s population, according to Oxfam.  And this rich-poor gap has been growing.

In 2010, 358 of the richest owned the same wealth as the poorest 50%.  This number dropped to 80 in 2014 and 62 in 2015.

The wealth of the poorest 50% fell by 41% in 2010-2015, while the wealth of the richest 62 people rose by US$500 billion to $1.76 trillion (or $1,760 billion).

Such stark inequality has captured the attention of politicians, spiritual leaders, economists and journalists, in the wake of increasing social unrest in many countries.

The U.S. President Barrack Obama called inequality “the defining challenge of our time.” Bernie Sanders, a leading Democrat candidate in the US Presidential elections process, last week highlighted that the top 0.1% of Americans own as much wealth as the bottom 90% and said he would “take on the greed of corporate America and Wall Street and fight to protect the middle class.”

Pope Francis, stated that “inequality is the root of social evil” and criticised “unfettered markets and trickle down theories.”

Prominent economists have recently highlighted inequality, notably Joseph Stiglitz and Thomas Piketty, who each wrote famous books on the subject. After receiving the Nobel Prize in 2013, another economist, Robert Schiller, warned that “the most important problem today is rising inequality in the US and the world” and added that inequality is unjust and a danger to democracy and social stability.

The Centre for American Progress, a Washington based think-tank, reported that the average wealth of the top 20% of families rose by 120% from 1983 to 2010, while the middle 20% had a 13% increase and the bottom 20% had an increase in debt over assets (a decrease in net wealth). 

A survey found that homeowners in the bottom 5% lost 94% of their wealth between 2007 and 2010.

The prominent journalist Martin Wolf wrote an article in the Financial Times last week, “The economic losers are in revolt against the elite,” about how those who have not gained from globalisation (a large segment of the Western population) are alienated from and angry with the elite.

This has resulted in the rise of right wing populist politicians (as in France and the United States) who are riding on the anti-immigrant wave.  Wolf warns that it may be already too late to stop this trend of resentment.

Wolf is right to be concerned about the rise of the right-wing populist politicians, but there is also an opposite trend:  the public disenchantment with the austerity measures taken by governments in Greece, Spain and elsewhere, resulting in protests and the rise of left-wing anti-austerity movements and parties.

In the US itself, there is resentment of how the conservative political elite have taken measures in recent decades to cut taxes of the wealthy and the corporations, while reducing welfare programmes that benefit the lower income groups.    

In much of the Western world, there was a post-World War Two consensus that while the market should be promoted to generate jobs and wealth, the government has the crucial role to tax the well-to-do and redistribute incomes to ensure the welfare of the poor is taken care of, through unemployment and social benefits.

The government should also intervene and boost its spending during period of low growth or recession to smoothen out the boom-bust cycle and through boosting demand and employment.

The Reagan-Thatcher revolution broke this consensus.  According to the new orthodoxy, taxes on the rich and corporations should be reduced, so that they can generate investments.

Welfare benefits should be curtailed or cancelled to prevent abuse by the poor and reduce the government’s fiscal burden. And governments should not take part in the economy, but leave the markets alone to do the job.

The new orthodoxy was put into effect widely, including in those developing countries that fell into debt crises and had to follow the structural adjustment policies of the IMF and World Bank.

However, the global financial crisis of 2007-2011 and the ensuing economic slowdown revived the popularity of the Keynesian policies of government intervention.

Many economists and institutions believe that the economic slowdown or recession is due to the lack of aggregate demand.  One reason for this is the increase in inequality.

To boost demand, it is important to promote equality.  When more income flows to the poor, demand will be boosted because the poor spend more of their income than the rich. 

In 2012, the Chair of Obama’s Council of Economic Advisers, Alan Krueger, concluded in a report that one effect of the worsening of inequality is that income shifts to the rich, who spend less of each marginal (or extra) dollar, causing consumption and economic growth to slow.

The wealthy tend to save nearly 50% of their marginal income, while the rest of the population saves roughly 10%, according to Krueger’s finding. 

Recent studies have shown that wages in many countries have fallen as a share of national income, while the profit share has correspondingly risen, and this increased inequality has been linked to the lack of demand and the slowdown in growth.

There is thus an important economic justification to reduce inequality and increase equality.  It is an essential factor in reversing the global economic slowdown.

This is in addition to the other reasons – moral, ethical, social and political – why inequality has to be tackled and why more equality has to be promoted.