ARE economic burdens and benefits fairly distributed in your country? That was the question posed to 12,000 people in 22 countries by pollsters for the BBC between December and February. The answers, reported by the Beeb last week, were startling.
Some 90 per cent of Spaniards felt that economic burdens and benefits were not fairly distributed. Eighty per cent or more felt the same in France, South Korea and Chile and close to that level in Russia. In the United States, two thirds of respondents thought their system was unfair; and in the United Kingdom, the proportion was 61 per cent.
On Jan 11, the New York Times reported the results of a survey by Pew Research, which confirmed the results for the US: about two thirds of Americans believe there are "strong conflicts" between the rich and the poor.
Closer to home, last week, the Asian Development Bank (ADB) released its 2012 Asian Development Outlook, which was presented in Singapore by its deputy chief economist Juzhong Zhuang. The special theme for this year: Rising inequality in Asia. Almost everywhere, it seems - including Singapore - "the great economic divide" is the big issue of our time.
Till as recently as the 1990s, most policymakers paid little attention to inequality. The belief was that so long as everybody gains, it matters little whether some gain more than others. Inequality was also not high on the agenda of institutions such as the IMF, the World Bank or the ADB. Studies of the issue were confined to left-of-centre academic institutions.
But after the financial excesses of recent years and especially after the global economic crisis of 2008, which uncovered financial excesses ranging from imprudent banking practices to outsized executive compensation packages and outright fraud, the issue of economic unfairness came out into the open and onto the streets.
It was what the "Occupy Wall Street" we-are-the-99-per-cent movement was all about. It was a factor in the so-called "Arab Spring" uprisings in the Middle East, which were basically a popular revolt against the political and economic power of the elites. Inequality also explains some of the outrage in China and India over corruption by political bosses, often in cahoots with business interests. Economic inequality may also explain some of the popular disaffection in Singapore.
In Asia, inequality has been creeping up on countries over the past 20 years, a side effect of the liberal economic development model that has been followed, with trade and technology at its core. The model has had many successes. As the ADB's report points out, Asia has done well in reducing absolute poverty, the incidence of which has come down dramatically, from 50 per cent in 1990 to 20 per cent in 2008 (based on a poverty line measure of US$1.25 per day). But Asia has not done well in reducing relative poverty: the gap between rich and poor has been widening almost throughout the continent.
Measure of inequality
The standard economic measure of inequality is the Gini coefficient. The larger the number, the greater the degree of income inequality. In the three most populous countries of Asia, the degree of inequality as measured by the Gini coefficient has risen significantly over the past 20 years. It has gone from .32 to .43 in China; from .33 to .37 in India and .29 to .39 in Indonesia.
In Singapore, it has gone from .44 to .48, which makes Singapore one of the most "unequal" economies in Asia, by this measure. In Singapore's case there is also other evidence. According to the World Top Incomes Database, the share of total income of the richest 10 per cent of people in Singapore rose from around 30 per cent in 1995 to more than 41 per cent in 2009. As for the richest one per cent, their share went up from under 10 per cent of the total to a peak of more than 15 per cent in 2008 before falling back slightly.
If inequality of wealth, rather than just income, is taken into account (the ADB's report does not do this), the gaps between the haves and have-nots would be even wider.
However measured, economists now recognise that inequality is a problem that needs to be addressed. Why? For at least three reasons, according to the ADB.
First, it dampens the effectiveness of economic growth in reducing poverty - simply because too many of the benefits of growth accrue to the rich. The ADB estimates that had inequality in Asia remained stable over the past 20 years, an additional 240 million people would have been lifted out of poverty.
Inequality also weakens the basis of growth: it leads to a waste of talent, undermines social cohesion and hollows out the middle class. Third, it tends to worsen governance, by increasing pressure for inefficient, populist policies. For example, to placate angry voters, governments resort to subsidies they can't afford, as well as other policies such as protectionism or other nationalistic measures whose merits are more political than economic.
As to the reasons for inequality, while these vary according to the economy, there are some common themes, says the ADB. One is technological change coupled with globalisation and market-reforms.
While these forces have led to growth, they have also widened the rich-poor divide, because they tend to favour the use of capital over labour (and income from capital is less equally distributed). They also reward skilled workers a lot more than unskilled workers - which has also happened in Singapore, with the shift to the knowledge economy over the last decade. In larger economies like China and India, these forces tend to benefit coastal cities more than inland areas, because the best economic opportunities are seized by people in locations close to trade routes.
There is one more factor that has added to inequality especially in richer countries, which does not get much play in reports by the international institutions, and that is reductions in direct tax rates. A study by Thomas Piketty of the Paris School of Economics, Emmanuel Saez of the Centre for Equitable Growth at the University of California at Berkeley and Stefanie Stantcheva, a PhD student at the same university has found a strong correlation between the reductions in top tax rates in countries such as the US and the UK and the increases in pre-tax incomes of the richest one per cent from the mid-1970s to 2008. In these countries, top tax rates were slashed about 40 percentage points within a decade after the Thatcher and Reagan "revolutions". At the same time, the income share of top one per cent roughly doubled.
Interestingly by contrast, during the same period, France and Germany did not reduce their top income tax rates by much and the share of income of their richest one per cent remained largely unchanged.
So for rich countries at least, tax policies would appear to be important reasons for the increase in inequality. As the authors of the study point out: "Contrary to the widely held view, globalisation and new technologies are not to blame."
So how should countries deal with rising inequality?
According to the ADB's Mr Zhuang, policymakers like to distinguish between inequality arising from unequal effort and that resulting from unequal opportunity. In practice, this is hard to do: the rich would tend to argue that they attained their wealth through hard work, while the poor would attribute their condition to the lack of chances.
Rather than trying to decide who is right (both probably are, to some degree) policymakers should as far as possible eliminate the inequality of opportunity wherever they see it.
So for example, they should spend more on education and health and make both easily accessible, because these influence opportunities. Among other policies, the ADB also recommends:
- more targeted fiscal transfers rather than general subsidies, such as fuel subsidies, which benefit mostly the rich;
- a broadening of the tax base so that governments can collect more revenue; many Asian countries have a very low proportion of working people paying income tax - as low as below 2 per cent in China and India, for example;
- more employment-friendly policies, for example more support for SMEs, which tend to depend more on labour and less on capital and labour market regulations that don't discourage hiring, such as laws that make it impossible to fire workers.
And while the ADB does not recommend this, the evidence would seem to suggest that at least some countries should revisit their tax codes and consider raising top rates of income tax to make the system more progressive. Singapore, which has also reduced top rates of income tax sharply over the past 15 years, might also consider this.
The increased focus on reducing inequality suggests that we are perhaps at an inflexion point in policymaking, where there is a shift in mainstream thinking about economic management. Growth for growth's sake is out, inclusive growth is in; personal tax cuts are out, more progressive tax codes are in; outsized compensation and bonus packages for high-level executives is out, higher pay and protection for workers lower down the scale is in.
In short, the time has come to narrow "the great economic divide", which should be good news on Labour Day.