WORLD VIEW: Populism and income inequality

By Jonathan Power-March 28, 2017

THE ASIAN economies are picking up speed again. After the big hit from Wall Street when, Lehman Brothers, collapsed in a heap in 2008, sending shock waves everywhere, a recovery is now in the works.

How many child deaths in the Third World did these bankers cause? Another question is will future growth be like the past- fast but severely inequitable? The same growth before 2008 that reduced absolute poverty created a widening gulf between the haves and have-nots.

But isn’t that sufficient for the day, many ask? Absolute poverty must be the key mark of progress- raising incomes, giving people more money to seek education for their children or medical care or filling the coffers for the state so that it can fund bore holes in the countryside and sewers in the urban slums.

After all in the period of rapid growth from 1990 to 2008 the number of people living in extreme poverty was almost halved, from more than 1.5 billion to 850 million. China’s poverty fell dramatically from when 85% of the population lived on less than $1.25 a day to when only 13% lived in poverty. India has also reduced poverty rapidly, particularly under the last Congress government of Manmohan Singh and Sonia Gandhi, but the voters still fell for the opportunistic populism of the BJP and voted Congress out.

Of course there are good arguments why the progress made has not been seen as enough, not just because of rising inequality but because India and China between them have two-thirds of the world’s poor.

Escaping poverty is not enough. In all parts of the world the poor want a larger slice of the cake when the cake is getting bigger. It is a natural instinct and to reject the urge for more equality when there are still massive slums and not enough schools and health clinics is to make the proletariat and peasantry dissatisfied at the least and angry at the worse. All major religions suggest this is wrong.

No trickle downDeclining income equality is not good for political stability as we saw with the American election when poorer whites rallied to the banner of the populist, Donald Trump. “Trickle down” from the progress of the well-to-do had not happened.

In the Third World there are a good number of these populists. In the end, voters invariably find the simple mix of remedies of the populists don’t work.

An article in the International Monetary Fund’s magazine “Finance and Development” reports that “income disparities are associated with worse economic outcomes, including lower growth and greater volatility. Income inequality is now thought to retard growth and development for such reasons as limiting the accumulation of human capital in a society.”

Inequality in Asia has risen faster than any other part of the world, especially so in China and east Asia – in Hong Kong, Singapore, South Korea, Pakistan, Sri Lanka, the Philippines, Indonesia and Taiwan, but not including Japan. In contrast, countries in Latin America, the Middle East and Africa have bucked the global trend and have on average reduced inequality. Indeed in Latin America the incomes of the poorer 20% have risen by more than other sectors of the population.

Maybe globalization is partly the fault of growing inequality. Technological change in another. But this doesn’t account for income distribution being so much worse in Asia. It must be other factors: fiscal policies, the structure of labor markets and access to banking and other financial services. Added to that is insufficient spending on education, health services and the too-low wages.

Tax policies in Asia are way off the mark. There can’t be much redistribution of incomes when the ratio of tax to national income averages half of that in the developed countries. Because taxes are light on income tax and heavy on indirect taxes on goods and services the poor end up paying a disproportionate percentage of taxes. These items have to be rapidly reformed and improved and grow at a faster rate than GDP.

Perhaps the only good things one can say is that the world has seen in recent years the biggest decrease in inequality between nations since the Industrial Revolution.

And, according to World Bank figures, with the exception of Asia, inequality within countries has decreased since the 2008 crisis.

During these past nine years of economic crisis the Asian countries have concentrated on economic reforms in the banking and financial sectors, in working on the impediments to more trade and smoothing labor relations.

But diminishing inequality has to be given equal time. The better off have to be educated by governments and the press to realize this is in their own interest too. Inequality at the bottom is a drag on the whole society.