Rising Inequality – How to Reverse It?
30 October 2014
Dominik Etienne and Annett Victorero
The last decade has witnessed a revival of concern over the impact of high-income concentration on economic development and wellbeing. The global distribution of income has for decades resembled a ‘champagne glass’ (figure 1).
Today, the top 20 per cent receive more than 70 per cent of the global income, and the top 1 per cent (70 million people) earn as much as the poorest 3.5 billion people – that is half the world population. Some positive news can be found, for example in the case of Latin America, but progress is much too slow. Yet, at the current rate of progress it would take 800 years for the bottom billion to get even 10 per cent of the global income.
On 23 October UNU-WIDER, ILO, and UNCTAD organized a policy seminar to discuss why it is crucial to integrate the economic equity perspective to national and international development processes, with examples of policies that have worked. More than 50 representatives of over 20 international organizations – among them 13 UN agencies and bodies – and permanent missions to the UN followed the invitation and engaged in the discussions with the expert panel consisting of Isabel Ortiz, Richard Kozul-Wright, and Giovanni Andrea Cornia (LINKS). The meeting was chaired by Tony Addison, Deputy Director and Chief Economist of UNU-WIDER.
New policy model - key for falling inequality in Latin America
Many observers ask how rising inequality could be halted and reversed – through policies in the areas of trade and banking regulation, labour markets, social transfers, and others. This debate can benefit from the evidence of a significant decline in inequality recorded in much of Latin America in the first decade of the millennium (figure 2) as presented by Giovanni Andrea Cornia, Professor at the University of Florence and former Director of UNU-WIDER.
The UNU-WIDER research project led by Andrea Cornia suggests that the drop in income inequality in nearly all of the Latin American countries was mainly due to: a fall in the skilled-unskilled wage ratio; an increase in social assistance transfers, and a lower concentration of capital incomes.
Figure 2: Trend in average regional income inequality in Latin America 1980-2010
According to Andrea Cornia, the drop in inequality in the region is structural rather than cyclical, as inequality continued falling during the crisis of 2009-12 and based on the most recent data from 2014 is still doing so. The positive trend does not seem to have been due to improvements in the global economic conditions, but rather to the rapid and equitable accumulation of human capital as well as new policy approaches.
The new policy approach spread through the region following the return of democracy in many countries, starting in early 1990s. Many of the new regimes, on the left and right, adopted more prudent macroeconomic policies and avoided the traditional pro-cyclical (and unequalizing) fiscal and monetary policies of the past. The shifting focus from global to regional trade during the 2000s helped reduce vulnerability to macroeconomic shocks. Crucially, labour and social policies were targeted at battling the inherited problems of unemployment, job informalization, falling low earners and minimum wage, and a weakening of wage bargaining institutions. Social expenditure started rising in most Latin American countries in the 1990s and accelerated during the early 2000s with more targeted social assistance transfers and more effective taxation systems.
A key role in the fall of income inequality was played by the rise of completion rates of secondary education which led to a marked improvement in the distribution of ‘human capital’. A higher supply of skilled workers meant a lower wage premium for those skills, thus equalizing income. Also increases in minimum wages had an equalizing effect Andrea Cornia reported.
Policies matter - at the national and international level
Isabel Ortiz, Head of Social Protection at ILO, shared Andrea Cornia’s message that the right socio-economic policies are crucial if we are to tackle inequality in development processes. She showed (LINK to VIDEO) that since the global economic crisis in 2007-08 there have been further setbacks for the goals of equitable and fair human development for all, as the richest ten per cent continues to accrue most of the income generated. The crisis, and the now prevalent austerity policies that followed initial bailouts and stimulus, have had a large impact on the lower earning quintiles. This occurred through unemployment, wage cuts, lower remittances, a rise in cost of foods and fuel, loss of access to credit and savings, and cuts in government spending (ranging from education to health and social protection). Furthermore the level of official development aid has come under pressure.
In 2014, 122 countries are reducing public expenditures; 82 are developing countries. As the response to the crisis has prioritized finance over socio-economic recovery, Isabel Ortiz argued strongly for bringing equity back into the development agenda. This would re-establish a link between economic and social policies. The key for Isabel Ortiz is to set out new policy options that together replace the orthodox economic policy advice of the 1980s and 1990s and support a Development Agenda for All.
Inequality must be a corner stone of the development agenda post-2015
According to Isabel Ortiz the case for equity is now enormous; it is not only about social justice. Equity contributes to growth and builds political stability. Indeed some countries in Asia and Latin America have been focusing on cutting inequality in order to foster national demand and consumption.
But in order to bring equity into the development agenda and policy advice of international organizations the key will be to mainstream it systematically into all sectors – from agriculture, education and health to finance, trade, industry, and others (figure 3). It is not enough to simply undertaking a few interventions in selected areas.
Figure 3: Interventions in selected sectors with equitable and inequitable outcomes
2015 -a window of opportunity
In order to achieve more robust development outcomes in the future, Isabel Ortiz further argued that equity needs not only to be recognized by international actors as a national challenge but equally promoted at international level through, for example, adequate trade agreements and regulated international financial flows.
Richard Kozul-Wright, Head of the Division of Globalization and Development Strategies of UNCTAD, argued that the key unequalizing factor at this time is the global trend of financialization and the unregulated financial flows. Here Kozul-Wright sees a role for international institutions to come with new policies to support the Development for All Agenda. He joined his co-panellists in advocating for the set of policies that have been proven to help reduce income inequalities, but argued that they are often overlooked in the international discourse. Richard Kozul-Wright pointed out that exactly the question of how to go from knowledge to implementation continues to be the big challenge.
The Geneva policy seminar was a good opportunity to share views on how to incorporate equity front and centre in the post-2015 development strategy. Policy packages will vary across countries and local ownership is key. For this the evidence base from Latin America can be a source of learning and optimism for the international community. Here we have only been able to discuss some of the key issues raised in the policy seminar but we warmly recommend that readers watch the extremely interesting presentations.
Dominik Etienne is Associate Programme Officer at UNU-WIDER
Annett Victorero is Communications Associate at UNU-WIDER