The very inclusion of a specific sustainable development goal (SDG) to reduce inequality is a gamechanger.
For a generation or more, any serious mainstream discussions of inequality had been off the table. In the formulation of the millennium development goals all the key players knew that income or asset inequality was to be kept off the agenda. Governing elites and international organisations would hardly acknowledge it as a relevant concept for development, often dismissing inequality focused academics and activists as hard-leftists. Many commentators vehemently argued that inequality promoted competition, by reducing inefficiency, which in turn created jobs and profit.
The global financial crash of 2008 and the fallout that continues to affect so many people, has changed the conversation. A small group of people made vast profits while tens of millions lost their jobs, houses and dignity. The evidence of the damage to society caused by high levels of inequality has been re-examined, while new research and popular campaigns have seen a new consensus form relatively rapidly.
Richard Wilkinson and Kate Pickett set the ball rolling in The Spirit Level. They argued that rising inequality in rich nations negatively impacts on our physical and mental health, education, experience of work and even life satisfaction, and is associated with the use of illegal drugs and mental illness. Detailed studies by Martin Ravallion and World Bank colleagues showed that as inequality rose in poor countries, the poverty-reducing impacts of economic growth declined. Subsequent work revealed how rising inequality also slowed downs rates of improvement in human development indicators. Rising income inequality was bad for the citizens of both rich and poor countries.
The SDG for reducing inequality, with a specific target to “progressively achieve and sustain income growth of the bottom 40% of the population at a rate higher than the national average” encapsulates the broad acceptance of the perils of inequality, not just between countries, but within them. The fact that the target applies and demands action from all countries enhances its potency as evidence of shifting global norms.
However, this is not a radical goal, such as arguing that top incomes must be capped or that the Gini coefficient must be reduced every year. Rather, it is a modest, reformist goal that seeks to ensure that those at the bottom of the income scale are not left behind as economic growth moves forward.
Yet for all the evidence, the hand-wringing from business elites at Davos, calls from parties across the political spectrum and increasing disaffection with the status quo from those left behind (at least in rich nations), relatively little is being done to seriously address the problem of rising inequality around the world.
Since 2000, the incomes of the bottom 40% have experienced slower growth year in, year out. Inequality is rising at spectacular rates. While different measures (wealth or income), different datasets (national accounts or taxation) and different analysts disagree on the detail, they all agree that the wealthiest are getting richer faster than anyone else (except in Latin America). The real income of the global top 1% rose by more than 60% over 1988-2008.
Turning this situation around will take a Herculean effort, for two main reasons. First, contemporary capitalism is based on economic processes that permit those who manage to amass money by their brain power or political connections or both, to increase their wealth faster than others. As Thomas Piketty tells us, the returns to capital (owning physical and financial assets) are greater than the returns to labour (working). So the rich get richer.
Secondly, when the rich get richer, they have the ability to keep it that way. They are able to shape national and international public policies to such an extent that they remain on a rising tide of prosperity. They can also safeguard national and international patent and competition laws, enabling them to dominate the markets in which they operate, and influence rules which allow them to avoid paying tax.
To top it all, by gaining control of the media plutocrats, the super-rich even persuade the public that inequality is good for everyone. Billionaire Donald Trump somehow becomes the voice of those left behind. Gold taps in private jets seem to be a qualification for public office in what Francis Fukuyama terms “political decay” in the US.
So what can be done? Few support the 20th century revolutionary solution of seizing and redistributing land and assets, as happened after the second world war in China, South Korea, Japan and Taiwan. Perhaps more reformist measures are a more popular 21st century answer? In most low income countries, effective public expenditure on domestically-financed education, health and social protection would raise the prospects for sustained growth, structural transformation and welfare advances. The evidence for such policies is clear but, enacting them in the places they are most needed is very problematic. The nature of domestic business and political elites – often greedy, extractive and predatory – allied to international business elites and the social norms they transmit, means that socially beneficial policies are not effectively implemented.
Significantly reducing inequality doesn’t have to be the stuff of utopian dreamers. In Brazil, a sustained decline in inequality levels has been of the most striking aspects of its development performance over the last 10 years. In addition to raising an estimated 40 million people out of poverty, the Brazil’s Gini coefficient fell by 12%, from 0.59 in 1995 to 0.52 in 2012. While inequality in Brazil remains high, this reduction stands in stark contrast to other OECD and Brics (Brazil, Russia, India, China and South Africa) countries, which have seen levels rise.
Recently published research investigating the Brazilian development model looked in detail at the factors behind this trend. An estimated 35-50% of the reduction in inequality in Brazil can be attributed to changes in non-labour incomes, largely as a result of growing social assistance programmes. Despite costing just 0.7% of GDP, the extremely effective targeting of the bolsa familia, a conditional cash transfer scheme, has been vital. A further 10% or so can be attributed to demographic factors, particularly the declining household size among poorer families. The remaining 40-55% is attributed to changes in the distribution of labour earnings. This had previously been attributed to the effects of an increasingly educated workforce, but our research suggests that reduced wage gaps for women and ethnic minorities actually made the biggest impact.
Achieving the SDG target to reduce inequality will require a huge shift in how economies and political systems operate right around the world. Some Latin American countries, such as Brazil, demonstrate that sustained reductions in inequality are achievable, when there’s a fairly explicit shift in the social contract, enabling politically difficult decisions to be taken and sustained over a long period. As Angus Deaton tells us, humanity has made amazing progress in reducing income poverty and raising health standards. The next big task is reducing inequality so that we can all enjoy a better life.
Reducing inequality in every country will be extremely difficult. But a growing tide of protest and its consequences (sometimes socially progressive and sometimes regressive) may persuade the 1% that they will not get the world they want for their grandchildren if business continues as usual.
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