The most recent Oxfam International report on "Political Capture and Economic Inequality" is damning as it concludes "Almost half of the world's wealth is now owned by just one percent of the population, and seven out of ten people live in countries where economic inequality has increased in the last 30 years. The World Economic Forum has identified economic inequality as a major risk to human progress, impacting social stability within countries and threatening security on a global scale."
For most geopolitical economists this is not news but the tone of this report is more candid and hard hitting than previous reports:
This massive concentration of economic resources in the hands of fewer people presents a real threat to inclusive political and economic systems, and compounds other inequalities – such as those between women and men. Left unchecked, political institutions are undermined and governments overwhelmingly serve the interests of economic elites – to the detriment of ordinary people.
This report was meant to send a stark message to the global public and private leaders in Davos during the World Economic Forum that concluded this past weekend: "Oxfam calls on leaders at the 2014 World Economic Forum at Davos to make the commitments needed to counter the growing tide of inequality," the report said. And the Forum is aware as they rank "severe income inequality" as amongst the top 5 most significant risks facing the world in 2014.
In fact, Pope Francis opened up the 2014 Davos World Economic Forum talks last week (read by proxy) reminding the wealthy to "…stop thinking only of yourselves"and that "modern business activity [for all its virtues, often has led to] a widespread social exclusion." Moreover, he stated that
indeed, the majority of the men and women of our time still continue to experience daily insecurity… [and] he observed that the business community often fails to take into account the dignity of every human person and the common good. I [Pope] am referring to a concern that ought to shape every political and economic decision, but which at times seems to be little more than an afterthought.
The aftermath of the global financial crisis has brought the discussion of income inequality to the forefront in both developed and emerging economies. These discussions to date have ended with little action or ineffective action primarily because we do not have a massive solution. The most recent example of knee-jerk quick fixes has come from the increasingly unpopular French President Hollande who slapped a 75 percent tax on anyone with a salary of over one million euro (approximately $1.37 million) as a Christmas holiday gift to the poor. The result of this has been a massive exodus of wealthy French declaring residency in Belgium or Luxembourg (creating local housing bubbles in both these neighboring countries).
The fact of the matter is that the Oxfam Report is right. The problem of growing income equality is systemic and tied to political influence. For the downtrodden there is lack of access not only to modern economic systems but also political systems that set the police and laws. In developed economies, the middle- and lower-middle classes are slipping towards the bottom as education becomes more expensive, credit becomes more difficult to obtain, and well-paying jobs becoming scarcer. In the U.S. we are just beginning the discussion of a bare minimum quality of life that keeps the dignity of human beings intact. Europeans are miles ahead of Americans on this issue in discussion and in deed as they contemplate a minimum quality of lifestyle standard (well beyond the notion of minimum wage as it embodies health care, education, etc). Whether the Europeans can currently afford such a lofty standard is another issue.
In emerging markets, while the middle class is growing it is accompanied by an even faster growing gap between the rich and poor. Although this uneven growth is normal for emerging markets, if they continue with the current economic growth models they are almost guaranteed to have income inequality problems as they become developed economies – as we in the West have today.
Perhaps income inequality is just a natural inevitable byproduct of efficient free markets?
There is no easy fix. There must be a balance. No one wants to disable the wealthy hard working earners and smart investors but at the same time a reset button is desperately needed as economic and political systems are failing much of the population they intended to serve.
Many claim the answer is government intervention. Clearly any real change on a massive scale will involve the government taking action but implementation must not disrupt market efficiency – rather it must increase market access. Others with a more pessimistic view claim that the lack of wealth and access to influence government policy will undermine any grass-roots movement to create the needed changes to alleviate gross income inequality.
There is a raging debate whether this can be managed better under democracies and free markets or under more autocratic governments with more central planned economies. Much like globalization was heralded in the 1980s as the miracle cure for languishing impoverished nations and global poverty, so have been the many claims that social media would be a game changer. Perhaps ... but in the very long run – just like globalization. To date, social media has served to better inform the underprivileged in HD color just how wide the chasm really is in income inequality.
Social unrest is plaguing both the developed and emerging markets at an astounding rate. Most of this unrest is rooted in economic inequities. The growing awareness of inequality and lack of access to the system where wealth can be generated (credit markets) and the increasing cost of support structures which allow you access wealth (i.e. education) are the root of social unrest in many countries.
Social unrest in any political regime, if it gets big enough, may indeed generate some changes that eventually give more people more systemic access to economic prosperity and it might even better control political corruption. Social unrest is, however, a highly disruptive tool to any country's development in the short- to medium-term. Recovery from a massive overhaul (economic or political) is arduous and the wealth benefits usually skip a generation at least.
Income inequality in the West is a problem that will probably need to get much worse before people are galvanized to use their democratic rights and vote to create change. History may still prove that income inequality is a natural state of free markets, hence, the need for a "reset button" – whatever manner of policy that might manifest to be. This is especially true if we can't find a series of workable solutions as the world's population grows from 7 billion to 9 billion in 20 years or so.