Home > Uncategorized > Understanding global inequality in the 21st century

Understanding global inequality in the 21st century

from Jayati Ghosh

Inequality has increased since it caught the attention of the international community. The claims that global inequality has decreased because of the faster rise in per capita incomes in populous countries like China and India must be tempered by several considerations. National policies are crucial in this worsening state of affairs and the international economic architecture and associated patterns of trade and capital flows encourage such policies. More national policy space is required for governments, especially in developing countries, to pursue policies that would move towards more sustainable and equitable development which in turn requires significant changes in the global architecture. None of this can be done without some international coordination, and there is a need to revive a progressive and acceptable form of multilateralism that supports the working people across the world, rather than the interests of large capital.

It is apparent – but still depressing to note – that inequality has increased since it caught the attention of the international community. The Global Financial Crisis was preceded by a massive increase in within-country inequality; since then, things have got significantly worse. The Sustainable Development Goals foregrounded the reduction of inequality, and included that as a major goal; since their announcement, inequality has increased in almost all economies.

The claims that global inequality has decreased because of the faster rise in per capita incomes in populous countries like China and India must be tempered by several considerations. First, these and similar fast-growing nations have mostly experienced significant internal increases in inequality. Second, when incomes are measured in the more realistic market exchange rates than in the ultimately fanciful Purchasing Power Parity exchange rates that substantially underestimate real poverty, convergence is much less apparent. Third, the famous “Elephant Curve” that shows big increases in income at the lower middle of global distribution is based on relative increases in income, which can appear large when the base incomes are low. When absolute increases in income are considered, the bottom half or the middle of the global distribution does not fare so well at all, and there is no hump in the middle.

In any case, people everywhere experience inequality within their own societies, and this experience has clearly deteriorated in this century. Wage shares of national income have fallen sharply, and in many cases continue to fall. The top 1 per cent and top 10 per cent of the population in most countries continue to increase their shares of assets and incomes. Economic inequalities continue to interact with and intensify social inequalities.

What are the processes responsible for this worsening state of affairs, which flies in the face of so many well-intentioned and even pious declarations by governments and international organizations?  Of course, national policies are crucial in this; and many governments have engaged in policies that have reinforced relative power imbalances, and then been reflected in unequal economic outcomes. But the international economic architecture and associated patterns of trade and capital flows encourage such policies and generate processes that further accentuate inequalities of various sorts.

This happens at two levels: at the level of primary distribution of income; and at the secondary level that takes into account patterns of taxation and public subsidies and transfers. At the primary level, one significant factor generating further inequality is the creation of new “assets” whose ownership and control are concentrated, which then provide revenue streams only to the privileged. These include, most of all, intellectual property rights (IPRs) that generate rents from the control over knowledge, control that is increasingly in private corporate hands. They also include the ownership of new products like data, which have become similarly commercialized and concentrated in terms of ownership. And they include the privatization of what should be public or social assets, like those in nature.

The primary distribution has also been affected by changes in the relative bargaining power of (mostly large corporate) capital vis-à-vis labor and vis-à-vis citizens in general. This shift has generally been attributed to the forces of globalization and technological change, which are presented as inexorable changes that states are powerless to prevent, shape or mitigate. But it is important to remember that these forces and the extent of their force and impact are the result of government policies and therefore of political choices. The current popular backlash against globalization in many parts of the world possibly reflects this growing realization. Furthermore, the weakening of the bargaining power of workers and citizens relative to capital is also very much an outcome of government policies of deregulation of capital and labor markets, some of which are purely domestic in nature.

The primary distribution of income has also worsened across the world because of major changes in national and global legal and economic architectures: in particular, the creation of new “assets” in the form of intellectual property rights, the creation of new “products” like data and the privatization of what should be public or social assets like nature as well as the delivery of what should be public services. All of these have led to enhanced concentration and monopoly control, as well as increased rent-seeking activities of major companies that further accentuate both the inequalities of asset ownership and the concentration of income streams from such assets.

The secondary distribution reflects what states can do and choose to do to change the initial primary distribution. Europe was significantly different from the rest of the world in that the secondary distribution was significantly better than the primary distribution, because of progressive taxation and spending policies that provided net transfers to the poor and less well-off groups, paid for by taxes that fell more on richer individuals and companies. However, over the past decades, fiscal policy in Europe as a whole has been less progressive than in the past, so that the secondary income distribution has come closer to the primary distribution, in other words has become more unequal. In other parts of the world, governments were already less successful in causing major changes in income distribution through their fiscal policies, and this has continued and worsened in the neoliberal period.

National policies (driven by the international context as well) that have furthered secondary inequality include inadequate direct taxation and the consequent reliance on regressive indirect taxation. This is enabled by national and international tolerance of tax avoidance measures that enable illicit financial flows across countries. Inequality is further worsened by skewed public spending patterns that do not prioritize the generation of good quality employment and the universal public provision of good quality services.

What is to be done about all this? Obviously, more national policy space is required for governments, especially in developing countries, to pursue trade and industrial policies, fiscal and monetary policies and social policies that would move towards more sustainable and equitable development. But this in turn necessarily requires significant changes in the global architecture.

To start with, the current obsession with trade wars and their possible outcomes should not distract us from considering how to deal with the changing nature of cross-border trade. The United Nations Conference on Trade and Development (UNCTAD) (in the Trade and Development Report (TDR) 2018) has done considerable work on how more trade consists of “intangibles” and how a greater proportion of the value added from trade is appropriated by such intangibles, in particular by “headquarter functions” that really reflect rents and profits of multinational enterprises (MNEs). Some part of this expansion of trade in intangibles reflects real economic processes, but a significant and growing part also reflects monopoly profits and tax avoidance strategies of MNEs, that must be addressed by new global rules.

The current explosion of debt levels around the world suggests the urgency of a better, more just and effective system of sovereign debt management, in which the burden of adjustment is not disproportionately borne by citizens and workers in a country, but shared more equitably among those responsible for creating the problem, including creditors.

The problems of climate change and environmental destruction are no longer in the future, but are already upon us – and so it is imperative to improve conditions of technology transfer and enable developing countries to develop and empower their own systems of “green” technology to mitigate and adapt to these changes. This requires both a fiscal push and a push to ensure access to the relevant knowledge on reasonable terms.

This also highlights the crucial need to revamp and restructure the global IPR regime, which is no longer fit for purpose. Intellectual property appropriation and control, especially by MNEs based in advanced countries, have become huge threats not only for development and the move to equality, but also to the survival of the planet. Inequalities in the creation of and control over knowledge are reinforcing existing inequalities of power and economic outcomes, and making them much harder to overcome.

None of this can be done without some international coordination, and so all of this points to the need to revive a progressive and acceptable form of multilateralism that supports the needs and desires of working people across the world, rather than the interests of large capital. Given the current travails and loss of popular legitimacy of the existing global multilateralist system, such a move is both more necessary and more possible today.

    July 25, 2019 at 9:33 pm

    This in my opinion is something that the general public and particularly students should before engaging in economic conversations and the causes of inequalityTed

  2. July 28, 2019 at 1:15 am

    US Greens are actively developing policy around ideas such as these. Your input is maybe slower to be recognized than you thought; even so, be a little patient. Persist. What can you do without a political party? Only greens are ecological socialists concerned with extinction, as far as I know.

  3. Ken Zimmerman
    August 1, 2019 at 11:38 am

    According to Rousseau, “The first man, who, after enclosing a piece of ground, took it into his head to say, ‘This is mine,’ and found people simple enough to believe him, was the true founder of civil society. How many crimes, how many wars, how many murders, how many misfortunes and horrors, would that man have saved the human species, who pulling up the stakes or filling up the ditches should have cried to his fellows: Be sure not to listen to this imposter; you are lost, if you forget that the fruits of the earth belong equally to us all, and the earth itself to nobody! But it is highly probable that things were now come to such a pass, that they could not continue much longer in the same way; for as this idea of property depends on several prior ideas which could only spring up gradually one after another, it was not formed all at once in the human mind: men must have made great progress; they must have acquired a great stock of industry and knowledge, and transmitted and increased it from age to age before they could arrive at this last term of the state of nature. Let us therefore take up things a little higher, and collect into one point of view, and in their most natural order, this slow succession of events and mental improvements.” Eventually leading to a species of property, private property that ensured ongoing inequality.

    Rousseau’s account of societal inequality, written with little direct observation, none the less is consistent with all the ethnological evidence going back at least 5,000 years.

    The current inequality (status, prestige, social power, as well as economic) in America involves several factors. First, since the 1980s, tax policy has favored over accumulation of wealth and income by the wealthiest Americans. This is related to the shift in the focus of economic activity from manufacturing (making stuff) to finance (moving money or money surrogates around). Couple this with a radical shift in American economic mythology. In 1861, Abraham Lincoln wrote, “Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. Capital has its rights, which are as worthy of protection as any other rights. Nor is it denied that there is, and probably always will be, a relation between labor and capital producing mutual benefits. The error is in assuming that the whole labor of community exists within that relation. A few men own capital, and that few avoid labor themselves, and with their capital hire or buy another few to labor for them. A large majority belong to neither class—neither work for others nor have others working for them.” Horace Greely, editor of the New York Tribune and one of the founders of the Republican Party was a life-long friend of Lincoln and helped guide Lincoln to the Presidency. The ideals and ideas of the Republican Party that put Lincoln up for President were anti-slavery, pro-worker and sometimes overtly socialist. The New York Tribune championed the redistribution of land in the American West to the poor (e.g., Homestead Act) and the emancipation of slaves (13th Amendment). Greeley welcomed the disapproval of those who championed free markets over the interests of the working class, a class he recognized as including both the oppressed slaves of the south and the degraded industrial laborers of the north. Lincoln’s Party had changed fundamentally by 1908 when Eugene V. Debs reminded his listeners in Springfield, IL that “The Republican Party was once red [socialist]. Lincoln was a revolutionary.”

    Since the onset of the industrial revolution, finance, and “Robber Barons” after the American Civil War, capital has been working to fundamentally change what Lincoln and Greely told us about the American mythology. The World Wars destroyed this effort. Reversing the work of capital. History shows that it is violence that leads to compressions of society and more equality as result. The greater the violence, the more inequality is reduced. This violence is not all human created. There is no repertoire of benign means of compression that has ever achieved results that are even remotely comparable to those produced by the Four Horsemen.

    By the 1970s in America capital was moving toward control of national government. Reagan solidified this control. The targets of his counterstrike against expanding equality – government and society. As with Margaret Thatcher in the UK. From that point forward, it’s been downhill for labor. Peer pressure and cultural expectations shifted toward capitalists as “job creators” and champions of economic “good sense.” This push was not so much anti-labor as labor is irrelevant. Except for “skilled” labor (MDs, engineers, academics, etc.) who became adjuncts of capital. First national and then some state governments began to ignore the needs of labor (e.g., wages, working conditions, contracting). Then capital began the move to remake America, so all of this becomes permanent. This is aided by the decidedly strong move toward autocracy. And the almost paranoid desire to “deregulate” everything in America, including but not limited to the economy. Along with a virulent racism aimed at “dark” people afflicting 15%-20% of the American population.

    • Robert Locke
      August 1, 2019 at 7:51 pm

      Ken, we do not need to start with the idea of property, but with the notion of the firm. In the English-speaking world, we have a proprietary conception of the firm, which means that those who own and control firms have proprietary rights; but there is another conception of the firm that began to gain currency during the late 19th century, the organic conception, which means that the people who put up the money or list their firms on stock exchanges do not constitute the whole of a firm — to them must be added those who work in he firm and their customers. This organic view does not mean very much to individuals or families running small businesses, but it is a very important concept when dealing with very large, international firms. The organic concept of the firm is integral to the German idea of firms, and embodied in postWW laws on co-determination. Proudhon said that property is theft; but the concept is less valid when the firm is considered organically

      • Ken Zimmerman
        August 4, 2019 at 1:25 am

        Robert, correct. My statement in the original post was meant to convey the importance of the invention of private (as opposed to community or organic) property, “Eventually leading to a species of property, private property that ensured ongoing inequality.” In some parts of the world, among some peoples, private property became the dominant or only form of “ownership.” In other parts with other peoples it did not, as you point out. Which way this goes makes a big difference in the kind of lives people live. So, we need to pay close attention.

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