ROME, Sep. 8, 2015 (IPS) – Recent years have seen a remarkable resurgence of interest in economic inequality, thanks primarily to growing recognition of some of its economic, social, cultural and political consequences in the wake of Western economic stagnation.
The unexpectedly enthusiastic reception for last year’s publication of Thomas Piketty’s “Capital in the Twenty-First Century” underscores this sea change.
New thinking on social protection recognises that most of the poor and vulnerable in developing countries are outside the formal economy, with almost four-fifths of the poor living in the countryside.
Piketty has correctly renewed attention to the connections between the functional and household/individual distributions of income as well as to wealth inequality. Clearly, the distribution of wealth (capital, real property) is the major determinant of the functional distribution of income.
And by textbook economics’ definition, profit maximisation involves capturing economic rents of some kind – from finance, monopolistic intellectual property rights (IPRs), ‘competitive advantage’, producer surplus, etc., presumably thanks to successful rent-seeking, by influencing legislation, regulation, public policy, public opinion and consumer preferences.
As is understandable and the norm, Piketty’s focus is on inequality at the national level, rather than at the global level. But Branko Milanovic and others have shown that about two-thirds of overall world interpersonal or inter-household inequality is accounted for by inter-country inequality, with the remaining third due to what may be termed class and other intra-national inequalities.
International inequality
There are many competing explanations for international inequalities. Historical differences in capital accumulation, including public investments, and productivity are commonly invoked to explain different economic capacities, capabilities and incomes.
But frequently unsustainable foreign investments also lead to significant net outflows, greatly diminishing the net benefits from additional economic capacities. Financial flows to the settler colonies from the late 19th century were exceptional in this regard. Generally, a small share of foreign direct investment actually enhances economic capacities, instead mainly contributing to acquisitions and mergers.
Financial globalisation in recent decades, especially capital market flows, have not ensured sustained net flows from capital-rich to capital-poor economies, but has instead worsened financial volatility and instability, increasing the frequency of crises with traumatic effects for the real economy, and growth sustainability.
Contrary to the conventional wisdom that international trade lifts all boats, it has generally favoured the richer countries at the expense of their poorer counterparts. For well over a century, except during some notable periods and some rare minerals more recently, the prices of primary commodities have declined against manufactures.
This has been especially true of tropical agriculture compared to temperate products, as productivity gains have accrued to consumers more than to producers. In recent decades, cut-throat competition has meant a similar fate for developing country manufactured exports compared to the large marketing margins of manufactures from developed economies.
Social protection
As the deadline for the Millennium Development Goals approaches, the call to address inequality as a crucial challenge for development has emerged as an issue to be addressed in the post-2015 development framework.
Inequality gradually came back into development debates after the United Nations, the World Bank and the IMF focused flagship publications on this issue a decade ago, with the publication of the UN 2005 Report on the World Social Situation entitled The Inequality Predicament, the World Development Report 2006, and the 2007 World Economic Outlook on Globalization and Inequality.
The ongoing effects of the global financial and economic crisis since 2008 have reinforced recognition that inequality has been slowing not only human development, but also economic recovery. But this has not led to any fundamental change in economic policy thinking or a major commitment to redress inequality at the global or even national level, except perhaps by improving taxation.
Instead, it has led to a consensus to establish a global social protection floor, recognising not only that poverty and hunger in the world will not be eliminated by more of the same economic policies, especially with the currently dim prospects for sustained economic and employment recovery and growth.
Historically, the welfare state emerged in developed countries to address deprivations in the formal economy – retirees, retrenched workers, military veterans and mothers among others. Social protection and other fiscal interventions do not fundamentally challenge wealth or income distribution, and current thinking is mindful of the potentially unsustainable burden of a welfare state.
New thinking on social protection recognises that most of the poor and vulnerable in developing countries are outside the formal economy, with almost four-fifths of the poor living in the countryside. The new interventions thus seek to accelerate the transition from protection to production, for greater resilience and self-reliance.
Jomo Kwame Sundaram is the coordinator for Economic and Social Development at the Food and Agriculture Organization and received the 2007 Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.
