People's Democracy

The Economist 'Discovers' Growing Inequalities

 

R Arun Kumar

 

THE Economist in its recent issue (October 12, 2012) published a Special Report on the growing inequalities worldwide. It is indeed a reiteration of what we had been saying all these days – the world is increasingly becoming inequitable. The Report states “...within many countries income gaps have widened. More than two-thirds of the world’s people live in countries where income disparities have risen since 1980, often to a startling degree” and further “These days the inverted U has turned into something closer to an italicised N, with the final stroke pointing menacingly upwards”. Worried about the consequences, the Report calls for 'modern politics' to “come up with ways of mitigating inequality without hurting economic growth”.

 

To emphasise its case, it extensively surveys the world and quotes data. “Many countries, including Britain, Canada, China, India and even egalitarian Sweden, have seen a rise in the share of national income taken by the top 1 per cent. The numbers of the ultra-wealthy have soared around the globe. According to Forbes magazine’s rich list, America has some 421 billionaires, Russia 96, China 95 and India 48. The world’s richest man is a Mexican (Carlos Slim, worth some $69 billion). The world’s largest new house belongs to an Indian. Mukesh Ambani’s 27-storey skyscraper in Mumbai occupies 400,000 square feet, making it 1,300 times bigger than the average shack in the slums that surround it (here it compares with the house of a US railway magnate, the industrial leader and says that his house in 1889, “was 300 times bigger than the average dwelling of its day”).

 

Tracing the historic changes of increasing inequalities it states: “Before the industrial revolution, wealth gaps between countries were modest: income per person in the world’s ten richest countries was only six times higher than that in the ten poorest. The industrial revolution widened the gaps both between countries and within them. As incomes accelerated in western Europe and then America, the distance between these countries and others grew. So, too, did internal income disparities”.

 

About the present, the Report says: “The huge changes that have swept the world economy since 1980 – globalisation, deregulation, the information-technology revolution and the associated expansion of trade, capital flows and global supply chains – narrowed income gaps between countries and widened them within them at the same time”. There is only one exception to this general worldwide phenomenon, “The biggest exception to the general upward trend is Latin America, long the world’s most unequal continent, where Gini coefficients have fallen sharply over the past ten years”.

 

Furthering its case on the necessity to immediately address the question of inequality, it quotes IMF, ADB and even World Economic Forum, held every year in Davos. “Research by economists at the IMF suggests that income inequality slows growth, causes financial crises and weakens demand. In a recent report the Asian Development Bank argued that if emerging Asia’s income distribution had not worsened over the past 20 years, the region’s rapid growth would have lifted an extra 240 million people out of extreme poverty...A survey for the World Economic Forum meeting at Davos pointed to inequality as the most pressing problem of the coming decade (alongside fiscal imbalances). In all sections of society, there is growing agreement that the world is becoming more unequal, and that today’s disparities and their likely trajectory are dangerous”.

 

As the above extensive quotes from the Report show, it had got the diagnosis about the disease inflicting our world correct. It even accepted that growing inequalities lead to a contraction of demand – as the purchasing power of the majority people is crippled and when what is produced is not purchased, crisis is the result. The Report grudgingly and with a lot of difficulty accepts the historic role played by the labour organisations in ensuring the reduction of inequalities. “The growth of the industrial workforce brought increasing political pressure for redistribution. Communism was the most dramatic result. But capitalist economies changed profoundly too. In response first to the formation of workers’ unions and the rise of socialist parties and then to the Depression, politicians on both sides of the Atlantic introduced progressive taxes, government regulation and social protection...In most countries the share of the top 1 per cent fell persistently from the 1920s until the late 1970s”. It goes on, “In America disparities declined fastest in the 1930s and 1940s, in Europe after the second world war. America’s Gini coefficient reached a low of around 0.3 in the mid-1970s, and Sweden’s hit 0.2 at about the same time. In most advanced economies the gap between rich and poor in the 1970s was a lot narrower than it had been in the 1920s...By the 1970s average income per person in the ten richest countries was around 40 times higher than that in the ten poorest”.

 

LATIN AMERICA

BUCKS THE TREND

On the role of the governments in reducing the inequalities too it speaks about the role played by those in Latin America. “Governments around Latin America have reinforced the narrowing of wage gaps with social spending targeted at people with the lowest incomes. These include more generous pensions and conditional cash transfers – schemes that offer payment to the poorest families in return for meeting specific conditions, such as making sure their children go to school”. Explaining this point, “Countries from Argentina to Bolivia have introduced non-contributory pension schemes – in effect, a promise of government support for the elderly. Minimum wages across the continent have soared. Brazil’s has risen by more than 50 per cent in real terms since 2003. And since pension benefits are linked to the minimum wage, the two trends reinforce each other”.

 

For how these measures had led to reduction of inequality it quotes an analysis by Ms Lustig, Luis López-Calva of the World Bank and Eduardo Ortiz-Juarez of the United Nations Development Programme, which suggests that “narrower wage gaps explain most of the reduction in inequality throughout the region”. The result according to the Report is “Poor people’s incomes have surged over the past decade, leading to a big drop in inequality. In most Latin American countries the Gini coefficient in 2010 was lower than in 2000. The region’s average, at 0.5, is down from almost 0.54 a decade ago, and lower than at any time in the past 30 years...Although Latin America saw only half the average GDP growth of emerging Asia over the past ten years, its poverty rate fell by 30 per cent. Around a third of the decline is due to improvements in income distribution”.

 

The Report was forced to accept that due to the actions of the many progressive governments in the region for the first time in history even, “disadvantaged indigenous people have made big gains”. Of course, the 'devil' – the progressive governments in the region led by Chavez (Venezuela), Morales (Bolivia), Correa (Ecuador), Rousseff (Brazil) and others – is not given the due.

 

Now the most interesting and important part of the Report is its analysis of the policies in the US and the growing inequalities in that country. It bemoans that “According to Karla Breceda, Jamele Rigolini and Jaime Saavedra, three economists at the World Bank, Latin American governments, on average, now spend a larger share of GDP on education for the poorest 20 per cent of children than does the United States”.

 

Critically evaluating the policy pursued by the successive governments in the US the Report states: “Social spending is often less about helping the poor than giving goodies to the relatively wealthy. In America the housing subsidy to the richest fifth (through mortgage-interest relief) is four times the amount spent on public housing for the poorest fifth...In the rich world the cronyism is better-hidden. One reason why Wall Street accounts for a disproportionate share of the wealthy is the implicit subsidy given to too-big-to-fail banks”.

 

REAL

RESULTS

Detailing the results of such policies it says, “The democratisation of living standards has masked a dramatic concentration of incomes over the past 30 years, on a scale that matches, or even exceeds, the first Gilded Age. Including capital gains, the share of national income going to the richest 1 per cent of Americans has doubled since 1980, from 10 per cent to 20 per cent, roughly where it was a century ago. Even more striking, the share going to the top 0.01 per cent – some 16,000 families with an average income of $24 million – has quadrupled, from just over 1 per cent to almost 5 per cent. That is a bigger slice of the national pie than the top 0.01 per cent received 100 years ago...Over the past 30 years incomes have soared both among the wealthy and the ultra-wealthy. The higher up the income ladder, the bigger the rise has been. The result has been a huge, and widening, gap – financially, socially and geographically – between America’s elite and the rest of the country”.

 

The Report continues, “Between 1979 and 2007 (just before the financial crisis) the real disposable income after taxes and transfers of the top 1 per cent of Americans more than quadrupled, a cumulative rise of over 300 per cent. Over the same period the bottom fifth’s income rose by only 40 per cent. The middle class shrank, both as a share of the population and geographically. Only 40 per cent of American neighbourhoods now have an average income within 20 per cent of the national median, compared with 60 per cent in the 1970s”. These are the real results of the neo-liberal policies initiated from the 1970s.

 

Analysing that the recent economic recession too did not harm the interests of the America's wealthy much, it states: “America’s wealthiest fared poorly in 2008 and 2009, largely because the tanking stock market ravaged their bonuses and share options...But the sluggish recovery has brought back the old pattern. More than 90 per cent of all income gains since the recession ended have gone to the top 1 per cent”.

 

Directly pointing to the naked class bias of the US governments (of course, without using these terms), the Report indicts saying: “The combination of tax loopholes, bank bail-outs and massive lobbying has led many observers to conclude that America’s growing inequality has political roots. The wealthy, in this logic, control the political system and rig it to their advantage”. No wonder, according to the Report itself '80 per cent of the total donations to the parties comes from fewer than 200 donors'.

 

The contrast these details provide with the recent elections in Venezuela, where Chavez had won once again cannot be lost. Chavez, who was much despised by the Economist and whose victory was grudgingly accepted, depended on the majority poor for his victory. His campaign was run by the finances collected from them – small amounts of voluntary contributions. We should also remember that Chavez' policies of utilising the country's oil revenues for poverty elevation were earlier criticised by the Economist as mindless 'populism'. This only explains the class bias of the Economist.

 

The Report is an indicator of the serious struggle waged by the ruling classes to wriggle out of the current global economic crisis without tilting the class balance of forces. This dilemma is reflected even in the prescriptions it tries to provide to erase the inequalities, not out of concern for the poor, but out of necessity to save the skin of its class masters – the capitalists. No amount of reform can save capitalism.