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Fear of disorder versus hope for change: the politics of global inequality

Written by Andrew Norton

Turn-of-the-year reflections usually focus on events. But this year there is a striking focus on a longer-term trend – namely, global inequality.

Perhaps minds have been focused by Bill de Blasio’s inauguration as mayor of New York City – the first mainstream politician in a long time to make reducing inequality a major part of his programme. Then, two major global figures made inequality their ‘theme of the year’ in 2013. Pope Francis’ ‘apostolic exhortationin November contains a number of striking sub-headings, includingno to an economy of exclusion’, and ‘no to the inequality which spawns violence’. Barack Obama has also highlighted the ways in which technological, social and political change are creating greater inequality and insecurity within the US.

Some of this ‘zeitgeist’ concern with inequality is clearly driven by fears of social disorder in developed countries, many of which have been experiencing a potentially toxic mix of lack of growth and growing inequality. As a result, income inequality is ranked as the no. 1 risk in terms of ‘likelihood’ by the World Economic Forum (WEF) Global Risks Report of 2013.

Increasingly the focus of debate is on the global – not the national – frame, as in the Financial Times’ editorial of 1 January (‘Much ado about rising inequality’). They reference the excellent work done by Branko Milanovic at the World Bank using an ever-improving database building on a large number of national household surveys (565 of them in 2013) to track the evolution of global income inequality between 1988 and 2008. They link to his 2012 working paper, which comfortingly concludes that global inequality (measured by a ‘global gini coefficient’) reduced over the period. The short story is that rising national-level inequality is driving global inequality upwards: a trend more than offset by dramatic reductions in inequality between countries (driven in that period largely by the economic rise of China and India).

However, the FT is not up to date. Branko’s December 2013 analysis (with Cristoph Lakner) of the same (but improved) material says something significantly different: they now find that the two countervailing trends still stand – but they equal each other out. Their best estimates now (and all this is inevitably somewhat approximate given the nature of the database) say that global inequality did not in fact fall between 1988 and 2008.

So, why the change? Part of the improved methodology in the 2013 paper involves attacking one of the enduring mysteries in studies of income distribution in a different way. There is a persistent and growing discrepancy between two figures that ought, in theory, to be the same – namely the total of national consumption as measured in national accounts data and the total of national consumption as extrapolated from household surveys. This discrepancy is bafflingly large for some developing countries (India in particular): a discrepancy dealt with by some authors by attributing the ‘missing’ amount across the entire population following the income distribution suggested by the household survey data. Lakner and Milanovic make a persuasive case that the real driver is the fact that household surveys are very bad at measuring consumption (or income) of the wealthy. This is for all kinds of intuitively obvious reasons – rich people are hard to find, don’t like answering questions about money, and are really good at hiding it. Furthermore there is plenty of empirical evidence from tax data that household surveys underestimate incomes at the top end. Lakner and Milanovic attribute the missing ‘national accounts’ money entirely to the top earners (in increasing amounts according to how wealthy people are). As a result, the notional reduction in global inequality found in their 2012 paper disappears.

So where does this leave us? In short with two immensely powerful long-term drivers – one (the fact that developing countries are comfortably out-pacing OECD countries in terms of economic growth) pushing global inequality down – and the other (increasing country-level inequality driven largely by growing elite incomes) driving it up. If you stop for a moment to think about the known scale of the first phenomenon (economic convergence between rich and poor countries) – then the fact that the second one can cancel it out is pretty striking.

And there is a further slightly scary thought I would add – the trend that acts to push down global inequality (inter-country convergence) has a natural, logical end-point. The trend of increasing inter-personal inequality (driven by increasing separation of hyper-elites from the rest) does not. In terms of the really long term, if the trends continue on a plausible trajectory we can expect that, at a certain point, global inequality is going to start to seriously accelerate.

Where does this leave the debate about inequality and social disorder? The journalist Paul Mason has carved out a niche as the chronicler of the global movements that use inequality as a major part of their narrative (such as ‘Occupy’). He started with a famous blog in 2011 – ‘20 reasons why it’s kicking off everywhere’. His end-of-the-year offering for 2013 gently mocked the ‘political risk’ industry that seeks to predict likely instability on the basis of country-level inequality. He argues, rather, that: ‘the networked character of modern society makes country-specific unrest predictions pointless. There is, in reality, one political entity that matters….It is the world’.

To put it another way – even if in 2014 ‘it’ might not kick off everywhere – it certainly could kick off anywhere. We can expect the WEF to continue to be concerned.

Where does all this lead in terms of a policy agenda? Here I think the FT editorial gets it (partly) right. There is one overriding priority: to create a global tax system which is fit for our evolving global economy. This year’s G8 agenda item on tax built some helpful momentum. More effective deployment of that revenue for social ends will of course be needed too. But to get there we will need to find a new political courage and voice on inequality – maybe Bill de Blasio’s success in New York will be the start.