At the beginning of October 2021, the ICIJ (International Consortium of Investigative Journalists) published the Pandora Papers – leaked data on how the world’s very rich hide their wealth in tax havens. The practice is perfectly legal, but less so when it is used to avoid or evade tax. In both cases, it is money that remains hidden, and not only skews the statistics – according to Tax Justice between $20–30 trillion US dollars remain hidden from the tax authorities – but also causes financial problems for national governments. According to the South Centre, the States are missing out on some US$500 billion to US$600 billion US dollars annually due to corporate underpayments.
All this data once again points to the festering wound of inequality in the world. It receives far less international attention than poverty because it is a problem with major political implications. While poverty makes people suffer, inequality tears apart and divides societies, and makes them powerless.
For the countries of the south, after their decolonisation, it was very clear that there needed to be a global redistribution of income, but the World Bank did not see it that way. For the Bank, it was growth that could be redistributed, but not income or wealth. That closed the discussion.
The major difference between the two problems is that poverty as formulated by the World Bank is a problem for individuals, while inequality inevitably requires addressing the whole of society. Poverty can then be tackled with measures that give vulnerable people access to the market or to education and health care, whereas inequality cannot be tackled without also looking at the top percentage of society by wealth. In other words, inequality, more than poverty, is a political problem.
Inequality of what?
Inequality is more difficult to grasp than poverty. The various philosophical approaches to poverty – conservative, liberal, Marxist – are reasonably straightforward, and despite all the 'multidimensional' aspects of poverty, it can safely be said that in any market economy, poverty amounts to an income deficit.
But how are we to define inequality? Inequality of what? Of income? Of wealth? Of opportunity? When the UNDP started its annual reports on 'human development' in 1990, it also published very interesting data on income inequality, but the solutions offered were mostly about inequality of opportunity.
As the limitations of international poverty reduction efforts became apparent, at the beginning of this century, more and more reports on inequality began to appear. The United Nations, the UNDP, the UNRISD, the ILO, the OECD and several major authors such as Stiglitz, among others, wondered how income inequality was evolving and what the impact of globalisation might be.
These studies brought to light the many difficulties of understanding inequality. How do we measure inequality? By income or by expenditure? Absolutely or relatively? Gross or net?
And if we look at countries, what should the criterion be? Differences within countries, between countries, weighted or not, or, without borders, the global differences between individuals? What is the link between inequality and poverty, if any?
How difficult the problem was for the international financial institutions became clear in the World Bank's 2006 World Development Report. The preliminary drafts clearly talked about income inequality, but all of that fell away in the final report, which only talked about 'equity' or equality of opportunity.
Yet, it was at the World Bank that important research was done, amongst others by Martin Ravallion. Not only did he establish that too great an inequality stands in the way of an effective fight against poverty, but he also clearly explained that every approach to inequality is ideologically biased. The results of any calculations will vary according to whether one measures consumption or income, in absolute or relative terms. It all depends on what one wishes to 'prove.'
As examples, for India, the World Bank's Gini coefficient is 0.34 based on consumption, but in terms of income it rises to 0.50; for Belgium, the Gini coefficient is 0.45 based on gross income, but only 0.25 for net income, after taxes and social protection.
Similarly, the calculations of Branco Milanovic showed how inequality in the world changes greatly depending on whether we analyse differences between countries, with or without fast-growing China, or globally between people. It is this author who created the famous elephant graph to show how globalization between 1988 and 2008 mostly benefited the upper middle class, while the poor and lower middle classes lost out. This is certainly the case in India and China, while the old rich countries are more likely to lose out. The real winner, however, is the upper class, in all countries. The real losers are found in sub-Saharan Africa.
China has managed to eradicate extreme poverty in a relatively short period of time, but in the meantime inequality has risen rapidly.
Today, inequality has taken its proper place on the international agenda. In 2013, the World Bank unveiled a 'sharing prosperity' programme that would combat inequality by making the incomes of the 40% poorest in each society grow faster than average incomes. It is this approach that was also incorporated into Goal 10 of the UN’s SDGs. It is an easy solution that once again addresses mainly the poor instead of the rich.
Whether this will be effective is highly questionable though. The greatest inequality in any society is not between the poorest and the richest, but rather within the small group of the very richest. Anyone looking at the UNDP’s 1992 graph (glass of champagne) of global wealth distribution can see that the incomes of the bottom four quintiles of the population are relatively 'equal.' Within the top quintile, and especially among the richest 10%, the situation goes completely berserk and comparisons can hardly be made. At the beginning of the 1990s, the richest 20% already received 82.7% of world income, while the bottom 80% had to make do with 17.3%, with the poorest 20% receiving a meagre 1.4%.
Interesting reports from institutions such as CapGemini, Credit Suisse and Forbes, containing figures on the very richest, now appear every year. It is this data that Oxfam uses to illustrate how the very rich are rapidly becoming richer and how the gap between the rest of the population is widening. In 40 years, the richest 1% have earned more than twice the income of the poorest 50%. The share of labour in global income is falling in comparison with the share of capital.
According to Piketty, this is inevitable. When income from capital exceeds income from labour, inequality increases rapidly and unsustainably.
All these figures can be put into perspective. Whether inequality is greater today than in the past is a difficult question, but everything seems to point in that direction. The global income Gini coefficient is estimated to have been 0.43 in 1820, 0.61 in 1913 and 0.70 in 2002. It is clear that Western democracies with a welfare state and a more or less fair tax system have relatively low inequality figures. Where this is not the case, such as in Brazil or South Africa, inequality is skyrocketing.
And those who look not at incomes but at wealth cannot help but notice the fundamentally unjust state of the world.
The Gini coefficient of wealth is estimated to be between 0.55 and 0.80 for 26 countries in 2000, while global wealth has doubled since then. According to Piketty, the rate of growth of the greatest wealth is three times greater than average wealth and five times greater than average incomes. According to CapGemini, the number of rich and ultra-rich individuals is increasing at rates of 7% to 9% per year, as are their assets. According to Credit Suisse, the richest 1% own almost half of the total assets, and the poorest half own no more than 1% of the same assets.
What can be done?
As austerity programmes return to the agenda, energy prices rise, families struggle to survive, and more figures of insane wealth become known, so does discontent with what can only be called a dualization of societies, a slow split between a large mass of people below or just above the poverty line, and a small group of rich and super-rich who live in ‘another world.’ The global middle class is slowly disappearing. But there is, therefore, no global proletariat at all: the poor in rich countries are several times richer than the poor in poor countries. Moreover, workers who lose their jobs in rich countries because of competition with the South are more likely to side with local capital than with their colleagues in poor countries.
The more inequality and its consequences are brought to light, the clearer it becomes as to why poverty reduction was on the international agenda thirty years ago and inequality was neglected. It is only poverty that the rich can handle without their fortunes being touched.
Milanovic sees three possible solutions: firstly, to raise the incomes in the poor countries to the level of the rich countries, yet that is not ecologically possible; secondly is global redistribution; and the third rational solution is migration from poor to rich countries. Migration is already happening now and is not sustainable.
So the second solution remains, but it is certainly not politically obvious. Piketty points out that ex-post redistribution will not suffice, and that a wealth tax is also required. In a neo-liberal philosophy, however, curbing inequality will inevitably also curb economic growth. It is only the 'unjustified' inequality that needs to be tackled, wrote The Economist in 2001. And for Hayek, redistributive justice was the road to serfdom. International organisations know that revolts and rebellions are never the work of poor people whose energy is needed for survival, but of middle classes who can no longer accept the growing injustice. Today these middle classes are confronted with privatisations and collapsing public services, a de-legitimisation of welfare states and an attack on trade unions and labour law which 'favours' them. In this way, an attempt was made to turn the poor into allies of the rich, against the organised working class.
There are, of course, many other reasons to combat inequality: the need for borders if one wants to stop migrants, political instability, and the social problems – health, crime, suicides, etc – that Wilkinson & Pickett have brought to light.
Finally, there is the principle of equality that underpins the democratic systems we always prioritise. It is an equality of rights that has no chance of succeeding when material inequality becomes too great. The problems of inequality delegitimise great wealth. Inequality endangers democracy. Fortunately, today there are citizen movements like ICIJ, Tax Justice and Global Financial Integrity that are looking up numbers and making them known. An academic World Inequality Report 2022 came out a couple of weeks ago. And perhaps there is light at the end of the tunnel, as China reverts to the old concept of ‘common prosperity’ and the Bidenomics in the US some say are trying to regulate and moralise capitalism.
Because of the power relations it implies, inequality is far more difficult to fight than poverty and this explains the priority of international organisations. Indeed, it is not philanthropy that we need, but a fair contribution from everyone for stability and sustainability. Inequality is a global problem that requires global solutions.