Inequality in the age of neoliberalism Jayati Ghosh Jawaharlal Nehru University and IDEAs South-South Institute Bangkok 3-8 November 2014

Is inequality necessary for economic growth? Inequality is NOT a necessary “cost” of economic growth – some fast growing economies have shown less inequality; some countries with high inequality have stagnated. Inequality has recently increased in both rich and poor countries. “Constructive” inequality supposed to reward higher productivity and provide incentives for hard work, innovation and creativity – but in fact high asset concentration and excessive rentier incomes create disincentives for this.

Inequality is generally bad for economic growth Financial markets function imperfectly, so those without assets cannot access credit, which affects their productivity and inhibits growth. Inequality in health and education affects workers’ productivity, hinders development of their full potential, limits the pool of qualified workers and reduces the aggregate productivity of the economy. Adversely affects domestic aggregate demand by reducing incomes of the majority, so strong disincentive for investment in the absence of other markets. Can lead to attempts to generate demand through reliance on credit bubbles that end in financial crises. Inequality can become socially and politically dysfunctional, generating tensions and strife that impact upon economic processes and investor behaviour, so that growth is hampered.

Forms of inequality Differences in household or individual incomes: Gini coefficient or the ratio of the income of rich to poor. Returns to factors of production: wages, returns to self- employment, profits, rent and interest. Asset ownership and control: land, other natural resources, financial assets. Economic vs social inequalities (health, education, access to infrastructure and services). Horizontal inequalities (rural-urban income differences and regional differences) vs vertical differences within a region or location. These in turn reflected in inequalities of power.

Estimating global inequality Gini coefficients of per capita income of countries Gini coefficients weighted by population Gini coefficient of “all” global incomes derived by assessing incomes across the world, deflated by PPP exchange rates and using domestic income distribution data. Typically they all use PPP, which is problematic. Internal distributions of functional income shares can also be considered.

Inequality measured by per capita incomes (PPP)

Trends in international inequality Despite recent improvement, international inequality remains high. Excluding China, Gini coefficients across countries (weighted and unweighted) were higher in 2010 than in Country of birth or residence still explains nearly half of income differences between people. Absolute gaps in per capita income have increased: Difference in average incomes between rich and poor countries increased from $18,525 in 1980 to close to $32,900 in 2007 before falling slightly to $32,000 in Across low income and upper middle income countries, the absolute gap more than doubled from $3,000 in 1980 to $7,600 in 2010.

Internal distribution also matters : Average income per capita of the top and bottom 10 per cent of the population in selected countries, late 2000s

Rising inequality within countries Milanovic measure of global inequality: Gini coefficient increased from 68.4 per cent in 1988 to 69.4 per cent in 1998 to 70.7 per cent in 2005 This is higher level of inequality than that found in any country. The income share of the top 10 per cent of the world population increased from around 51.5 per cent to 55.5 per cent. Recent rise in global inequality is due to increased inequalities within countries.

Is there a Kuznets Curve? Gini coefficient and GDP per capita (in constant 2005 PPP $) by country

Wage shares of national income in advanced countries,

Wage shares of national income in developing countries, (Unweighted averages, DVP3 = Mexico, South Korea, Turkey; DVP5 = China, Kenya, Mexico, South Korea, Turkey)

Share of income of top 1 per cent Year Proportion of income owned by top one per cent (Percentage) Annual growth rate of the income share of the top one per cent since 1980 (Percentage) Argentina Australia Canada China Denmark Finland France India Indonesia Ireland Italy Japan Mauritius New Zealand Norway Portugal Singapore South Africa Spain Sweden United Kingdom United States

Movements in Palma Ratio (ratio of incomes of top 10% to bottom 40%)

Trends in income distribution in different countries, 1990 to 2010 Number of countries by type of trend in Gini coefficient AfricaAsia Latin America and the Caribbean Europe, North America, Oceania and JapanTotal Percentage of countries Percentage of total population c Rising inequality Continuously rising U-shaped trend N or reclined S shape (increase- decline-increase) Falling inequality Continuously falling Inverted U-shaped trend No trend b Total

Regional differences Latin America and Africa still the regions with the highest levels of income inequality But in LAC the Gini coefficient declined in 12 out of 20 countries between 1990 and 2010 Gini also declined in many African countries, including very high inequality countries such as Botswana, Lesotho and Swaziland, but has continued to increase relatively fast in South Africa despite more social spending Asia mostly shows increasing inequalities.

What has caused increased inequality? Global macroeconomic forces and policies Trade expansion that has increased supply of “global” labour Financial deregulation and the liberalization of capital accounts that have given more bargaining power to capital Fiscal policies that have reduced taxation of rich and of surplus Technological changes leading to increased demand for a skilled labour force amidst an abundance of unskilled workers, Deregulation of labour markets, increase in non-standard forms of employment and decreasing unionization Transition of some countries to market economies, as well as increased commercialisation and privatisation of utilities and basic services.

What caused inequality to decline in some countries? land redistribution raising and enforcing minimum wages and improving the conditions for workers’ associations that improve their bargaining power. fiscal strategies of higher taxation of rich and of corporations, policies towards control over natural resources that increased public revenues spent on social infrastructure and services as well as social protection macroeconomic and industrial policies as well as other more structural policies.

Policies to reduce inequalities Combination of growth enhancing macroeconomic policies with redistributive social policies is required. What matters is not just the primary distribution of income, but "secondary" distribution, after taxes, public spending and transfers. Inequality is generally lower in countries with larger welfare programmes and more fiscal redistribution. Inequality lower even in globalised countries that have shifted growth orientation to domestic market, used redistributive fiscal policy measures, emphasised education and health spending, developed universal social protection programmes and wide-ranging social assistance and increased labour market opportunities for less skilled workers.

Important role of universal public provision Universal good quality provision of basic amenities like access to housing, water and electricity and essential social services such as nutrition, sanitation, health and education. This is essential for reducing inequalities across income, class, gender, ethnicity and location. Targeting only to the poor creates errors of unfair exclusion and unjustified inclusion, and has been shown to be inefficient and susceptible to elite capture. Universalism creates wider public demand for better quality of public services, which in turn enables more progressive tax collection that flattens income distribution even as it produces more social stability. Nuanced approach that recognises specific social patterns and differentiation within social groups and by gender.

Macroeconomic policies Ensuring that wages increase along with labour productivity. Increasing the productivity and remuneration of small-scale and self-employed activities. Progressive income taxation and redistributive social transfers targeting education and health spending as well as public child and old-age benefits Policies to regulate finance and financial returns Strategies to curb the excessive concentration of ownership or control of land and other resources.

Reducing wage inequalities Need to reduce wage gaps across skill, ethnicity and gender of workers Increasing public investment in good quality education at all levels Ensuring that macroeconomic policies support employment creation Institutional changes, such as an increase in minimum wages and bringing all workers into formal contracts subject to labour laws.

Thanks for your attention!