An Economy for the 1%?

Inequality – A shocking revelation

According to Oxfam report, the combined wealth of the world’s 8 richest men: Bill Gates, Warren Buffett, Carlos Slim, Jeff Bezos, Mark Zuckerberg, Amancio Ortega, Lawrence Ellison and Michael Bloomberg is equal to that of the poorest half of the world’s population. While this alarming figure is astonishing to many, income inequality is not an unheard-of-phenomena. In fact, we could see it coming. It has been brought up to the attention of public throughout the years, but were disregarded by some as hoax. For instance, Christine Lagarde’s effort to raise concerns over inequality was in vain and faced backlashes from economists back in Davos 2013.

Other findings of the report showed that since 2015, the richest 1% has owned more wealth than the rest of the planet. While the income of the poorest 10% has increased by less than $3 a year between 1988 and 2011, the income of the richest 1% has increased by 182 times as much. A Financial Times Stock Exchange 100 CEO earns as much in a year as 10,000 people working in garment factories in Bangladesh. In developing countries, income inequality which is measured by Gini Coefficient, shows a more disconcerting situation. In Vietnam, the richest man in the country earns more in a day than the poorest person earns in 10 years. The wealth of the rich is growing at an unprecedented rate. It is predicted that we will witness the first trillionaire in 25 years’ time. This suggests a far greater income gap, which can be devastating for the economy if no concrete effort is done to address the underlying problem.

Why the rich get richer while the poor get poorer?

Riches are increasingly concentrated in the hands of few, perpetuated by the unequal distribution of power within a capitalist society. The rich are fueling the inequality by evading taxes, suppressing wages, and influencing policy making.

The rich and big corporations actively seek ways to evade and dodge taxes. While the two terms are often misused interchangeably, they have distinct differences. Tax dodging refers to the legitimate way of sheltering income from taxes, whereas tax evasion involves illegal act of minimizing taxes paid. The Panama Papers, which exposed more than 214,488 offshore entities illustrates how the rich use tax havens for their own economic benefits. The John Doe who leaked the Panama Papers, documents cited income inequality as the reason for his action, that ‘because he understood enough about their contents to realise the scale of the injustices they described’(BBC, 2016). In developing countries, $100bn are lost each year to tax avoidance, which can be used for health care, education and other welfare to improve the lives of millions (Crivelli et al., 2015)

Besides, corporations are motivated to pay out large share of its profit to its shareholders, driven by their goal to create greater shareholder value. In UK, 10% of profit were returned to shareholders in 1970 but in recent years, this figure has grown to 70% (Purpose of Corporation, 2016). Among the shareholders, majority are the rich, while institutional investors representing the less wealthy and working class like pension fund own only insignificant shares. Who benefits from this? Again, it is the rich. This cycle of transferring wealth from the rich to the rich has done nothing but widened the income gap.

The rich have also utilized their economic power to suppress wages of working class in order to reduce cost. This answers the question of the increasing gap between the rich and the poor. The International Labour Organization estimates that 21 million people are forced laborers, who generate an estimated $150bn in profits each year (Wheelwright, 2016). Those whose labor are used to generate profit, are not given their fair share of income while those at the top walk away with the fruits of their labor. This is the reality of our society—a population that adopts an economic system that funnels wealth to the rich at the expense of the poor.

The economic power of the rich is so vast that is enables them to influence political outcome. For instance, Charlos Slim controls approximately 70% of all mobile phone service and 65% of fixed lines in Mexico, which contribute 2% of the country GDP. This enables the ultra-rich who have control over great amount of resources to pressure the government and policy makers into making policy which favor them. The policies are therefore rigged at the expense of the poor and powerless. Alphabet, in particular, is one of the biggest lobbyists in Washington and has been in constant negotiation in Europe over anti-trust rules and tax. Smaller businesses, on the other hand, struggle under the monopoly power of giant corporations. Therefore, far from trickling down to the those who need it most—the income and wealth are being sucked upwards at an alarming rate. Once a fortune is accumulated, it develops a momentum of its own. When you are rich, it seems harder to get poor given the ability to keep the ball rolling in acquiring wealth: you get to acquire the best investment advice and possess the economic power to monopolize and manipulate, while the poor fall deeper into poverty.

The Implication

Quoting from President Obama, a world where 1% humanity controls as much wealth as the bottom 99% will never be stable. Inequality which is trapping hundreds of millions in poverty has resulted in increased crime and insecurity, and is a threat to social stability. Wage stagnation, insecure jobs, and a widening gap between the rich and the poor have led to disillusionment with mainstream politics. The events of Brexit and Donald Trump’s reign show the public’s effort to overthrow the establishment due to their loss of confidence in the existing political and economic establishment.

The Cure

Winnie Byanyima, Executive Director of Oxfam International believes that the millions of people who have been left behind by the broken economies need solutions, not scapegoats. In fact, three quarters of extreme poverty can be eliminated using existing resources (Hoy & Sumner, 2016). In the light of that, Christine Lagarde, echoed by Richard Baldwin, professor of International Economics at the Graduate Institute of International and Development Studies in Geneva, called for redistribution of wealth. Joe Biden reinforced that there is an urgent need for the implementation of a progressive and equitable tax system where everyone pays their fair share. ‘The proceeds of business activity should go back to those who enabled and created them’, said formal vice president of the United States.

However, merely taking from the rich and giving to the poor does not promise sustainability as it does not address the fundamental problem underlying income inequality. There is a need for a pro-growth approach which invigorates the middle class by creating a favourable environment for making money. The middle class has been the engine for growth, but it is being hollowed out, per Joe Biden. He suggested that the U.S. government could, and should, pay for college to help advance people in their careers. In addition to addressing income inequality, there is an indispensable need to address gender pay gap. Women constitutes a large proportion of the lower income group. For each dollar men earn, women earn only 79 cents (Sahadi, 2017). Therefore, the society should work hand in hand to dismantle barriers to women’s economic progress by improving their competency.

To curb the problem of tax avoidance through tax havens, government should promote cooperation, instead of competition, in terms of providing lower corporate tax. A new global consensus needs to be reached to ensure corporations and rich pay for their fair shares of taxes and maintain reasonable wage rate of labour.

Creating an economy for the 99%

Economic growth ought to be inclusive to ensure its sustainability. Economic progress is about attaining shared prosperity, instead of few thriving at the expense of the rest. The economy has enough resources for all. Careful management and allocation that work in the interest of everyone, is indispensable, so that the proceeds of growth are distributed fairly, not just to those who have the power to control and manipulate them.  

GINI Index by Countries

Source: http://data.worldbank.org/indicator/SI.POV.GINI

Download The Report & Infographic Here:

Report - An Economy for the 1 Percent.

Infographic: An Economy for the 1 Percent

 

References

BBC News. (2017). Panama Papers: Source breaks silence on Mossack Fonseca leaks – BBC News. [online] Available at: http://www.bbc.com/news/world-latin-america-36232142 [Accessed 25 Jan. 2017].

Crivelli, E., De Mooij, R. and Keen, M. (2015). Base Erosion, Profit Shifting and Developing Countries. 1st ed. [ebook] IMF. Available at: https://www.imf.org/external/pubs/ft/wp/2015/wp15118.pdf [Accessed 25 Jan. 2017].

  1. Wheelwright. (2017). Technology news, features and analysis from Guardian US | The Guardian. [online] Available at: https://www.theguardian.com/technology/2016/sep/26/tech- news-lobby-election-taxes-tpp-national-security [Accessed 25 Jan. 2017].

Hoy, C. and Sumner, A. (2016). Gasoline, Guns, and Giveaways: Is There New Capacity for Redistribution to End Three Quarters of Global Poverty?. [online] Center for Global Development, p.433. Available at: http://www.cgdev.org/sites/default/files/gasoline-guns-and-giveaways-end-three- quarters-global-poverty-0.pdf [Accessed 25 Jan. 2017].

Purposeofcorporation.org. (2017). News – Behind the Purpose of the Corporation infographic – Purpose of the corporation. [online] Available at: http://www.purposeofcorporation.org/en/news/5009-behind-the-purpose-of-the- corporation-infographic [Accessed 25 Jan. 2017].  

Sahadi, J. (2017). 6 things you need to know about the gender pay gap on Equal Pay Day. [online] CNNMoney. http://money.cnn.com/2016/04/12/pf/gender-pay-gap-equal-pay-day/v