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EADI/ISS Series | Rethinking inequalities, growth limits and social injustice

By Rogelio Madrueño Aguilar, José María Larrú and David Castells-Quintana

Inequality is above all a multidimensional problem. Yet, the key question is whether it is possible to reduce inequality and to what extent. Recent evidence suggests that the growing divide between rich and poor threatens to destabilize democracies, undermines states’ economies and fuels a variety of injustices, either economically, socially, politically or ecologically. Despite certain variations, this holds true not only for rich economies, but also for low and middle income countries.


Inequality is above all a multidimensional problem. It is by all means a complex issue that requires global solutions in accordance with the challenges imposed by the 2030 Agenda for Sustainable Development. As stated in this agenda “the achievement of inclusive and sustainable economic growth […] will only be possible if wealth is shared and income inequality is addressed”.

Yet, the key question is whether it is possible to reduce inequality and to what extent. Recent evidence suggests that the growing divide between rich and poor threatens to destabilize democracies, undermines states’ economies and fuels a variety of injustices, either economically, socially, politically or ecologically. Despite certain variations, this holds true not only for rich economies, but also for low and middle income countries.

When looking a little more closely at the ongoing popular upheavals, protests and street disturbances in different countries, they have something in common: the dissatisfaction of people, mostly youths, with the uneven distribution of opportunities, limited social mobility and issues of environmental sustainability in their societies, to name only a few. After 2008, all these reasons have triggered a wave of global protest in a growing number of countries, such as Chile, Haiti, Ecuador, Spain, etc.

In particular, there seems to be a lack of confidence in the political class and the institutional setting, and their capacity to reverse these negative trends. More importantly, there is a clear awareness that the concentration of market power and wealth in the hands of the rich with linkages to political power is a fundamental problem.

Institutional solutions versus social mobilization

The open question now is whether we should pave the way for reducing inequality through the normal functioning of institutions, or through different types of mobilization and social protest? In fact, we are indeed witnessing many cases which show a preference for the second option.

Again, the aim of fighting inequality faces a daunting challenge: the combination of rising inequalities within countries and an apparent inequality trap seems to be a vicious cycle that is difficult to break; especially in the light of prevalent inconsistencies in policy objectives and institutional implementation at the national and global level: on the one hand there are mechanisms in place that reinforce economic, political or social structures that lead to persisting inequality. On the other hand, efforts are being made to connect the fight against corruption, crime and tax evasion, which may lead to a reduction of social inequalities.

This lack of policy coherence is affecting economic growth and redistribution as two key conditions to reduce the gap between the richest and the poorest. It is not only that several regions experience weak growth in per capita income, but there has also been a strong opposition to the introduction of a capital gains tax for the wealthiest across countries, who have become even richer over the past decades. This, however, translates into an emerging pattern where inequality is strongly linked with less sustained growth. At the same time the goal of economic growth itself is increasingly being questioned. Particularly in countries of the global north there are serious doubts about its compatibility with ecological sustainability.

Persisting inequalities or paradigm shift?

For all of these reasons we find ourselves facing a tough situation in which class struggle settings are becoming more frequent and severe in many areas of the world. It seems that we are either moving towards a problem of persistent inequalities or standing on the threshold of a new paradigm shift.

Therefore, there is an urging need to examine and assess the different impacts that the spiral of inequality is causing around the world. While acknowledging that some inequalities might be socially fair to a certain extent, others claim asymmetric responses in order to favour socially disadvantaged groups such as women and children. Markets alone are unable to reach an economically efficient outcome or to create a level playing field for all members of society. This means moving ahead towards a balanced social agenda that takes into account the multidimensionality of inequalities as well as the historical, legal, social, economic, climatic and intergenerational perspective.

If you are you interested in discussing global inequalities, please, consider submitting to our seed panel “Rethinking inequalities in the era of growth limits and social injustice” at the EADI/ISS General Conference 2020.

Our panel aims to find new understandings to the notion of inequalities in order to enrich the contemporary development discourse and explore global cooperative solutions. This involves new ideas, dimensions and approaches, including critical voices from the global south.


This article is part of a series launched by the EADI (European Association of Development Research and Training Institutes) and the ISS in preparation for the 2020 EADI/ISS General Conference “Solidarity, Peace and Social Justice”. It was also published on the EADI blog.


Image Credit: Alicia Nijdam on Wikicommons


RMadrueñoAbout the authors:

Rogelio Madrueño Aguilar is Research Associate at the Ibero-America Institute for Economic Research, Georg-August-Universität Göttingen, the Complutense Institute of International Studies, and the Spanish Network of Development Studies (REEDES).josemalarru.jpg

José María Larrú is Professor of Economics at the Universidad San Pablo CEU, Madrid.

foto_davidcastellsDavid Castells-Quintana is visiting professor in the Department of Applied Economics at the Autonomous University of Barcelona.

 

Micky Mouse economics: how trade theory fails but policy still sells its fairytale benefits by Irene van Staveren

Income inequality is rising globally. Trade has not delivered on its promises. Statistics and econometric analyses begin to show this failure in the global south as well as in the global north. However, IMF economists and the Trump administration stick to the usual policies of ‘workers, just get more education’ and ‘tax cuts for the rich are good for workers’. These policies are inconsistent with the evidence of increasing inequality. When even some filthy rich Americans see this and oppose their own tax cuts, it’s time that IMF economists begin to give consistent policy advice too—to the benefit of workers worldwide.


 

Worldwide, economic inequality is on the rise—both in incomes and in wealth. See, for example, the first World Inequality Report, published in December 2017. The problem occurs within developing as well as developed countries. And it occurs at a global scale: the world’s richest households get richer at a much faster rate than the global poor, while globally, middle class incomes are stagnating. The only decline in inequality we see is between developing countries as a group and developed countries as a group. But those are just country-level statistics not reflected in the everyday reality of people.

A related problem is the decreasing share of wages in national income. Again, this trend occurs in both developing and developed nations. In other words, the labour share in national income declines and the capital share in national income increases, with China being among the countries showing the strongest trend of this rising factor income inequality.

A logical question, then, is whether this trend is indeed problematic, or perhaps is inevitable for economic growth. If the rich would be more productive than the poor, thereby contributing more to economic development, as neoliberal policy-makers believe and would have us believe, rising inequality is perhaps the price to pay if we want economies to grow out of poverty. According to the dominant economic theory, the answer to the question is yes: let the rich be free to make money because by doing so, they stimulate the economy, create jobs, and let employees benefit too.

This is exactly what Donald Trump promises with his tax cut policy for the rich and large firms. The hardworking American would see his annual wages rise by a few thousand dollars if his boss’ tax bill is cut. So, when Scrooge McDuck gets richer, all inhabitants of Duckburg benefit, according to neoclassical economic theory.

The trickle-down effect: A fantasy

But institutional economists know, since Thorstein Veblen published his Theory of the Leisure Class in 1899, that such a trickle-down effect is a fantasy. The rich protect their vested interests and manage to change the institutional environment in such a way that they benefit as much as possible. Today’s statistics prove him right. The globalised economy of today, in which low-skilled jobs move around following the location choices of capital, and medium-skilled jobs get replaced by machines, the production factor labour is on the losing end everywhere.

To my surprise, this view suddenly receives support from researchers at the IMF in a working paper and in other IMF publications. They state that investment in the world’s stock of capital has become cheaper over time due to technological development. And, of course, the low interest rate in the developed world has helped too. As a consequence, more and more labour is being replaced by relatively cheap machines and software. Hence, however hard an employee or subcontractor works to add even more to the increasing labour productivity, it does not pay out in a higher wage or fee. Moreover, newly created jobs tend to be increasingly flexible jobs—a euphemism for insecure as well as low paid jobs.

This lack of power of labour over total income generated in the economy affects workers worldwide. In China, for example, wage growth is under pressure because the export products are not sold in a competitive world market to the highest bidder. Rather, the entire production process is contracted by oligopolistic multinationals controlling global value chains.

This means that just a few big companies control a whole sector, ranging from food to electronics and from personal care products to sports brands. They pay very low prices for the goods produced in local Chinese-run factories thanks to the threat to end the contract with the factory and move to another factory that keeps wage demands better in control. So, when a few big multinationals outsource their production through global value chains, local contractors, factories, sweatshops and workers are on the losing end.

So, the IMF has in fact admitted that technological development and globalisation disadvantages workers in both the developed and the developing world. This is nothing new for labour economists and development economists, but it is interesting to see this assessment coming from a mainstream and influential development institution.

Interestingly, this view goes against the dominant trade theory which has found strong support in the IMF. This theory predicts that trade is beneficial for low-skilled workers in developing countries—not only in terms of numbers of jobs but also through rising wages. The same theory also predicts that although low-skilled workers would lose jobs in developed economies, the middle class, relying on medium-skilled labour, would benefit.

Well, the disappointment expressed in populist votes by these middle class workers in the US, Europe and other western countries shows that also that prediction has not come true. The only benefit of trade for them is lower consumer prices of imported products—but what is the benefit of cheaper consumer goods if you don’t have sufficient income to buy them?

Of course wages in China have risen enormously over the past two decades. But China’s capital income has risen faster, alongside the capital earnings of shareholders of multinationals who are largely located in the developed world.

So, what was the policy advice that the IMF report came up with? What was the conclusion of the IMF in the face of evidence provided by their in-house researchers promoting this dominant theory that trade and elite development would simultaneously benefit workers and the poor? Amazingly (or not), the IMF’s report’s main conclusion was that workers worldwide should keep on investing in their education. As if one had advised the passengers of the Titanic to move up a deck to stay safe.

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What surprises me most is that it has apparently not occurred to the IMF economists that there is a gap between their recommendation and the findings from their own study. I almost feel sorry for those poor IMF researchers. How attached the IMF economists are to out-dated theories. When will they open their eyes for the benefits of shifting taxation from labour income to capital earnings? Or to the disadvantages of free trade of goods and free capital flows when at the same time labour migration is severely restricted?

Perhaps they should watch the short YouTube video by a Disney heiress, Abigail Disney, who informs us about the immoral and ineffective tax cuts for the rich in the US. She states how appalled she is that her already relatively low tax bill is cut even further. She is convinced that this will not help middle class Americans in any way, let alone those with low incomes without access to affordable healthcare. In conclusion, if such rich individuals in the entertainment industry can relinquish their Scrooge McDuck personas to see through the rhetoric, IMF economists should do so too.


Picture credit: Fibonacci Blue. Photo has been edited by cropping and applying a filter.


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Irene van Staveren is Professor of Pluralist Development Economics at the ISS. Professor Van Staveren’s field of research included feminist economics, heterodox economics, pluralist economics and social economics. Specifically, her field of expertises lie in ethics and economic philosophy.