Post #9: Inequality: Pretense and Reality (Part 1)

The managing director of the International Monetary Fund, Christine Lagarde, has recently come out against rising income inequality.  Imagine, a leading figure in global finance actually acknowledged that “rising inequality and economic exclusion can have pernicious effects.  In the years ahead it will no longer be enough to look simply at economic growth. We will need to ask if this growth is inclusive” (www.nytimes.com/reuters/2014/02/25/technology/25reuters-imf-lagarde.html?hp).

Excuse me, Madame Lagarde, but isn’t income inequality within and between countries very old news? Inclusive growth?  What a wild idea.  I mean, it’s nice that the IMF is going to pay attention to the inequities of economic growth, though Lagarde’s stated reason is that inequality slows economic growth rather than that it’s a matter of social justice.  But the sad reality, which national and international leaders will not admit, is that income inequality is deeply structured into the global economy and national policies, and so long as those policies continue to favor multinational corporations and big-time investors, inequality—not to mention environmental destruction, greatly reduced work opportunities, and ethnic conflict, all of which are typical consequences of inequality—will remain virtually impervious to significant improvement.

Numerous critical economists and political scientists have for many years called attention to the misleading character of economic growth statistics, which mask income (and many other) gaps.  At the national level, some leaders have acknowledged the problem, such as the Brazilian president when he admitted long ago that while Brazil is getting richer, Brazilians are not.  (Brazil has always had one of the highest income gaps in the world between rich and poor households.)  At the global level, to say that the world economy is growing is to say very little about personal income and the quality of life in specific countries.  Nowadays, even though income inequality between countries has declined slightly, inequality within most countries remains high (see http://economix.blogs.nytimes.com/2014/03/18/qa-a-development-expert-on-narrowing-inequality/).  Thus, for example: The average income of the richest 10% of the population in developed nations is nine times that of the poorest 10%–up from 5% in the 1980s. In the US, Israel, and Turkey, the ratio is 14 to 1 (Report of the Organization for Economic Cooperation and Development, 2011, www.oecd.org/els/soc/49499779.pdf ).

Large income gaps alert us to the realities of poverty.  The rich keep getting richer while the poor remain mired in poverty.  True, on a global scale, the UN’s goal of cutting poverty (meaning the number of people earning under $1 a day) in half has been achieved.  But within countries, poverty—and in particular, extreme poverty—has not improved all that much.  Economic development, Michael Doyle and Joseph Stiglitz remind us in a paper just out from the Carnegie Council, must be equitable to be meaningful to ordinary people.  They call for a worldwide focus on eliminating extreme poverty—a far cry from the IMF’s hope to do something about making growth inclusive (www.ethicsandinternationalaffairs.org/2014/eliminating-extreme-inequality-a-sustainable-development-goal-2015-2030/).  The Doyle-Stiglitz paper brings together all the reasons—economic, political, and moral—for addressing this issue, and show why doing so is in every country’s best interests.

China gives us a window into the importance of attacking inequality and not poverty alone.  Its annual double-digit economic growth rates have led to impressive poverty reduction, yet China has a large and growing income gap that now equals that of the US.  There as in most other countries outside Scandinavia, the top 10 percent of the population, and even more so the top 1 percent, earn staggeringly more money and have far greater overall wealth and opportunity than anyone else.  No one is more aware of China’s income gap than its leaders, whose families and cronies have secreted away enormous fortunes.  They well understand what inequality and being a 1-percenter mean for the country’s political stability.  And they know that they must deliver not only growth but also equity if the Chinese Communist Party is to survive.

In short, an economy’s gross statistics may have little to say about what real people are experiencing in the economy.  Rapidly growing economies, traditionally defined by high GNPs, GDPs, and trade surpluses, may have relevance to meeting people’s basic needs.  Yet IMF and World Bank studies show that increasing income inequality is actually often a consequence of rapid growth.  Again, China is the best current example.  But just as importantly, income inequality is only one of many inequalities that need to be addressed.  And here our values enter the picture: Which inequalities are important to correct?  Work and educational inequalities? Gender inequalities?  Access to a clean environment and health plan?  From a human-interest perspective, of course they all are important; in fact, they are human rights issues.  Only when those rights are being fulfilled are we in a position to evaluate whether an economy and a political leadership are really delivering the goods.

All Mme. Lagarde had to do is consult any issue of the UN Development Program’s (UNDP) annual Human Development Report (www.undp.org).  It is full of statistics for nearly all countries on their real economy.  Specifically, human development measures societies on the basis of literacy and educational levels, gender balance, water quality, nutrition, medical care, and many other factors besides income.  All countries are then given a human development index number that brings together the human-development indicators in a single ranking.  In the end, what the UNDP is actually measuring is a key element of human security.

So congratulations, Mme. Lagarde, for promising that the IMF will be looking into income inequality.  Forgive me, however, if I’m not terribly impressed.  After all, this is an old problem, not just in the developing countries but also right in your and my backyards.  (Oh yes, the United States ranks high in human development, according to the UNDP; but—see the end of the second post on inequality (#10) for additional statistics—it also ranks high in income inequality.)   One last point: While you’re at it, you might also consider the IMF’s own role in the creation and maintenance of income inequality, another well-researched problem that should be on your reading list.

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3 Comments

  1. Growth for the sake of growth is the ideology of a cancer cell. A solid and healthy economy depends on the health of the environment (resources) and of people (labor). It is astounding to me that this simple and obvious fact is overlooked by so many. I pray we are able to make the transition from a parasitic system to a synergistic system. Anything less could spell our extinction.

  2. Beating up on the IMF and Lagarde for acknowledging the pernicious impact of economic inequality may have some appeal, rhetorically, but it’s also a tad disingenuous if I may say so. You would never know from this post that the IMF Paper (presented by Lagarde) dealing with growth and inequality represented the Fund’s brief for progressive tax changes as vehicle for equalization. What’s wrong with that? To be sure, the IMF has been slow and less than aggressive, but I’d rather see it on the correct side of the issue than in the opposition. Some positive recognition is in order.

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