Income inequality - an overview

Dhaka,  Tue,  25 April 2017
Published : 15 Apr 2017, 20:56:37

Income inequality - an overview

Muhammad Mahmood
Income inequality has now become the principal topic of public debate not only in the developed world but also in developing countries like Bangladesh. So much has been written and discussed about '1 percenters' and '99 percenters',  the general public is now better informed and aware of the issue. Income disparities have become so pronounced that in a country like the USA top 10 per cent now on average have nearly nine times more than bottom 90 per cent.  To make the  matter worse, the top one per cent  on average have over 38 times than the bottom 90 per cent. But this divide pales when top 0.1 per cent income is compared to every one else; it is staggering over 184 times the income of the bottom 90 per cent. The Global Financial Crisis (GFC)  only made the matter worse. Initially it dampened  top 0.1 per cent share but soon after the upward surge of income share for 0.1 per cent has resumed.

In developed countries income inequality is primarily a matter of wage inequality. But in a country like Bangladesh there is an added factor - an all-pervasive inequality of opportunity.   A person's potential to succeed is simply determined by birth.  Increasing social stratification based on various contesting  interest groups and more importantly,  the rural-urban divide in the country  further exacerbating  inequality of opportunity which is directly linked to inequality of outcome as reflected in rising  income differentials in Bangladesh. 

The growing anti-establishment populism has now taken strong roots in most European countries and catapulted Donald Trump to power in the USA. Michael Moore described the rise of Donald Trump to power  as equivalent to a 'human molotov cocktail thrown at the US establishment' to send a clear message. The growing strength of this populist movement has now reached a stage where stimulating economic growth alone would not heal the increasingly fractured society. The populist politicians are blaming globalisation for the loss of jobs at home but forget to mention that  the jobs they are referring to (manufacturing)  have been disappearing long before the current phase of globalisation accelerated in the very early 1990s. This has been happening due to automation and new technologies making many jobs obsolete. Also  technology used in manufacturing now  requires highly skilled labour. While technological innovation destroyed old kind of jobs, it also created new kind of jobs. But that process appears  to be slowing down. No wonder the French Presidential Candidate Benoit Hamon (Socialist Party) is advocating  to impose tax on robots. Larry Summers, former US  Secretary of Treasury, pointed out how capital is now playing two roles (a departure from the  conventional assumption of capital) - one  directly via the  production function ( a factor of production quite distinct from labour)  and the other, indirectly supplementing labour.

Increased  financialisation of the economy   has given rise to the growth of powerful financial services industry (banking, insurance, investment, leverage and derivatives etc.). Increasingly now profits are made through financial channels rather than through trade and manufacturing. This industry has  expanded not only in its size but also in its importance in the economy as reflected in its sizeable contribution to gross domestic product (GDP) . This industry also has become an important source of employment. But given the very specialised nature of the industry, skill requirements are of very specialised. It  is now well  recognised  their influence goes far beyond their role in the economy spilling over into the political arena. The repeal of the Glass-Stegall Act in the USA is  just one important example of their political influence. Even many observers of the industry now argue that this industry has become a threat to representative democracy. The real impact  of the industry on the real economy has always been very questionable . There are now empirical evidence available that suggests that it has contributed to income inequality and wage stagnation of the middle-income groups.Another contribution of this industry  is to bring to the fore the interests of shareholders to the exclusion of all other interests.  As a consequence, shareholders' increased value  pressure generates downward pressure on wage outcome.

Developing economies like Bangladesh has also encouraged their finance industry to develop to promote economic growth. Bangladesh has seen over the last three decades spectacular expansion of this industry, especially banking and insurance.   The industry in Bangladesh has gone even a step further  by promoting financial inclusion of very poor  in rural areas of which microfinance and micro-credit are the policy instruments to achieve that objective.  This has helped to expand the monetisation of rural areas, thereby facilitating resource transfer from rural to urban areas.  The rural economy in Bangladesh has also, as a consequence, become more market-oriented. The increased  financialisation of the economy has created an environment where  huge wealth  has been accumulated  by a section of the rich by defrauding banks, in particular state-owned ones.  Stock market scams in Bangladesh is most likely to be  linked to these  fraudulent financial practices with the ultimate motive for acquiring  control of  various listed companies by bankrupting small-time investors.

The legal system also plays a distinct role  to enable owners of capital to accumulate, consolidate and increase their wealth.  A capital-friendly legal  bias is inherent in market-oriented economies both in  developed and developing countries but that is not very evident always in the case of legislations relating trade unions and safeguarding worker rights.  We have seen how anti-trust laws have been watered down since the early 1980 at the same time  increasingly limiting worker rights. We  have seen reduced income inequality in the post-war period  and that continued  until the 1970s in most industrialised countries. It was largely achieved through collective bargaining by trade unions and government interventions in the labour market through minimum wage legislations and in many countries, also through national incomes policies. This was a period which witnessed an expansion of welfare state largely funded by progressive income taxation.

But under  the influence of the neo-liberal  doctrinaire view these have become an anathema since the early 1980s. One of the leading philosopher gurus of  the neo-liberal school, Nobel Laureate Robert Lucas  clearly articulated their view that economists should not concern themselves at all with income inequality. He went to say that the focus on income distribution is very harmful to sound economics,  instead focus should be on limitless potential of increasing output.  Professor Lucas in his presidential address at the 2003 American Economic Association  annual conference made his famous declaration that the  "central problem of depression prevention has been solved''. If one now looks at Greece, his comment  sounds  very ironic.  One consequence of that speech was almost disappearance of the Fiscal Policy chapter from macroeconomics textbooks for a number of years for under-graduate courses.

Given that most markets are oligopolistic in nature,  the Polish economist Michael Kalecki clearly pointed that in such a market structure (oligopolistic), excess capacities and mark-up pricing are the basis for a successful wage bargain. The more  powerful the trade unions are, the more successful they will be to increase their share of wages in national income. But the role and power of trade unions since the early 1980 have been on the decline  as reflected in the declining membership of unions.  They are also increasingly facing legal obstacles in fulfilling their responsibilities to  safeguard their members' interests. This has seriously reduced their capacity to undertake effective collective bargaining on behalf of their members. There are  both structural and institutional factors that  are at work  causing the decline in union power and  membership. One factor looms large is  that the legal framework that guides union activities has increasingly become hostile, even limiting the rights of workers. This is also true in developing countries including Bangladesh.  Industrial relations laws now in most countries even allow individual bargaining.  But there is a general agreement that the increasing trends in income inequality coincided with the declining fortunes of trade union.

The issue of rising income inequality is bound up with structural and institutional factors which have been undergoing  rapid changes over the last three decades. Some of  these changes were brought about by changing ideological reorientation in developing economic policies with consequent impact on politics as we are now witnessing in most developed countries. 

The factors that helped to reduce income inequality in the decades from the early 1950s through to the late 1970s may provide us with helpful hints how  to deal with the current crisis. But that does not seem to be  on the agenda as reflected in pushing through fiscal dumping in many countries, including the USA,  to boost profits which can further worsen income distribution. This  is also happening in developing countries  to attract foreign investment. The tax system requires overhauling to raise the needed revenues to address the issue of rising income inequality.

The writer is an independent economic and political analyst.

Editor : A.H.M Moazzem Hossain
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