|Fight Global Income Inequality|
The current global development agenda prioritises poverty reduction whilst largely ignoring the problem of inequality. Policy makers should place greater value on redistributional justice, which could be achieved through global taxes and social protection, argues Francine Mestrum.
21st August 2009 - Published by Znet
Since the international organisations put poverty on the political agenda in the 1990s, little has been heard about inequality. This is quite amazing, since it was the income gap between rich and poor countries that gave rise to the development project after the Second World War. The first UN resolutions on development do not mention poverty, but they do refer to the huge inequalities between developed and under-developed countries.
With the new poverty agenda of the World Bank and the human development programme of the UNDP (United Nations Development Programme), both introduced in 1990, people, if not individuals, clearly have become the objects of development. There certainly are good reasons to welcome this shift, since development without benefits for people would be rather meaningless. But one also has to recognise the perfect convergence of this shift with the emergence of a neoliberal agenda that tried to weaken states and deprive them of their economic role. If countries are neither the objects nor the driving forces of development but only have to create an enabling environment and care for the extremely poor, there clearly is a new development agenda and there are good reasons to analyse all its consequences.
One of these consequences is the semantic change in the concept of social development. Poverty is defined in absolute and not in relative terms. The PRSPs (Poverty Reduction Strategy Papers) promoted by the World Bank and the IMF as well as the MDGs of the UN perfectly fit into the liberal agenda. Redistribution is no longer mentioned, whilst inequalities concern all matters of social life and rarely incomes, and equality of opportunity is the most ambitious objective. There is a global consensus, even with NGOs (non-governmental organisations), to give priority to poverty reduction. Yet, there are no convincing arguments to explain why poverty is more important than income inequality. As I will explain below, there are reasons to believe that inequality is more threatening than poverty and can be considered to be a more urgent global problem.
Whatever the reasons for the shift from inequality and (re)distribution to absolute and extreme poverty, it should be clear that two totally different agendas are concerned. On the one hand, the development agenda of the 1960s and 1970s as designed by the UN and its new majority of poor countries. Development was supposed to enhance economic growth and social progress; it was a collective project for the modernisation and emancipation of countries and societies. On the other hand, the poverty agenda of the 1990s aims to help extremely poor people and especially women gain access to education and health services, in order to boost their productive capacities. Economic development is left to market forces and free trade is supposed to boost economic growth. (In)equality and (re)distribution are no longer on the agenda.
The (Re)emergence of an Equality Agenda
It would be wrong to state that inequality has completely disappeared from the current political discourse.
In Latin America, the world's most unequal continent, even when poverty is declining, inequality can be rising. The concept has always played an important role in development thinking and even recent World Bank documents on Latin America recognise its major role in producing poverty.
In recent years, a number of researchers and international organisations are again looking at inequality, even if they do not always link political conclusions to their findings.
The first and major organisation that has to be mentioned is the UNDP. Since it started publishing its Human Development Reports in 1990, it has provided yearly statistics on the growing inequality at the world level. In 1992 it published the now famous glass of champagne showing how the richest 20 per cent of the world's population possess 82.7 per cent of global income, while the poorest 20 per cent have to share 1.5 per cent. "The world's richest 1 per cent of people receive as much income as the poorest 57 per cent. The richest 10 per cent of the US population has an income equal to that of the poorest 43 per cent of the world. Put differently, the income of the richest 25 million Americans is equal to that of almost 2 billion people". However, despite these shocking statistics, the UNDP never has political proposals to reduce these income inequalities. It seems as if the examples were just mentioned to encourage all political actors to engage in more solid human development efforts. It is one of several points where the UNDP is found to be slightly schizophrenic.
Just as is the case with poverty, there are many different ways to measure inequality, and they are not ideologically neutral. Many researchers have looked at the possible links between globalisation and inequality but come to divergent conclusions. Some find a growing level of inequality among or within countries. Others are more cautious or state that inequality may have declined worldwide but that leaving China and India out of the analysis, inequality is clearly rising.
These diverging conclusions are in fact inevitable because there are too few reliable data to measure income inequality, because different measurements are possible and different methods can be used. The lack of data is even worse than in the case of poverty measurements, where 67 countries lack any data and 93 countries lack trend data on the 1 Dollar a day poverty line. The main differences however come from the ideological stance the authors are taking, the different values about what constitutes a just distribution of the gains from globalisation.
One of the major researchers on inequality, Branco Milanovic, works with three different concepts of inequality. The first is unweighted international inequality. It uses income or GDP (Gross Domestic Product) per capita and disregards population. This inequality has clearly been rising over the past decades. He makes a distinction between four groups of countries, the rich ones, the contenders, ready to catch up and join the rich club, the third world countries and the fourth world countries. From the nineteen non-western countries that belonged to the rich club in 1960, only four remain there in 2000. Four new non-western countries joined the club of the rich. The group of contenders almost disappeared. Twenty out of the twenty-two original contenders in 1960 were either in the third or in the fourth world group in 2000. The Group of fourth world countries increased from twenty-five in 1960 to seventy-one in 2000. This makes Milanovic conclude that there has been an Africanisation of poverty and a westernisation of wealth.
His second concept is population weighted international inequality where one assumes that everyone in a country receives the same income but the number of representative individuals from each country reflects its population size. It assumes that within-country distribution is perfectly equal. Measured in such a way, inequality has decreased in the past twenty years, though it has increased if one takes out India and China.
The third concept treats, in principle, everyone the same, disregarding individuals' nationality. This is no longer an international measurement of inequality but a global one. It goes beyond methodological nationalism. Here we see a sharp increase in inequality between 1988 and 1993. The poorest 5 per cent have lost almost 25 per cent of their real income, while the top quintile has gained 12 per cent. Most of this increase can be explained by the rise of between-country inequality. 50,000 rich people receive as much as 2.7 billion poor people. 75 per cent of the world population lives with less than the world mean income of 3,526 Dollars in PPP (purchase power parity) terms.
Measuring inequality with the third concept, Milanovic notes that only 17.4 per cent of the world population is middle class and that they receive only 6.5 per cent of the world 1998 income. Milanovic concludes that "people are poor because they live in poor countries".
Why Should Inequality be Back on the Agenda?
In preparing its second major poverty Report of 2000, the World Bank published various articles on the new poverty data, on its new social protection policy and also one on the reasons why inequality is making a slow comeback. Equity and efficiency are not separable phenomena, the authors note, because markets are never perfect. Even if inequality does not change much over time, the task is to find combinations of instruments that will deliver both growth and equity. The world seems to be converging towards two clubs: a rich one and a poor one. Policy matters, and a country's evolution can be altered by intervention.
Ravallion was the first to show that inequality can be an impediment for pro-poor growth and that in countries with high inequality it is perfectly possible that growth has no impact at all on poor people. These findings are confirmed in other articles and formally integrated in the World Bank's thinking. "High levels of inequality and deprivation can be harmful to efficiency and growth", states the World Development Report of 2003.
In 2006, the World Bank's World Development Report was dedicated to equity. "Equity and equality overlap quite extensively" stated one of the outlines of the report in which both concepts were used without ever making a clear distinction. If this focus on equity is a major achievement for the World Bank, it should also be noted that the final report exclusively focuses on equity and ignores equality. The policy aim is not equality of outcomes. Outcomes matter, but mainly for their influence on absolute deprivation and their role in shaping opportunities. Individual incentives should not be blunted by income redistribution schemes, because that could lead to less growth. "The history of the twentieth century is littered with examples of ill-designed policies pursued in the name of equity that seriously harmed [...] growth processes... A balance must be sought..." The report constitutes a real shift in World Bank thinking by mentioning social protection as opportunity-enhancing, minimum wages, human rights and core labour standards, even taxes, though all these elements are said to imply serious trade-offs. In fact, the report does not concern income inequality but merely inequality of opportunity and it does not give statistics on income inequality. Moreover, this seemingly positive shift at the World Bank is contradicted by another series of its reports that classifies countries positively when they have little or no labour market regulations, and gives them a negative score when labour markets are regulated.
And Some Other Good Reasons to Fight Inequality
The reasons mentioned by the World Bank why inequality is back on the agenda are rather limited though not unimportant. Its 2006 report shows that the Bank is not really convinced of the usefulness of analysing income inequality. In fact, its reasoning on the links with the poverty-reducing potential of growth could lead to a kind of optimal inequality: small enough not to hinder poverty reduction, large enough not to hinder growth.
There are other reasons for tackling inequality.
The first reason is moral indignation, not only faced with the magnitude of inequality, but also faced with the profound feeling of injustice many people have. Milanovic gives the example of a room full of people where one person gets 20,000 Dollars and all others between twenty-five and seventy-five cents. Everybody's welfare improves, yet most people will not accept this unfair distribution. The income people receive is not only a means whereby to acquire more goods and services, it is also a tangible recognition of how society values them. Equality is a fundamental value in each society, and that is why the point of inequality becomes relevant when so much attention is focused on globalisation. The inequality between Africa and Europe is not relevant as long as there is no human interaction between them, but once there is, inequality becomes very important.
This argument becomes very important when newspapers and television have daily stories on the huge wealth accumulation of CEOs and report mass lay-offs in companies making profits. According to the Merrill Lynch World Wealth Report, there are now 9.5 million people worldwide with more than one million Dollars financial assets (HNWI or high net worth individuals), an increase of 8.3 % compared to 2005. 1 per cent of them own more than thirty million Dollars in financial assets. The accumulated HNWI-wealth went from 16,600 billion Dollars in 1996 to 37,200 billion in 2006, an increase of 8 per cent per year and much more than the rate of economic growth. According to the ILO (International Labour Organisation), 1.39 billion people or 50 per cent of the total labour force and 58.7 per cent of the labour force in developing countries earned less than 2 Dollars a day in 2003. 550 million people or 23.3 per cent of the labour force of developing countries earn less than 1 Dollar a day. Half of the world's workers are thus working poor. Less than 10 per cent of the population in the poorest countries has adequate social security protection. In December 2006, 4000 financial workers in the City of London received each a bonus of 1.5 million Euros.
A second reason again is linked to globalisation and the paradoxical need of borders linked to growing inequalities. If one beliefs in the desirability of one world community in which not only goods and capital but also people can move freely, inequality is clearly a major problem. The gap between rich and poor countries, as well as the lack of perspectives in large parts of the world, makes people migrate in search of better opportunities. It is not the extremely poor people that leave their country, but mainly middle classes with professional skills that are needed in rich countries. However, rich countries lack the social basis for mass migration, welfare states are under severe pressure, so-called illegal migrants are often exploited on the labour market or die on the Mediterranean beaches or at the Southern electronic border of the United States. There clearly is no free movement of people, today's migration is a kind of survival strategy and borders have to be raised in order to stop mass migration. In turn, this is one of the reasons why rightwing populist and often racist or xenophobic political forces gain momentum in most rich countries and threaten democracy. Huge inequalities, then, make borders necessary and hinder the free movement of people. In other words, huge inequalities are not compatible with globalisation or with democracy.
A third reason is linked to political instability. Since 2002 and the RIO+10 UN conference on sustainable development, the World Bank speaks of "social sustainability". Social matters are part of a government's portfolio and are to be managed in the same way as environmental matters. Problems arise when these assets are at risk and can lead to "social stress - and at the extreme, social conflict" Contrary to the Club of Rome's statement of 1971 calling for limits to growth in order to preserve the environment, the World Bank calls for poverty reduction and environmental protection in order to preserve the growth process and avoid conflicts. However, there is no evidence at all that extremely poor people are a root cause of political instability or terrorism. Extremely poor people, living on less than 1 Dollar a day in a market economy, have to use all their time and energy in trying to survive. By contrast, middle classes threatened by impoverishment, young graduates with no employment perspectives, professionals frustrated by the non-met promises of development, all faced with the constant western good-news-shows of globalisation may have reasons to resist and revolt. Growing inequalities can only worsen this situation. The most urgent task then should not be to reduce poverty - however necessary that is - but to reduce inequalities. If one wants to promote global political stability, the best war on terror is not war on poverty as the former World Bank president, Jim Wolfensohn, declared, but a war against inequality.
A fourth reason is also political. Social and economic rights came into being in order to give meaning to political citizenship. Citizenship is based on equality. Throughout the end of the nineteenth and the first half of the twentieth century, a growing consciousness of the importance of equality and of the equal value of all human beings led to the creation or the promise of welfare states. Equally, the development project that came into being after the Second World War was explicitly aimed at closing the gap between poor and rich countries. However, the current growing inequalities undermine the political citizenship of individuals. In poor countries, it is not too difficult to buy the votes of poor people, just as it is not difficult to buy the votes of poor countries in international assemblies. Economic differences imply asymmetric power relations and the domination of some over others. At the UN, poor countries are often obliged to follow the vote of the rich countries, in order to maintain their development assistance. The World Bank and the IMF can impose their economic conditions of privatisation and deregulation because they hold the key to development financing. The UN Charter speaks of the "sovereign equality" of countries, but geopolitics and inequality inevitably point in another direction.
A fifth reason is linked to the debt of rich countries towards poor countries. Recent history can be said to have favoured the rich world and impoverished the poor world. There is now a lot of evidence that structural adjustment policies clearly had huge negative social consequences for poor countries. The costs of the economic crisis that started in the 1970s have largely been transferred on the poor countries, in the form of debt servicing, falling commodity prices, rising imports from the rich world and capital flight. Between 1998 and 2003, net transfers from poor to rich countries were 51 to 132 billion Dollars per year. Poor countries had 1,460 billion Dollars deposits in banks of the North, whereas they had 700 billion Dollars of debt towards these same banks. Apart from this social debt, rich countries have an enormous ecological debt by the way they are exploiting natural resources, their responsibility for the diminishing of biodiversity, their CO2 emissions that reduce the development possibilities of poor countries, as well as their production of dangerous or polluting chemical, toxic or nuclear arms and waste. Measuring this ecological debt is a complex and controversial exercise, but over a period going from 1950 to 2000 a country like India would have accumulated a carbon credit of more than 500 billion Euros, a country like Congo between 27 and 38 billion Euros. Finally, there are good reasons to mention a historical debt, due to centuries of colonisation and slave trade that robbed poor countries of their best natural and human resources. Again, measuring this debt is necessarily a controversial issue, but taking into account the transfer of tens of millions of black people from Africa to the Americas, the amount cannot be a minor one
This fifth reason calls for some reflections on responsibility. If the debt question clearly is the consequence of a historical process, do current generations bear any responsibility for it and do they have to service this debt? It is difficult to give a positive answer to this question, since no one can inherit their ancestors' sins. But as Thomas Pogge rightly asks, then why "can they inherit the fruits of those sins, the huge economic superiority prevailing at the end of the colonial period"? The inequality built up in the colonial period made for a very unequal start into the post-colonial era. These inequalities are mirrored in the very asymmetric power relations of organisations like the World Bank and the IMF, where twenty-four African countries have less than 1,5 per cent and China less than 4 per cent of voting power, whereas the United States with less than a quarter of China's population has more than 15 per cent. In other words, inequality tends to reproduce itself.
How to Fight Income Inequality?
If there are good reasons to fight inequality, does it mean we have to aim for full income equality? While some people will answer that question affirmatively, it is widely believed that some degree of inequality is perfectly acceptable because of different talents, the impossibility of perfectly equal opportunities and the divergent reactions to the incentives of inequality. But what degree of inequality is acceptable or unacceptable, cannot be answered at a theoretical level. It is a highly political question that can only be answered in a broad democratic debate. Few people will dare to state that inequality should be unlimited or that those who are wealthy should not share with those who have nothing.
If inequality is to be limited, in what way should it be done? By and large, there are two possibilities.
First, inequality can be reduced by giving poor people a possibility to rise to the income level of middle class or wealthy people. This already goes beyond the current UN MDGs or the PRSPs of the World Bank, which only fight extreme poverty. But this very attractive solution is not possible from an ecological point of view. The human environmental impact is already superior to the regenerational capacity of the planet with an overshoot of 20 per cent. The ecological footprint of the United States is, per capita, more than ten times as high as in India. A massive rise of incomes and western-style consumption would be the kiss of death to the sustainability of the planet, though new technologies can mitigate some of the consequences.
On the other hand, inequality can be reduced by curbing the incomes of the wealthy. This implies a redistribution of income and/or wealth in order to reduce poverty and inequality. Traditional methods to realise this are philanthropy and charity, income taxes, wealth taxes and social security.
Philanthropy seems to be the preferred method of today's rich. The ten largest foundations in the United States and Europe had more than 150 billion Dollars in assets in 2005. Warren Buffet and Bill Gates, two of the world's richest men, have joined hands and now count on 60 billion Dollars. In the United States, private giving far outpaces government aid and climbed to over 70 billion Dollars in 2004. Giving clearly makes rich people happy. It not only gives them tax benefits, it also is evidence of their social usefulness. Moreover, it gives them unlimited power. There is no democratic control on how and where foundations spend their money, whereas official development aid is scrutinised to the last penny and has to prove its effectiveness.
A wealth tax is on the other extreme of rich people's preferences. Only a few countries have a real property tax, though possibilities for tax evasion are numerous.
A progressive income tax is the best redistributive method, though it is becoming less and less popular giving way to indirect taxes or flat tax rates that are paid in a disproportionate way by lower-income families.
Taxes allow governments to provide for public goods, like public services that give equal access to all to social services (education, health, environment...). They also have a role in the defence of democracy. Apart from the old maxim no taxation without representation (and vice versa), taxes allow governments to have more legitimacy, as citizens can exert pressure for efficient spending and governments can be made accountable. Taxation can become an important element in the pursuit of good governance and democratization.
Social security has a dual function: to protect people against the arbitrariness of the market place and to organise solidarity. It is an insurance mechanism and an instrument for guaranteeing incomes. In that way, it plays an important role in the redistribution of incomes even if benefits are totally derived from labour incomes instead of capital. Before the neoliberal era, the World Bank promoted social security as an important factor in the modernisation of societies, by replacing communitarian or tribal solidarities by state organised solidarities, or, to use the Durkheimian terminology, by replacing mechanic by organic solidarity.
In the relationship between rich and poor countries, taxes and social security are not applicable as yet. Here development aid could play a redistributive role, but the volume of ODA (official development aid) is too limited to have any serious impact. Moreover, a large share of aid never leaves the donor country or organisation, but is spent on overheads, staff or acquisitions in the North.
Global Redistribution and World Public Finances
If poverty reduction remains the major priority of the international community, it should be clear that this should not be limited to extreme and absolute poverty. Even if all extreme poverty could be eradicated - way beyond the Millennium Development Goals - we would not live in a more just world if, at the same time, inequality is growing. People do not revolt because they are poor, but because they experience injustice, because their dignity is oppressed, because they are marginalised and feel excluded from the moral unity of humankind.
Even fighting absolute poverty requires that inequality is tackled. Asset and income inequality are a major impediment to poverty reduction. Growth is clearly not enough and threatens to be uneven and worsen inequality. Countries with the lowest poverty rates are also the countries with the lowest inequality. The MDGs will probably not be met, due to inequality trends. Whatever way one looks at the problem of poverty and inequality, it seems obvious that redistribution should be back on the agenda and that is why the concept of World Public Finance is so important. It can only happen on economic and political grounds.
Globalisation could be the first historical process that gives a real and meaningful content to the concept of global community and of one universal humankind. In order for globalisation to benefit every one, inequality should be tackled with redistributional justice, with global taxes and global social protection, beyond poverty reduction. Poverty is not an individual problem, but a problem of the whole of society, it points to a biased distribution of incomes and that is the level where it has to be tackled.
Distributional justice requires public finances and global distributional justice requires global public finances since finances can no longer be looked at from the exclusive vantage point of national states. Moreover, neoliberal globalisation has already seriously eroded the fiscal capacities of national states. Tax evasion and tax havens will have to be fought, while global taxes will have to create a solid basis for redistribution at the global level. This redistribution can take the place of development aid, a very arbitrary and inefficient way of financing poor countries. The new thinking on development assistance with budget support is a step in the right direction but it is still too closely linked with hard conditionality. With an efficient monitoring system on the arms trade and on capital flight, with more transparency on capital movements and consciousness of the necessary sustainability of the global system and human interdependency, this is perfectly possible.
The concept of World Public Finance has a very high potential to re-orient the development debate. It allows for thinking on the provision of global public goods like the global environment, public services, water and redistributive justice itself. The concept avoids the pitfalls of a too narrow vision on development and global taxes. What has too often been forgotten in the past decade is that development does need an important capital input. Aid can be multilateralised and become a global system of income redistribution and of solidarity.
Like poverty, inequality cannot be exclusively looked at from the vantage point of the poor. Both are social and societal problems that concern all of us. Poverty and inequality, at the individual and at the country level, cannot be dissociated from wealth, they are like breathing in and breathing out, they are both part of one single system that produces both wealth and poverty.
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