Wednesday, January 19, 2022


The alarming rise of Global Inequality

Inequality often finds dangerous expressions of radicalization of communities, militant nationalism, violence and nativistic policies against immigrants, creating social divisions and unrest.

By Jaykhosh Chidambaran

Saturday, November 27, 2021

It is estimated that a mere 62 individuals currently own wealth equivalent to the bottom 50% of the global population! Economic models and avant-garde theories on market deregulation, widespread tax-cuts, reduced social spending that were unequivocally, first implemented by Reagan and Thatcher administrations, on the implicit belief that markets are self-adjusting and thereby are efficient, have proved to be an absolute debacle. The consequences of such lopsided policies have culminated in the 2008 global financial crisis, termed the Great Recession, exacerbated by the sub-prime crisis in the US housing market. Lower- and middle-income groups were adversely impacted by economic liberalism that had resulted in widening of the wealth gap and diminishing their socio-economic mobility. Fiscal deficits skyrocketed, thus becoming untenable and unsustainable and their economic burden passed on to posterity. The economic consequences of Reaganomics and Thatcheronomics in the light of free market capitalism or social democracy as the ideal economic system are intensely debated by economists and intelligentsia even to this day.   

Myopic economic theories have played a pivotal role in this collapse, causing a weakening of the economic system through unfettered deregulation of market forces. The Second Welfare Theory of welfare economics promulgates that the primary role of the economists is to make the economic pie bigger and bigger and it is the onus of the political establishment to determine how this pie is to be divided. Therefore, distribution of wealth and efficiency was less of a concern for economists rather than increasing the GDP output. This was reinforced by another popular theory, though with no empirical proofs called “Trickle Down Economics”, which, even President John F Kennedy patronized, that the only goal of politico-economic process is to make the economy bigger and everyone would benefit. The implicit assumption was that “the invisible hand of market” coined by Adam Smith would act as the facilitator and organizer in income generation, resource allocation and wealth redistribution. Human greed superseding individual self-interest was perhaps the critical factor Adam Smith missed in his metaphor. If history is a guide, individual pursuits of gain doesn’t often translate into general utility of the society.    

But, the evidence for a 50 year worldwide economic performance analysis and income/wealth distribution have yielded disturbing results. For instance, in the US, the GDP has grown incrementally over the last 30 years, but the top 1% currently owns 62% of the total wealth created! The median income of the American middle class is lower than it was 25 years ago, the median income of the full-time mill worker is lower than it was 40 years ago and the wages of the bottom 20% of the workforce has eroded to abysmal levels than it was 50 years ago. While productivity of the American white-collar workforce increased since the 1980’s, their wages have stagnated. Low income leading to lower consumption and reduced Purchasing Power Parity (PPP) resulting in depressed demand for goods and services, and an inevitable recession follows. The rising tide lifted only few boats!

There are competing schools of thought on the causes of inequality. One that is propounded by the likes of the French economist, Thomas Piketty, in his seminal book ‘Capital in the 21st Century’ which summarizes the phenomena in the now famous equation r>g. R stands for rate of return on capital and G for average global economic growth. Substantiated by massive empirical data, he claims that the rate of return on capital has grown 7-9% as against the economic growth at 4-5% in the last 100 years! The owners of capital have their wealth rise exponentially, mostly by reinvesting and “economic rents” comparing to the average national economic growth. 

Another theory is the “Abstinence Theory”, proposed by 19th Century economist Nassau William Senior, which states that the rich are getting richer because they are smart, abstain from substantial spending and they are rewarded for their frugality. But far from truth!! Much of the enormous wealth created in the United States are through capital gains on inherited capital, land and other fixed assets. The owners of these resources enjoy “monopoly profits”, that are garnered and multiplied through exploitation and discrimination of the workforce, through buying out politicians, unethical lobbying with the administration for protectionist regulations, regressive taxation policies and gaining control of the resources and media etc. Is the world ruled by a phenomenon called “Patrimonial Capitalism”, where inheritance of elites rather than entrepreneurship, innovation and enterprise is the source of wealth creation? 

Research indicates that capitalism is at odds with meritocracy, demonstrated by the classic case of higher educational prospects in the United States. The aggregate demand for tertiary education is determined by the income and education of the parents, now pejoratively known as ‘hereditary meritocracy’! On percentage terms, 90% children of the top 10% income group have higher, tertiary university education as compared to the 20-30% children of the bottom 50%! The cost of a university education has risen to prohibitive levels, affordable to only a small, privileged section of the population. Middle- and low-income students irretrievably fall into the vicious ‘debt trap’, which is the cost of leverage to fund tertiary education to compete in the contemporary, ruthless corporate world. Looming educational debt burdens consequently creates a submissive workforce and a deferential society.

Inequality often finds dangerous expressions of radicalization of communities, militant nationalism, violence and nativistic policies against immigrants, creating social divisions and unrest. The world is witnessing such fissiparous trends as in France by the emergence of far-right political parties gaining mass popularity in the socio-political spectrum, accusing North African immigrants or in Britain where pro-Brexit factions winning a critical referendum, thus violating the spirit of Maastricht Treaty and throwing the European Union into socioeconomic turmoil and disarray. Similar anti-establishment, anti-immigration campaigners are on the rise in Brazil, Belgium, Netherlands, Sweden and Austria. Is economic inequality fast becoming a breeding ground for fascist ideologies?

The world is technologically advancing at a blistering pace, self-made billionaires are on the rise, economic mobility is decreasing at the bottom half of the world population and the pace of inequality is now an existential global issue, including G8 nations. It’s time for policy makers, social scientists, economic think-tanks and the intelligentsia to introspect on the true definition of progress, its moral position and social outcome encapsulated in the words of the former US President, Franklin D Roosevelt “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little…”

About the author : Jaykhosh Chidambaran is an accomplished management professional with over 20 years of diverse industry experience in MNC’s and is currently an EdTech Growth and Strategy Consultant for India & Middle East. He is an alumnus of Chicago Booth School of Business. 

Disclaimer : The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of TAS and TAS does not assume any responsibility or liability for the same.