Why Addressing Inequality Matters by Chantal Line Carpentier, Richard Kozul-Wright and Fabio David Passos
The Rio+20 negotiations began amidst the fallout from the 2008 financial crisis, which made it abundantly clear that the economic, social and environmental imbalances that had built up recently could no longer be tackled separately, sequentially, or by countries acting alone. Despite rapid export growth, strong capital inflows and high commodity prices in the developing world, the resulting income gains had been unevenly distributed, and many poorer countries and communities remained vulnerable to shocks and reversals. Crisis came in the wake of slow growth, massive income redistribution in favour of the top 1 per cent and an explosion in private debt, provoking not only a degree of moral soul-searching but also raising concerns about the fragility of the social compact.
It was recognized that the sustainable development goals (SDGs) would have to be more universal and more inclusive than the Millennium Development Goals (MDGs), to address a wider range of socioeconomic differences around which inequalities had emerged and grown.
The Scale of Inequality
Compared to 30 years ago, income inequality has risen in a startling number of countries and is at its highest level in most member countries of the Organisation for Economic Co-operation and Development (OECD) since the end of the Second World War. Moreover, income inequality has been compounded by wealth inequality, particularly in countries with already high inequality levels such as the United States of America. Other traditionally more egalitarian countries, such as Germany, Denmark and Sweden, have also seen the gaps between rich and poor increase.
Economists have been making the connection between globalization and income convergence, and closing income gaps across nations appears to be a clear trend, reflecting the growth slowdown in rich countries and sustained rapid growth in China and later in India. However, the trend is less secure than many had initially envisaged (The Economist explains, 2014). Moreover, recent growth spurts in developing countries have themselves coincided with rising levels of inequality, in some cases as or even more pronounced than in advanced economies.
Combining these intra/inter-inequality trends is no easy task, though overall, the global Gini coefficient has, on some estimates, dropped slightly over the last 20 years (Lakner and Milanovic, 2013), in no small part because wage earners in the advanced countries have seen their incomes squeezed. Even so, and except for the few most unequal countries, it is still greater, and by far, than inequality within countries.
Understanding inequality dynamics and their links within and across countries is one of the biggest challenges facing analysts and is also at the heart of the post-2015 development agenda.
Why Inequality Matters?
It is clear that inequality can be a serious threat to social and political stability. There is a growing recognition, however, that it can also threaten sustained growth. A study by the International Monetary Fund (IMF) showed that greater equality of income increased the duration of countries’ economic growth spells more than free trade, low government corruption, foreign investment, or low foreign debt (Berg and Ostry, 2011). There is literature exploring the links between growing inequality and economic shocks and crises (Bordo and Meissner, 2012), a connection that appears to be closely associated with the greater economic and political weight of unregulated financial flows and markets (UNCTAD, 2012).
Inequality jeopardizes the achievement of the overarching economic goals proposed by t he Open Working Group (OWG) of the General Assembly on Sustainable Development Goals, such as eliminating extreme poverty, boosting decent work and transforming economic structures. Inequality is not a matter of fate or chance and can be reversed through policies and reforms, a point made recently in the path-breaking research of Thomas Piketty. While solutions rest with national and regional policy makers, collective actions and measures at the international level also have a crucial role to play.
SDG 10: Reduce Inequality within and among Countries by 2030
The OWG on SDGs proposed a stand-alone goal on inequality with seven targets and three means to achieve them. The first target calls for the income of the bottom 40 per cent of the population to grow faster than the national average; the second—for the empowerment, social and economic inclusion of all, irrespective of race, ethnicity or economic status; and the third—for ensuring equal opportunity and reducing inequalities of outcome, including through eliminating discrimination by means of appropriate policies and actions.
Four other targets focus on progressively adopting policies to promote greater equality, including fiscal policies, regulation and monitoring of global financial markets and institutions, policies to promote the orderly, safe, and responsible migration and mobility of people, and the long-standing issue of fair representation and voice of developing countries in the global governance system.
Proposed means of implementation are more vague and more difficult to quantify and to develop indicators that will help measure progress towards reducing inequalities. Further thinking is needed. Specific proposed means include: 1) upholding the principle of special and differential treatment for least developed countries (LDCs); 2) directing official development assistance and encouraging financial flows, including foreign direct investment to countries in special situation such as LDCs, African countries, small island developing States, and landlocked developing countries; and 3) reducing the cost of migrant remittances transfers to below 5 per cent.
Can We Achieve this Goal by 2030?
Whether the targets and means under SDG 10 and SDG 17 will reduce inequalities by 2030, depends on the robustness of indicators selected to guide and monitor progress, the presence of political will for regional and international cooperation to rebalance the global system, and strengthened policy coherence.
Tackling within country inequalities will require increased policy and fiscal space at the national level to enact the country-specific mix of policies needed to lift all boats and, in particular, to increase the income of those at the bottom. Two crucial variables will be jobs and wages. Job creation remains the only assured way of tack ling poverty on a sustained basis, in particular where the labour force is expanding rapidly. But rising wages are also necessary to expand domestic demand, increasingly seen as an essential component of more sustainable growth (UNCTAD, 2013). Countries will thus have to build the kind of infrastructure and productive capacity that lead to a more diversified economy, moving away from dependence on commodities and achieving some degree of success in more sophisticated industrial activities, which relies on industrial policy.
Addressing imbalances arising from the international economic system will require global reforms of financial, investment, trade, monetary and fiscal system in order to reduce volatility. International conventions against tax avoidance and evasion to stem the use of tax competition and tax havens to circumvent fiscal responsibilities would help ensure sufficient financing for long-term investment projects of the kind that are required to achieve the inclusive and sustainable development paths. Between 8 and 15 per cent of the net financial wealth of households is held in tax havens, resulting in a loss of public revenue amounting to between US $190 and US $290 billion annually. Half of it is from developing countries, which may also be losing over US $160 billion annually through misuse of “transfer pricing” and “thin capitalization” for shifting accounting profits to low or no-tax jurisdictions. Making mandatory and extending the Extractive Industries Transparency Initiative would also help mobilize domestic resources.
While global reform will be slow, greater stability at the regional level can be generated by building up alternative rules and institutions to provide a degree of protection from financial shocks, requiring significant amount of capacity-building, South-South and triangular cooperation and also a fiscal cooperation space. For example, China’s success has relied on selective capital controls, countercyclical fiscal policy and active monetary policies aimed at stable exchange rates, as well as a full range of active industrial policies instead of solely focusing on GDP growth (UNCTAD, 2013).
Finally, an integrated policy framework that reflects all development models and ensures policy coherence across goals will be needed to assure that social, economic and environmental goals are mutually supportive.
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First published in the UN Chronicle, Department of Public Information, United Nations.
Chantal Line Carpentier is Chief of the New York office of the United Nations Conference on Trade and Development (UNCTAD). Richard Kozul-Wright is Director of the Division on Globalization and Development Strategies at UNCTAD. Fabio David Passos is an intern at UNCTAD and a student in International Economic Politics and Financial Markets at School of Professional Studies, Center for Global Affairs, New York University.