Wednesday, December 21, 2011
In a New Era, the Problem of Economic Inequality Takes a Philosophical Turn
Inequality is a subject of passionate debate. Mere mention of it brings out the best and the worst in most people. It is not a subject for relaxed gatherings at the local pub or your favorite restaurant. And despite the fascination with the subject, there seems to be no tangible action to come from it.
However you choose to look at it, the inequality predicament has a long and celebrated philosophical and political history. As we come to the end of another year in which millions struggle for survival side by side with the aspiring middle class or the decadent plutocracy, it might be a good idea to understand the modern history of inequality and how, like a virulent virus, it has adapted itself to changing political and economic circumstances.
During the last decade the subject of economic inequality has enjoyed something of a renaissance. But then interest in and concern with economic distribution has always had a checkered history. First it enjoyed center stage in the classical economics of Ricardo and Marx, then was moved to the sidelines with the emergence of neo-classicism, which emphasized the efficiency of resource allocation. Later it was brought out of the shadows, although in a very different form, by Keynes and the politics of the New Deal in the United States.
The emergence of communist states like the USSR and later China lent considerations of economic inequality a new paradoxical character. In democratic regimes, the welfare state recognized the popular appeal of universal entitlement to basic public goods and services. Its politics carefully contained the more radical elements of socialist thinking by resisting wholesale nationalization of key industries and banks, which had become the opening song of new socialist revolutions worldwide.
The utopian appeal of Marx was increasingly replaced by the language of equality of opportunity, social inclusion and human rights. In developing countries, fascinated by the political weight and early successes of the USSR, the distribution of income carried a continuing fascination. Again there were some interesting paradoxes.
Many, if not most, postcolonial governments were inherently attracted to the idea of a “fair distribution” of income, not only among different segments of the population within their borders but also in the global economy as a whole. Equality of opportunity seemed to be an appealing concept not only for their own citizens as they struggled to build nation states and create the technical expertise needed to replace departing colonial administrations and businesses. It was just as relevant at the world stage as developing countries struggled to find a place in the economic sun which shone brightly for the rich industrialized countries and so dimly for the majority of less-affluent nations.
Early models of development emphasized the “big push” and the capital accumulation that only a modern industrial sector could provide. Inequality was just a step in the scheme of things. The engine of growth in the much-quoted Lewis model turned on the transfer of labor from the low productivity subsistence sector to the high productivity modern one. Here was an early justification for the statistical generalizations of economic inequality during the process of development captured in the much revered Kuznets curve, which reflects the belief that inequality rises while a country is developing and then falls once a particular level of average income is attained.
The Kuznets curve generated more than its fair share of academic and policy-related controversy. The policy message, as with so much of the work on the distribution of income, was also two-sided. First, there was the comforting conclusion that economic inequality was just a passing phase. Indeed, an acceleration of economic growth can even shorten the length of the shift from widening to narrowing economic inequality. Too much preoccupation with radical programs of asset redistribution and nationalizations would be, on this view, redundant and socially risky.
But all that was before the remarkable economic performance of the Asian “Miracle” countries. Their emergence as serious economic players in the global market in the late 1970s onwards seemed to provide living proof that growth does not always imply a worsening distribution of income. Here were economies that seemed to have achieved in a short span of some three decades record rates of growth with low and stable levels of economic inequality.
The success of the East Asian economies from the 1970s to the advent of the Asian Financial Crisis of 1997-98 carried another political message not ignored by policymakers of the advanced industrial countries and the international financial institutions they funded. This was the conclusion that economic growth may not only be income-distribution neutral but also neutral with respect to political regimes.
This was a comfortable assessment at the time of the Cold War, since it allowed developed countries of the West to support Asian dictatorships as long as they were anticommunist. The logic was simple enough. If growth was distribution neutral and distribution could be managed by a mixture of macroeconomic and social service-oriented policies, there was little to choose between dictatorships and authoritarian regimes in terms of their ability to raise the absolute poor above the poverty line.
Capital market liberalizations of the early 1990s and the globalization of financial markets combined with the rapid growth of world trade, the collapse of the USSR and the botched privatization of Russian public enterprises, and the instability of international capital markets signalled by the 1994 Mexican Financial Crisis and the Asian Financial Crisis only four years later, all began to illustrate the complexity of the new increasingly globalized world.
Anti-globalization protests in Seattle and in WTO meetings later, the collapse of many a third-world dictatorship in favor of multiparty democracy, the emergence of radical Islam, the rise of China and India, and the current global financial crisis emanating from sub-prime mortgage defaults in the United States and culminating with the largest bailout in economic history have all begun to illustrate that mechanical modelling of growth and distribution linkages is of little use in defining practical policy choices.
The result is that traditional economic modelling has to a large extent given way to philosophical discourse. In this new fast-changing and less-ideologically certain world, economic injustice and the need to arrive at a “fairer,” more “equitable” division of resources has moved to near the center of policy making. This concern is present in the “hearts and minds” campaigns of an Iraq or an Afghanistan, it is there in the fears of social instability in India and China as income disparities noticeably worsen, and it is there in the politics of climate change and the collapsed negotiations of the Doha round. It is no longer the simple analytics of a Kuznets curve that is driving this newfound concern with an age-old political economy theme.
It is the jockeying for political space, a larger share of the global economic pie and the creation of a physically safe world friendly to open commerce and labor movements that lie at the heart of this renewed fascination with the fairness and social acceptability of a given pattern of income distribution. The advent of a democracy has merely added new domestic pressures to search for a better sharing of economic growth. That search is likely to go on for years if not decades ahead.
By Satish Mishra managing director at Strategic Asia Indonesia, a Jakarta-based consultancy promoting cooperation among Asian nations.