Perpetuating economic inequality

The gap between rich and poor or the haves and the have nots is widening with every passing day. The discourse on perpetuating economic inequality has become a political prime mover in the US and across Europe. French economist and London School of Economics professor Thomas Piketty’s  2013 landmark analysis of Western economic inequality, “Capital in the 21st Century,” is a treat for policy and academic circles, and a must read in this regard. His book argues that the rate of return on capital in developed countries is persistently greater than the rate of economic growth causing wealth inequality in future, proposing a global wealth tax to address this issue. Piketty argues that world has witnessed different ideologies defending inequality in one way or other. Wealth is diverted to uphold these ideologies; nonetheless, a higher standard of living did not come from the disproportionate property ownership but from social protests and political instability.

Political economy has an important role to play (especially political power and policy choices) in shaping income and wealth distribution. The more equitable distribution of economic and political powers in the society, the better is the income and wealth distribution and vice versa. When there is unequal distribution of political power in a society, there is a very high probability that law making body and  policies will favour the privileged few. This results in both economic and political inequality as economically well-off amass more power and wealth, further strengthening political inequality. Biased regulations and schemes favouring one group against another are common nowadays, barring groups of people from participating in politics, which  can deny them an equal voice, which characterises real democratic system.

Non-democratic systems discourage democratic political ideas and exclude some voices from the collective decision-making process, perpetuating economic inequality. Lack of redistributive policy also plays same role. In a democracy, on one hand, there is a demand for reducing inequality but on the other hand, there is absence of a redistributive policy; thus inequality is likely to continue growing. It is the age of digitalisation and globalisation. Digital revolution is god for those with skills and devil for those with no skills. It  has created wealth for those with the skills to take advantage of it, and liability for those with no or very low skills, while sidelining middle-skill jobs. Globalisation brought competition from rising or emerging economies or emerging market. It along with reduced trade barriers, has lessened employment prospects  without advanced skills showcasing typical neoliberal order.

Neoliberalism is beyond what is seen and observed and contemporarily used to highlight market-oriented reform policies such as lowering trade barriers, eliminating price controls, deregulating markets, and reducing state role in the economy especially through liberalisation, privatisation and globalisation (LPG model). The neoliberalism norm since the 1980s has changed the political economy of the world in general and developing economies in particular. It has led to political-economic and policy changes that have snowballed inequality, taking account of changes to the welfare state, and tax progressivity and  changes to central regulations.

Many solutions can come to rescue in order to reduce inequality and distribution of income is no exception. Better, and people friendly policies can increase the incomes of the poorest; such as policies related to tax-progressivity, wage-subsidy, and higher minimum wages. Merits good like education can also provide better solution for reducing inequality. Better education system can improve the knowledge and skill set of the workers thereby increasing their efficiency levels. Government can frame  policies that educate citizens about financial and capital markets. This will have a dual effect: one, it  will stimulate investment and two, it will promote financial education. Government must develop economics of social sector and guarantee public services like education, healthcare, and food security. Equally important is economics of infrastructure. Government must invest in public infrastructure and services. It is high time to provide internet services in remote areas to improve educational prospects and economic welfare.

Dr. Binish Qadri writes for many National Publications