Widening gap

The latest World Inequality Report underscores the importance of economic policy in addressing the gulf between the haves and the have-nots, especially in developing countries like India where the top 10 per cent of earners account for 55 per cent of the national income.

A pavement dweller in Coimbatore. Inequalities in society are worsening as the rich get richer and the poor remain trapped in poverty.

THE latest report from a project tracking global inequality warns that if such inequality is not monitored and addressed with shifts in major economic policies, the consequences can be nothing less than catastrophic in political, economic and social terms.

The 300-page World Inequality Report (WIR), a collaborative effort of more than a hundred researchers, jointly authored by five academicians, one of whom is the economist Thomas Piketty, author of Capital in the Twenty-First Century , aims to contribute to what it calls the global democratic debate on economic inequality with the help of data. Economic issues, the authors write, “do not belong to economists, statisticians, government officials or business leaders. They belong to everyone and it is our chief objective to contribute to the power of the many.”

WIR 2018 is part of the World Wealth and Income Database project, launched in the 2000s. Using available data sources, the report makes a strong case for public investment in health, education, well-paying jobs and environmental protection. According to it, education by itself will not be able to tackle inequality unless it is accompanied by well-paid jobs, healthy minimum wage rates and worker representation on corporate governance bodies.

Many countries, the authors write, do not even make public micro and macroeconomic inequality data. The report assumes the inevitability and existence of a certain level of economic inequality and also that there is no “single scientific truth about the ideal levels of inequality”.

Yet, it underscores the centrality of policies and institutions in “shaping inequality”—that is, policies and institutions have a major role in determining the level and the degree of inequalities. It argues that countries with similar levels of development show different levels of inequality, which points to the crucial role that specific policies and institutions play in determining those particular trends and levels of inequality.

Marshalling the services of nearly a hundred researchers spread across the world, WIR 2018 found that income inequalities were the lowest in Europe and the highest in West Asia, and quite high in sub-Saharan Africa, Brazil and India. The share of the top 10 per cent of income earners in Europe was 37 per cent compared with 61 per cent in West Asia and 55 per cent in sub-Saharan Africa, Brazil and India.

The exponential growth in inequality post-1980 marked “the end of the post-War egalitarian regime”, especially in North America, China, India and Russia. The report focusses on the period from 1980 onwards as that decade was a turning point in inequality and redistributive policies worldwide. The early 1980s marked the trend of rising inequality and shifts in redistributive policies, led by Reaganomics in the United States and Thatcherism in the United Kingdom, while new economic policy regimes began emerging in India and China with deregulation at the core.

In the countries that were under any such egalitarian regime in the post-War period, like countries in West Asia, Brazil or sub-Saharan Africa, the levels of inequality have remained stable at “extremely high levels”. The kind of policies and trajectories that economies adopted determined the level of inequality. In the post-War period, the policies of “egalitarianism” included the development of social security systems, public education, health, social and labour policies and progressive taxation. This gave rise to a patrimonial middle class (Piketty refers to this in his seminalbook when he says it is this class that could be a stabilising factor in a situation of severe inequality leading to social conflict) and a general decline of inequality in Europe.

The rise in inequality was abrupt in Russia, presumably after the collapse of the Soviet Union, moderate in China and gradual in India—an indication of the “different types of deregulation and opening up policies pursued over the past decades in these countries”. After a historical decline from the 1920s until the 1970s, income inequality was on the ascent. In the Soviet Union, for instance, the abolition of private property, land redistribution, massive investments in public education and strict government control over the economy via five-year plans (a feature also seen in India) spread the benefits of growth from the 1920s to the 1970s.

Likewise, in India, which did not have a communist regime but pursued policies that were socialist in nature, inequalities were reduced in the same period. The economic elite, therefore, captured a much smaller share of economic growth in the late 1970s than it did in the beginning of the century. In India, the top percentile income share decreased from 20 per cent in the colonial period to 6 per cent in the early 1980s; post-deregulation and the opening up of the economy, this percentile is now at 22 per cent, a little more than what it was in the era preceding Independence. In contrast to Russia, China’s economic transition was less abrupt and more gradual.

The connection between inequality and the economic regime adopted by nations became apparent. Inequality surged in economies that were hitherto regulated; in Russia it was “steepest” as the transition to the market economy was abrupt, according to the authors. Interestingly, western Europe and the U.S. had similar levels of development in the 1980s and similar levels of concentration of wealth, but inequality rose much more sharply in the U.S. post the 1980s up to 2016.

Ownership of capital The authors say that “massive educational inequalities, combined with a tax system that grew less progressive despite a surge in top labour compensation since the 1980s and in top capital incomes in the 2000s”, accounted for the massive inequality in the U.S. Continental Europe had less wage inequality and a better progressive taxation system.

In terms of gender, income inequality between men and women had more or less declined in both areas but remained high at the top levels of distribution. The benefits of economic growth did not translate into better incomes for most. The report puts it plain and simple: economic inequality is driven largely by the unequal ownership of capital, which is either private or public owned. It acknowledges that a lot of transfer of wealth from the public to the private occurred in the 1980s, and public wealth now in rich countries is almost to the level of zero. This, the authors contend, has serious ramifications for wealth inequality among individuals because as countries became “richer”, governments became “poorer”.

The sum of private and public wealth is equal to national wealth. The authors observe that since 1970, there has been a general rise in net private wealth in most rich countries, from 200–350 per cent of national income in 1970 to 400-700 per cent today. (Net private wealth is equal to private assets minus private debt.)

The transition from communist to capitalist or quasi capitalist regimes, in particular Russia and China to an extent, resulted in private income levels matching those seen in the U.S, the U.K. and France.

Worryingly, net public wealth has declined in all countries since the 1980s, limiting the ability of governments to regulate the economy, redistribute income and mitigate rising inequality. Public assets, the report says, continue to be substantial in China, unlike in most Western countries. They have further strengthened since the 2008 economic and financial crisis.

The overall exceptions were oil-rich countries with “large sovereign funds”, such as Norway. The only consolation the authors offer is that wealth inequality levels have not declined to the levels of early 20th-century Europe or the U.S. Yet, they warn, a “business as usual” approach cannot continue, because if it did global inequality would only increase. The authors say that if countries follow the inequality trajectory followed by the European Union between 1980 and now, there would be a moderate decline in global inequality in all countries. Conversely, it would increase if they followed the model pursued by the U.S.

Tax reforms Important tax reforms like progressive taxation, the authors argue, have proved to be effective in combating income and wealth inequality at the top. By doing so, high-income earners would be less incentivised to “capture higher shares of growth”. “Tax progressivity” was sharply reduced in rich countries from the 1970s until the mid 2000s. Inheritance tax as an important tax reform was also non-existent in emerging economies. In India, for instance, it was abolished in 1986 and opinion on its reintroduction is sharply divided.

The report also acknowledges the wide prevalence of tax havens and the multiple ways of tax evasion, which were exposed in the Panama and Paradise Papers leaks. The wealth held in tax havens has increased exponentially since the 1970s and accounts for nearly 10 per cent of the global gross domestic product (GDP).

In India, income inequality has reached historically high levels, with 10 per cent of the top earners accounting for 55 per cent of the national income. The report underscores what economists on the Left have been saying for long—that the opening up of the economy has led to greater inequality. The authors express concern at the “temporary end to the publication of tax statistics between 2000 and 2010”, which, they argue, highlights the “need for more transparency of income and wealth statistics that track the long-run evolution of inequality”.

One of the running themes in the report is the lack of availability of tax records and data from governments on sources of income. Such income and wealth data will lead to a more informed democratic debate on inequality and inclusive growth in India. The economic reforms ushered in from 1991 to 2000 were the “first set of reforms”, a continuation of the mid 1980s policy shift, which “placed the private sector at the heart of the economic policies”. They were implemented “both by the Congress government and its conservative successors”.

These reforms were “concomitant with a dramatic rise in income inequality by 2000”. By 2014, the richest 10 per cent had 56 per cent of the national income. The top 1 per cent of earners comprised fewer than 800,000 individuals in 2014, in sharp contrast to the 389 million individuals who comprised the bottom half of the adult population.

The final chapters of the report discuss methods to tackle inequality and level the “superstar effect”, one where technological change and globalisation make it easier for some to have a bigger share of growth. Owing to this effect, “tiny differences in talent can translate into very large income differentials”.

The authors make a strong argument in favour of progressive taxation as such policies reduce post-tax income inequality at the top of the distribution through their highest marginal tax rates. Also, the “reduction of inequality can be further enhanced if the public spending from this tax revenue is spent on fostering equitable growth”.

The report also says that educational and employment policies are key to reducing income inequalities. It quotes International Labour Organisation (ILO) reports as saying that the share of labour in aggregate income has continued its long-term decline in the last five years and that “80 per cent of workers are paid less than the average wage of the firm in which they work”. Likewise, minimum wages and labour market regulation are critical in “tackling income inequality”, say the authors.

Equality of opportunity or the lack of it is also a growing feature. In the U.S, out of a hundred children whose parents fall in the bottom 10 per cent of income earners, only 20-30 ever make it to college. The comparative figure is 90 for children of parents who are in the top 10 per cent of earners.

Of equal concern is the decline of the share of public wealth in national wealth in several countries. In France, Germany and Japan, it is almost zero, while it is negative in the U.S. and the U.K. (Net public wealth is public assets minus public debts.) These low levels of public wealth would make it difficult to deal with either present or future income inequalities because governments would not possess the funds to invest in education, health or even the environment. Although the report does not say so, it clearly calls for more public investment and more government intervention and expenditure in public utilities to improve access to opportunity.

In short, it recommends short-term and long-term policy measures and is sharply critical of those policy measures that have resulted in giving more space for the private sector to enter in what ought to have remained a public domain. The concentration of wealth and the concomitant inequalities, economic or social, could not have arisen in a policy vacuum, but have been the outcome of a deliberate policy shift from the 1980s onwards.