Growing Inequality Under Global Capitalism

Jomo Kwame Sundaram and Anis Chowdhury

Income and wealth inequality has increased in recent decades, but recognition of the role of economic liberalization and globalization in exacerbating inequality has never been so widespread. The guardians of global capitalism are nervous, yet little has been done to check, let alone reverse the underlying forces.

Global elite alarmed by growing inequality

The World Economic Forum (WEF) has described severe income inequality as the biggest risk facing the world. WEF founder Klaus Schwab has observed, “We have too large a disparity in the world; we need more inclusiveness… If we continue to have un-inclusive growth and we continue with the unemployment situation, particularly youth unemployment, our global society is not sustainable.”

Christine Lagarde, IMF Managing Director, told political and business leaders at the WEF, “in far too many countries the benefits of growth are being enjoyed by far too few people. This is not a recipe for stability and sustainability.” Similarly, World Bank President Jim Yong Kim has warned that failure to tackle inequality risked causing social unrest. “It’s going to erupt to a great extent because of these inequalities.”

In the same vein, the influential US Council of Foreign Relations’ journal, Foreign Affairs, carried an article cautioning, “Inequality is indeed increasing almost everywhere in the post-industrial capitalist world…. if left unaddressed, rising inequality and economic insecurity can erode social order and generate a populist backlash against the capitalist system at large.”

Much ado about nothing?

Increasingly, the main benefits of economic growth are being captured by a tiny elite. Despite global economic stagnation for almost a decade, the number of billionaires in the world has increased to a record 2,199. The richest one per cent of the world’s population now has as much wealth as the rest of the world combined. The world’s eight richest people have as much wealth as the poorer half.

In India, the number of billionaires has increased at least tenfold in the past decade. India now has 111 billionaires, third in the world by country. The largest number of the world’s abject poor also live in the same country — over 425 million, a third of the world’s poor, and well over a third of the country’s population.

Africa had a resource boom for a decade until 2014, but most people there still struggle daily for food, clean water and health care. Meanwhile, the number of people living in extreme poverty, according to the World Bank, has grown substantially to at least 330 million from 280 million in 1990!

In Europe, poor people bore the brunt of draconian austerity policies while bank bailouts mainly benefited the moneyed. 122.3 million people, or 24.4 per cent of the population in the EU-28, are at risk of poverty. Between 2009 and 2013, the number of Europeans without enough money to heat their homes or cope with unforeseen expenses, i.e., living with “severe material deprivation,” rose by 7.5 million to 50 million people, while the continent is home to 342 billionaires!

In the United States, the income share of the top one per cent is at its highest level since the eve of the Great Depression, almost nine decades ago. The top 0.01 per cent, or 14,000 American families, own 22.2 per cent of its wealth, while the bottom 90 per cent, over 133 million families, own a meagre four per cent of the nation’s wealth. The top five per cent of households increased their share of US wealth, especially after the 2008 financial crisis. Meanwhile, the richest one per cent tripled their share of US income within a generation.

This unprecedented wealth concentration and the corresponding deprivation of others have generated backlashes, arguably contributing to the victory of Donald Trump in the US presidential election, the Brexit referendum, the strength of Marine Le Pen in France, the Alternative for Germany, and the ascendance of the Hindutva right in secular India.

“Communist” China and inequality

Meanwhile, China has increasingly participated in and grown rapidly as inequality has risen sharply in the ostensibly communist-ruled country. China has supplied cheaper consumer goods to the world, checking inflation and improving living standards for many. Part of its huge trade surplus — due to relatively low, albeit recently rising wages — has been recycled in financial markets, mainly in the US, which helped expand credit at low interest rates there.

Thus, cheap consumer products and cheap credit have enabled the slowly shrinking “middle class” in the West to mitigate the downward pressure on their living standards despite stagnating or falling real wages and mounting personal and household debt.

China’s export-led development on the basis of low wages has sharply increased income inequality in the world’s largest country for more than three decades. Beijing is the new “billionaire capital of the world,” no longer New York. China now has 594 billionaires, 33 more than in the US!

Since the 1980s, income inequality in China has risen faster than most! China now has one of the world’s highest levels of income inequality, rising mainly in the last three decades. The richest one per cent of households own a third of the country’s wealth, while the poorest quarter own only one per cent. China’s Gini coefficient for income rose to 0.49 in 2012 from 0.3 over three decades before when it was one of the most egalitarian countries in the world. Another survey put China’s income Gini at 0.61 in 2010, greatly exceeding the US’s 0.45!

Originally published by Inter Press Service.

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Poverty, Vulnerability and Social Protection

Jomo Kwame Sundaram

According to the World Bank, the MDG target of halving the share of the poor was achieved by 2008, well in advance of 2015, the target year. However, increased unemployment and lower incomes in recent times remind us that poverty is not an unchanging attribute of a shrinking group, but rather, a condition that billions of vulnerable persons risk experiencing.

Despite the various shortcomings of money measures of poverty, they nevertheless reflect the extent of vulnerability. For example, the estimated number of poor globally in 2012 more than doubles from 902 million to 2.1 billion when one raises the poverty line by 63% from $1.90/day to $3.10/day per person, suggesting that a very large number of those not deemed poor by the World Bank are very vulnerable to external economic shocks or changes in personal circumstances, such as income losses or food price increases.

Of the world’s poor, three-quarters live in rural areas where agricultural wage workers suffer the highest incidence of poverty, largely because of low productivity, seasonal unemployment and low wages paid by most rural employers. Vulnerability and economic insecurity have increased in recent decades with rising insecure, casual and precarious jobs involving part-time employment, self-employment, fixed-term work, temporary work, on-call work and home-working – often mainly involving women.

Such trends have grown with labour market liberalization, globalization, and declining union power. To make matters worse, macroeconomic policies in recent decades have focused on low inflation, rather than full employment, while limited social protection has exacerbated economic insecurity and vulnerability.

Additionally, lower economic growth rates, following the global financial crisis, would push 46 million more people into extreme poverty than expected before the crisis. This figure was later revised to 64 million, implying over 200 million people fell into extreme poverty due to food-fuel price hikes and the global financial crisis.

While some of these figures were subsequently revised downward, they suggest widespread vulnerability and economic insecurity, due to the inability of governments to respond with adequate counter-cyclical policies and in the absence of comprehensive universal social protection measures. During the East Asian financial crisis of 1997-1998, the official poverty rate in Indonesia shot up from 11% to 37% in just one year following the massive depreciation of the Indonesian rupiah.

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World Bank Researchers Punch South Africa’s Poor and Coddle the Rich

Subsidized white capitalists and oppressed activists are amongst those who must “not be named”

By Patrick Bond

“South Africa can claim to have one of the world’s most redistributive public purses,” argues Johannesburg Business Day newspaper associate editor Hilary Joffe, drawing upon World Bank research findings. But not only is this nonsense. The Bank’s silences about poverty and inequality speak volumes.

To illustrate this in next-door Lesotho, Stanford University anthropologist James Ferguson’s famous book The Anti-Politics Machine criticized the World Bank’s 1980s understanding of Lesotho as a “traditional subsistence peasant society.” Apartheid’s migrant labor system was explicitly ignored by the Bank, yet remittances from Basotho workers toiling in mines, factories and farms across the Caledon River accounted for 60 percent of rural people’s income.

Ferguson explained: “Acknowledging the extent of Lesotho’s long-standing involvement in the modern capitalist economy of South Africa would not provide a convincing justification for the ‘development’ agencies to ‘introduce’ roads, markets and credit.”

Using Michel Foucault’s discourse theory, Ferguson showed why some things cannot be named. To do so would violate the Bank’s foundational dogma, that the central problems of poverty can be solved by applying market logic. Yet the most important of Lesotho’s market relationships – exploited labor – was what caused so much misery.

Three decades on, not much has changed. Today, the Bank’s main South Africa research team reveals a similar “Voldemort” problem. Like the villain whose name Harry Potter dared not utter, some hard-to-hear facts evaporate into pregnant silences within the Bank’s latest “South African Poverty and Inequality Assessment Discussion Note.” Bank staff and consultants are resorting to extreme evasion tactics worthy of Harry, Ron and Hermione.

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Geographical Poverty Traps in Rural Areas: A Growing Global Problem

Edward Barbier

More than one-third of the rural population in developing countries lives on less-favored agricultural land, according to global spatial datasets from 2000. How, then, does this distribution influence the incidence of poverty in these countries?

To address this question, our paper “Poverty and the Spatial Distribution of Rural Population” investigates two types of spatial distributions across 83 developing countries over a 10-year period: rural populations on less-favored agricultural lands and in less-favored agricultural areas. Less-favored agricultural lands are constrained by difficult terrain, poor soil quality, or limited rainfall. Less-favored agricultural areas include less-favored agricultural lands plus favorable agricultural land with limited access to markets (i.e. five hours or more travel to a market city with a population of at least 50,000).

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Land Degradation, Less Favored Lands and the Rural Poor: A Growing Global Problem

Edward B. Barbier

This summer, I completed with a graduate student of mine a major report for the Economics of Land Degradation Initiative, which is entitled Land Degradation, Less Favored Lands and the Rural Poor: A Spatial and Economic Analysis.  This study had three objectives:

  • To determine the spatial distribution of global rural populations on less favoured agricultural land and in less favoured agricultural areas from 2000 to 2010;
  • To determine the spatial distribution of global rural populations on degrading and improving agricultural land from 2000 to 2010;
  • To analyse how these spatial distributions affect poverty in developing countries.

The table below summarizes our findings over 2000 to 2010 for the distribution of rural populations on less favoured agricultural land (LFAL), in less favoured agricultural areas (LFAA), degrading agricultural land and improving agricultural land.

A sizable proportion of the rural population in developing countries is concentrated on LFAL, which are subject to low productivity and degradation due to steep slopes, poor soil quality or limited rainfall.   In 2000, over 1.3 billion rural people in developing countries, representing almost 36 per cent of the rural population, were located on these lands, and their numbers increased to 1.5 billion in 2010 (35% of the rural population).

Summary of spatial distribution of global rural population, 2000 to 2010

Developing countries are all low and middle-income economies with 2012 per capita income of US$12,615 or less (World Bank 2014).

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September 15, 2014 | Posted in: Uncategorized | Comments Closed

United Progressive Alliance-2 and Welfare Schemes

C.P. Chandrasekhar and Jayati Ghosh

A perception has been gaining ground that the United Progressive Alliance (UPA) coalition suffered politically because of its commitment to welfare schemes and “handouts” to the poor rather than economic growth. The murmurs began during the election campaign—fed by the BJP’s strident denunciation—and have gained ground especially since the UPA’s and Congress Party’s comprehensive electoral defeat nationally.

The argument goes something like this: The past five years of UPA-2 were years of “policy paralysis” in which economic growth slowed down because projects were stalled by environmental and other hurdles and slow clearances; and no new “reforms” were undertaken such as deregulating whatever little is left of formal employment in the organised sector. Instead the government frittered away time and resources on “populist” schemes that were corrupt and wasteful, which the country cannot afford, and which anyway the people do not really want. This argument, in various forms, is being repeated so often that once again people assume that it must be true.

In fact it is wrong on practically all counts. To begin with, while the elections do indeed reveal the extent of public dissatisfaction with the UPA, only one-fifth of the electorate actually voted for the BJP, and many of them did so because of effective communal polarization in the Hindi heartland. The slower growth of the second UPA tenure was related not only to effects of the global economic crisis but equally the result of the mess in the infrastructure sector, with massively leveraged investments not bearing sufficient fruit for private sector interest to be retained and a looming crisis of bad debt especially for power and aviation loans of public sector banks.

Most of all, the argument that UPA-2 wasted the country’s resources on “populist” schemes is both conceptually flawed and empirically unjustified. It is analytically misconceived because it does not recognize the crucial role played by social spending on countercyclical consumption stabilizing, as well as on ensuring domestic demand and positive multiplier effects on economic activity, or the impact on future productivity because of a better fed and healthier population.

But it is also empirically wrong: UPA-2 did not really spend on these important schemes. In fact, it can be forcibly argued that the Congress and its allies would have been much better off if the government had actually put its money where its mouth was. As it happens, the UPA parties barely trumpeted any of these measures in their electoral campaigns, whether because of a lack of conviction in them or because of the guilty feeling that they had not lived up to their own promises.

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Why is Calorie Intake Falling if Incomes are Rising in India?

Deepankar Basu and Amit Basole, Guest Bloggers

Deepankar Basu is an assistant professor of economics at the University of Massachusetts-Amherst. Amit Basole is an assistant professor of economics at the University of Massachusetts-Boston. This blog post summarizes the findings from their recent Political Economy Research Institute (PERI) working paper “Fueling Calorie Intake Decline: Household Level Evidence from Rural India.” The full paper is available here.

The Indian “Calorie Consumption Puzzle” has attracted a lot of attention recently. The puzzle is that average per capita calorie intake has been declining over the past few decades, even as real per capita expenditures and incomes have been rising. According to National Sample Survey (NSS) data, between 1983 and 2009-10, average inflation-adjusted monthly expenditure increased by 28% but calorie intake declined by 16% in rural India (Figure 1). Since, at any given point in time, calorie intake tends to increase with income, the Indian time trend is unexpected and puzzling.

Figure 1: Average real monthly per capita expenditure (MPCE) and calorie intake in rural India. Real MPCE is obtained by deflating nominal MPCE by the consumer price index for agricultural labourers (with 1986-87 as the base year). Source: Report 508 and 538 of the National Sample Survey Organization, India and authors’ calculation from unit-level data.

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Gujarat v. UPA: Models of Non-Governance?

Sunita Narain

The 2014 general election, it would seem, is becoming a referendum on the so-called Gujarat model and the something-UPA model. In the heat, dust and filth of elections, rhetoric is high, imagery is weak and facts are missing. Very broadly, the Gujarat model is seen to be corporate-friendly, with emphasis on economic growth at any cost and little focus on social indicators of development. The UPA [United Progressive Alliance] model, on the other hand, is seen to promote distributive justice and inclusive growth. And our conclusion could well be that this model does not work because we see little difference—high inflation pinches our purse; poverty and malnutrition persist; and crony capitalism thrives.

In this way, the referendum on May 16, when the counting is done, could well be seen as a go-ahead to rampant growth without a human face. But this, I believe, will be missing the key point.

If there is a referendum, it must be on the lack of delivery of programmes for social justice and inclusive growth. It cannot be a decision against the idea of rights-based development. That would be disastrous for India. So, what we need to do is to think about what went wrong. And the next government’s agenda must be to fix it. Not to throw out the baby with the bathwater.

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Quality Not Quantity: European Parliament Report on Role of Private Finance

Jesse Griffiths, Guest Blogger

Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad). He was one of the co-authors, together with Matthew Martin (Development Finance International), Javier Pereira, and Tim Strawson (Development Initiatives) of the European Parliament’s report “Financing for Development Post-2015: Improving the Contribution of Private Finance.”

The European Parliament has just released a major report with a clear message for all those engaged in the growing debate about the role of external private finance in development: quality matters far more than quantity. As the post-2015 debate on financing development continues, and the UN gears up for a major Financing for Development conference in 2015 or 2016, this timely paper – authored by four experts (I was one of the co-authors) gives clear recommendations on how European governments can ensure that fighting poverty stays at the heart of this agenda.

The Current Picture

Firstly, here are the main findings of the report’s review of all available data on global private finance flows:

  • Domestic private investment is significant and growing. Public and private investment, taken together, have grown as a proportion of GDP, from 24.1 % in 2000 to 32.3 % in 2011.
  • Outflows of private financial resources are extremely large. Most are not productive investments in other countries but repayments on loans (over USD 500 billion in 2011), repatriated profits on foreign direct investment (FDI) (USD 420 billion) or illicit financial flows (USD 620 billion).
  • Figures greatly overstate the real net financial private flows to developing countries. Foreign Direct Investment (FDI) is the largest resource flow to developing countries, but outflows of profits made on FDI were equivalent to almost 90% of new FDI in 2011. In addition, FDI includes the reinvestment of earnings from within the ‘destination’ country: not an inflow.

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Beyond the Mysteries of the "Middle-Income Trap"

Erinç Yeldan

The concept of the “middle-income trap” had been brought into fashion by Barry Eichengreen and colleagues (see their recent NBER Working Paper). The concept is used to describe the challenges, for countries with GDP per capita of around $16,000 (at 2005 prices), in achieving productivity growth and key institutional transformations.

Many economists have taken note of the fact that, as economies converge to this middle-income level, “easily-accessible” sources of growth based on the transfer of virtually unlimited supplies of labor from rural agriculture to urban centers and towards capital-investment-led high profit sectors gradually lose their stimulating impact. Technologies grow mature and finally become worn out. After this threshold is reached, sources of growth must be derived from technological and institutional advances and productivity gains, which can only be achieved by investments in human capital, research and development (R&D), and institutional reforms. This, however, is no easy task, and countries often get “trapped” at this stage of development, hence the middle-income trap.

Yet, as such, the middle-income trap is an average concept defined by national boundaries. Recent work reveals, however, that divergences persist, and often times are reinforced, between regions embedded within national economies and even within municipalities. In many instances, poverty-stricken regions co-exist side by side with rich and highly productive regions. The persistent co-existence of such divergent structures leads us to ask whether poverty is in fact being reproduced by the workings of the market mechanism favoring high-income regions. This observation has its roots in a long tradition in development economics of duality and dependency theories.

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