Tackling inequality, nationally and globally

The growing rich-poor gap is recognized as a major social and political problem, but what measures can be taken nationally and internationally to address this issue?

by Martin Khor

Economic inequality is now identified as one of the biggest challenges of our times.

In February, US presidential candidate Bernie Sanders, a rank outsider just a few months ago, won the Democratic primary in New Hampshire state by a landslide against Hillary Clinton, with a campaign theme of fighting inequality.

How do we tackle the seemingly intractable and growing problem of the rich-poor gap?

One major approach is to identify and act on how the rich have been accumulating their wealth through unwelcome ways such as rent-seeking activities, unhealthy speculation and tax avoidance.

In his latest book, Rewriting the Rules of the American Economy, Joseph Stiglitz pinpoints rent-seeking, financialization of the economy, poor communities’ lack of economic opportunities, and ineffective regulation and government oversight as some of the causes of inequality, and lays out suggestions to tackle these.

The global financial crisis exposed the finance industry’s many blatant excesses. Bankers sold low-grade financial products disguised as top-notch investments to unwitting customers. Leading banks even illegally manipulated the formulation of the sacrosanct international benchmark interest rates such as LIBOR. Banks and funds profit by speculating on the currency markets.

Many in the financial sector have made extreme levels of wealth. An obvious policy measure is to reduce or stop the rent-seeking and speculative activities. However, there has been only little and ineffective action by Western governments.

Another way to tackle inequality is the use of progressive taxation coupled with public investments benefitting the poor and average citizens. However, there has been a recent trend of reducing the taxes of the rich and the companies, while shifting some of the burden to the poor and middle classes (for example, through regressive sales taxes).  This trend should be reversed, and the tax incidence for the wealthy increased.

Tackling tax avoidance and capital flight is another measure. According to Oxfam, 30% of Africa’s financial wealth is held offshore, resulting in a loss of $14 billion in tax revenue. And tax dodging by multinational companies cost developing countries at least $100 billion a year.

Thus, international cooperation to prevent tax avoidance and using the increased tax revenues for social programmes would be important actions against inequality.

Most developing countries have large rural populations, which face acute problems of unequal land ownership and exploitation by informal moneylenders and middlemen. Pro-poor policies are thus necessary, including land reform with access to land for poor farmers; and fair credit and marketing facilities, which lower the cost of borrowing and increase the share of revenue to rural producers.

Providing jobs and livelihoods for all is an effective strategy to reduce poverty and inequality. Full employment should thus be made a key economic priority. Besides spreading income to the whole population, a full-employment situation will also boost wages as employers fight to obtain labour.

Public sector investment which includes a subsidy element is needed to ensure the poor and middle classes have access to education, health, water, electricity, transport and housing. This should be accompanied by welfare and direct income schemes for the really poor and the vulnerable.

International inequality

While the above are inequality-reducing measures at national level, inequality is also high and growing among countries, and international cooperation is needed to tackle this. 

Aid is the favourite and most obvious instrument to offset international inequality. Aid levels are inadequate and should increase; for a start, developed countries should meet their aid obligation of 0.7% of their gross national income. The quality of aid should also be raised. 

Many developing countries rely on commodities as their main exports. Ensuring fair and good prices for these is perhaps the most important step to bring about more equality internationally.

For most of the last century and more, poor commodity prices vis-ŕ-vis manufactures have been a major source of income transfer from poor to rich countries. More recently, commodity prices rose and boosted the poor countries’ economies. But in the past couple of years, the prices of most commodities have weakened and this has re-emerged as a major source of global inequality.

Many developing countries are also in danger of again falling into an external debt trap, which is a drain on government resources. An international mechanism to deal with sovereign debt restructuring should be set up to provide debtor countries with a more fair and balanced solution to debt crises.

The developed countries have increased their dominance over technology, including through the use of intellectual property rights (IPRs) which earn enormous monopoly revenues mainly for their transnational companies. A reform of the global IPR system, to prevent it from being a rent-seeking instrument (as Stiglitz and several other economists have proposed), would be useful, as would an effective programme for technology transfer to developing countries.           

Trade and investment agreements between developed and developing countries should also be reviewed. Some developing countries may perhaps have strong enough economies, but most are too weak vis-ŕ-vis developed countries to obtain net benefits from these agreements. Reforms should ensure that sufficient special treatment is provided to the weaker parties.

Some developed countries used to have trade agreements in which they open their markets for poorer countries but do not expect the latter to reciprocally open their markets. Unfortunately, these are being replaced with agreements in which even the poorest countries are asked to open up, with immense damage to their local firms and farms.

These agreements also typically ask developing countries to open their investment, finance and other services, as well as tighten IPR rules. These are areas where the rich countries’ companies dominate and will thus derive more benefits.

While some mature developing countries like South Korea or Singapore may enjoy more equitable results from these agreements, the typical developing country may find itself on the losing end of inequitable outcomes.  

Inequality is a hot topic, and how (or even whether) to reduce it is likely to generate even hotter debate.

The above is only a simple listing of issues and measures that may be considered when the discussion moves from inequality to how to tackle it.                     

This article was first published in The Star (Malaysia) (15 February 2016).

Third World Economics, Issue No. 608, 1-15 January 2016, pp14-15