Poverty, politics and riches

In January every year, the elite almost from every walk of life – politics, business, academia, multilateral institutions, and philanthropy – gather in the Swiss village Davos for deliberations on global issues.

This year’s annual meeting of the World Economic Forum took place on January 22-25. Two important reports were released on the eve of this meeting. The first, ‘Global Risks 2014’, identified major societal, economic, environmental, geopolitical and technological risks that may endanger the entire world and result in the breakdown of the whole system. The chronic gap between the incomes of the richest and the poorest citizens of a country is identified as a risk that is most likely to cause serious damage at the global level in a period of decade or so.

The second report, ‘Working for the few’, prepared by Oxfam goes deeper in analysing this risk. This report does at least three things while highlighting the risk of rising income inequalities. First, it identifies the severity of the problem in a more systematic way by incorporating the facts and figures relating to income gaps at the national and global levels. Second, it highlights the deep nexus between income inequality and political power in a society. Third, it touches upon the global dimension of the problem and gives suggestions and policy prescriptions to reduce income disparities.

The increasing trend of income and wealth concentration is leading to ‘opportunity capture’ since the best education, best healthcare, and better jobs are available only to the children of the rich. Added to this, lowest marginal tax rates are also available to the rich, undermining the very progressivity of the taxation systems. This trend reinforces the cycles of advantages and disadvantages that are transmitted across the generations. The scale of rising wealth and income concentrations, opportunity capture, and consequently unequal political representation are worrying trends that have serious implications for societies.

The problem of rising inequalities is becoming more severe every day. About 46 percent of total global wealth is now owned by just one percent of the world’s families. Their wealth amounts to $110 trillion – 65 times the total wealth of the bottom half of the world’s population. The richest 85 people in the world own the same wealth as the bottom half of the world’s population. These are really startling figures and if such a trend persists, income inequalities can turn out to be a risk far greater in magnitude and severity than other impending global risks identified by the global risks report.

Why do the rising levels of economic disparities pose such a major risk for societies? This question can be approached from various perspectives. From the economic perspective, concentration of wealth in a small group of people means reduction of what economists call aggregate demand. The rich may be extravagant. They may spend lavishly on themselves. They may spend a lot on the education of their sons and daughters. But despite all their extravagance, there is a limit to their spending. A major portion of their income crystalises to wealth stored in the form of immovable assets and as such does not remain into circulation.

On the other hand, if the wealth of one filthy rich man does not remain concentrated in his hands but is instead distributed, among say 100 families, by providing them employment financed through such income/wealth, it will boost aggregate demand by increasing consumption of goods and services. This will foster economic growth as well.

Acute income disparities have political consequences as well. Economic and political powers are closely intertwined. Ours is a pertinent case. The majority of the political leaders and public representatives belong to the economically powerful class. The rich legislate to safeguard their interests and bend rules and policies in their favour. Political economy considerations reign supreme. Hardly will a piece of legislation be passed by the rich members of parliament which harms their interests, no matter how beneficial it may be for the vast majority. Emphasis on indirect taxes and low public budget allocations for public health and education are some cases in point.

Implementation of policies and rules also bend in favour of the rich in such societies. Even if rule of law exists in theory, hardly will it be implemented in its true letter and spirit. Its application will always remain differential. The poor will get its wrath with full vengeance while the rich and powerful will go scot-free by bending the rules. Third, inclusive democratic institutions are hard to develop in a society characterised by deep economic disparities. The rich and elite will not let power and authority slip from their hands. Dispersion of political power remains a distant dream under such societal arrangements. Reluctance to delegate powers to local bodies and village councils is a case in point. Despite all rhetoric for democracy in Pakistan, all so-called democratic regimes have opposed the devolution of political power to the grassroots level.

Deep disparities of income and wealth can lead to societal breakdown as well, generating political uncertainty and heightening social tensions. “The poor cannot sleep because they are hungry and the rich cannot sleep because the poor are awake and hungry”, says Nigerian economist Sam Aluko. This ever-increasing economic disparity is leading the societies into two separate irreconcilable worlds. Rather than becoming partners in the prosperity and growth, they are treading two different paths.

The Oxfam report specifically mentions five developing countries, including Pakistan, where the rich 10 percent has held a much greater share of national income compared with the bottom 40 percent in the last three decades.

The problem of deepening income disparities is not confined to national boundaries. It has global dimensions as well. If collaborative efforts are not taken at the global level, world stability and peace stand threatened. One of the proposals given by the Oxfam study is that the affluent should simply stop dodging their taxes. According to Oxfam, total wealth now sitting in offshore tax havens is $18.5 trillion, larger than the gross annual GDP ($ 15.8 trillion) of the US.

Closure of these tax havens is not possible without international cooperation among the various nations. Related to this is the money and stolen assets of the poor and developing countries lying in developed countries. Retrieval of such dirty money and assets is not possible without global cooperation. The study also suggests that international bodies like the UN may be entrusted the task to monitor the share of income going to the top one percent.

At the domestic level, rent seeking and political privileges based on wealth should be curbed. But that will be possible only if the poor are politically empowered. That means drastic steps would be needed to change the existing public policies and priorities. Increasing public investment for universal education and health, revamping the taxation system to make it progressive, strengthening redistributive and social protection mechanisms, curbing financial secrecy and tax dodging, and removing the barriers to equal rights and opportunities to women can be a few starting points to avert the rising trend of economic disparities at the national level.

The writer is a graduate of Columbia University. Email: jamilnasir1969@gmail.com