The global challenge of inequality

Of the many challenges the world faces to stability and good governance, that which has received the least attention up until now is perhaps that of widening income disparities. It’s a problem that used to belong almost exclusively to the realm of development economics, but is now so widespread and of such a scale that it has become a concern in terms of political stability. Increases in inequality have been so great that it is time to acknowledge there is a societal pandemic on a global scale. Until we do so, we won’t be able to tailor a global response.

The World Economic Forum’s recent “Outlook on the Global Agenda 2014” suggests that widening income disparities will, in the coming 12 to 18 months, be the greatest source of instability in the world, second only to tensions in the Middle East and North Africa. The reason inequality is so disruptive is that it is leading lower and middle classes around the world to mistrust the economic systems under which they live, and therefore, to demand radical change. This shouldn’t be at all surprising. A recent Oxfam report called “Working for the Few” highlighted such shocking statistics as the fact that 1% of the world’s population owns almost half its wealth, and that the 85 richest individuals in the world have as much wealth as the bottom 50% of the global population.

Many people still mistakenly talk of a North-South or East-West wealth divide. Although differences in income tend to be greater across borders than within them, with inequality greatest between developed and developing nations, it is also the case that most developed states have in recent decades seen a marked worsening of domestic inequalities. This is true of most of Europe, and especially in the United States, where inequality is now at a level not seen since the late 1920s and the onset of the Great Depression. The financial crisis has accentuated this trend, as since 2009, some 95% of the wealth generated in the U.S. has gone to the top 1%. In 2011, that small group owned 40% of America’s total wealth and earned almost a quarter of the country’s aggregate annual income. It seems hard to argue that this isn’t a case of systemic spoliation of national wealth by a tiny elite.

There are many reasons to question the appropriateness of so much wealth being concentrated in the hands of so few. First and foremost, there is the obvious one that after an individual reaches a certain level of income, there is little increase in life expectancy or personal happiness. It seems right, therefore, to question the wisdom of philosophies (and policies) that call for the accumulation of wealth irrespective of a more balanced distribution within society.

But even if we were unwilling to subscribe to the idea that longer life expectancy or the promotion of individual happiness should be the driving principles of our polities, we should at least be aware that inequality is not only a limiting factor for positive things but also a source of negative ones. There is growing evidence that inequality is tightly linked to falling levels of trust in social structures, as well as to increasing levels of violence and criminality, and to falling rates of social mobility. This last point is perhaps the most significant because the accumulation of wealth in the hands of a few has enabled to them to systematically capture the social and political levers of power, resulting ultimately in the erosion of one of liberal democracy’s most sacred principles: equal opportunity. Data on the family background of those elected to public office, or those who gain admission to some of the world’s best universities corroborates that the scions of the wealthy tend to be over-represented on the social ladder and the places it takes you to. These are particularly worrisome trends in the case of Europe because equality of opportunity and rewards based on merit are two of the most important elements in what could be described as the European social compact.

Of the many possible causes of this pathology, ranging from those of personal philosophy to education to the nature of capitalism, we believe the most significant is globalisation and the way it has limited the power of states. In an environment where the wealthy can move resources across borders and avoid accountability and taxation, governments are left with little leverage on the distribution of wealth within their societies. States’ powers are today most effective when implementing redistributive policies that chiefly affect the lower and middle classes who tend to live off fully-declared and, therefore, easily taxable salaries. The top 1% are able to establish tax residence in Luxembourg or one of the Gulf States and so avoid almost all income tax. They can also construct complicated legal structures that avoid or minimise corporate taxation. In other instances, and regularly using the effective threat of outsourcing, they have managed to lobby their governments into establishing regressive tax systems. The overall effect has been the creation of a global elite capable of avoiding its fair contribution to common affairs, and able therefore to direct resources into perpetuating its position of privilege.

This is a problem that can only be tackled globally, and through the increase of international governance. Recent efforts by the G8 and the G20 to crack down on corporate tax avoidance are only the tip of the iceberg in terms of what is needed. A determined push to shut down all tax havens, a marked convergence of real corporate tax rates around the world, and a concerted international effort to share information and decrease tax fraud are among the measures that should be tabled without delay. States that profit from current arrangements should be put under heavy pressure to comply. A supranational actor like the EU, born as it was out of the desire (or need) to better manage cross-border interdependence, should play a prominent role in tackling this challenge.

Only through effective traction on these matters can we hope to give governments the ability to tackle inequality and guarantee equality of opportunity within their own borders. The current state of affairs, with a clear lack of governance on global taxation, is playing to the hand of the wealthy and enabling the few to profit from the many.