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 exhortation’ in November contains a number of striking
sub-headings, including ‘no
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.