God, Mammon and the debate on inequality

Kevin Watkins
21 January 2014
Debates on inequality move in mysterious ways. Last November, Pope Francis used his Apostolic Exhortation to deliver a theological swipe at markets that concentrate wealth while leaving ‘lives stunted for want of opportunity’. This week, the rich and powerful gathered at the World Economic Forum in Davos will engage in their own moment of deep reflection on wealth disparities. The prompt: a WEF risk survey identifying inequality as the number one threat to the global economy. Meanwhile, the UN High-Level Panel charged with framing the post-2015 development goals identified ‘leaving no one behind’ as an imperative.

With God, Mammon and the UN apparently united in common cause, you might have thought it would be game over for the drift towards growing inequality. Unfortunately, the evidence points in the direction of rising disparities, raising the obvious question: namely, how do we convert the steady stream of concern over inequality into strategies for greater equity?

As my colleague Andrew Norton pointed out in an excellent recent blog, the popular narrative on globalisation as a force for reducing inequality has been overcooked. Adjusting for the underreporting of top incomes, Branko Milanovic shows that the global Gini coefficient has been rising. The top 5% in the global wealth distribution have enjoyed a windfall: collectively, they have captured 44% of the increase in world income since the late 1990s.

The primary motor driving the rise of global inequality is within-country disparity. This is powerfully documented in a new Oxfam report written by Ricardo Fuentes and Nick Galasso (read it!). Beyond the OECD, comparable cross-country data on inequality remains partial. But Fuentes and Galasso show that, for a large group of countries – including India, Pakistan, Nigeria, China and Mexico – the top 10% are pulling away in-country. One of the most striking (make that shocking) findings of their report is that the top 1%
of the global wealth distribution control 65 times the total wealth of the bottom 50%.

Not all development commentators are enamoured of the growing focus on inequality. Lant Pritchett, a professor of economics at Harvard, has captured the mood of the dissenting camp in colourful fashion. In an attack on the Apostolic Exhortation Professor Pritchett raises theological and economic objections. On the former, he declares the Pope’s concern over inequality to be an incitement to the sin of greed – a red-card violation of the tenth commandment. Drawing from the Oprah Winfrey school of theology, he urges people to focus on personal betterment rather than the wealth of others. Turning to his home territory, Lant also offers the Pope some advice on the economics of development. ‘Poverty matters; injustice matters’, he writes: with the rider that ‘mere inequality is beside the point’.

In the last judgement, who knows God’s will on inequality or the divine preference on the global Gini coefficient? Suffice it to say that I think Lant gets it badly wrong, and not just on the theology.

The Apostolic Exhortation is clearly not an incitement to avarice. It’s a challenge to what the Pope describes as the ‘globalisation of indifference’ to extreme deprivation in the midst of plenty and an appeal to human solidarity.  More worrying than the theology, though, is Lant’s view that concern over inequality is a symptom of what Margaret Thatcher famously described as ‘the politics of envy’ and a diversion from absolute poverty reduction.

This is a confused argument. What drives public concern and protest over inequality is not envy, but the violation of basic precepts about fairness and social justice. Moreover, plenty of prominent economists would challenge the case for not questioning current patterns of wealth distribution. Robert Solow is one prominent example. Beyond issues of intrinsic fairness, extreme wealth disparities tend to restrict social mobility. They also act as a brake on economic growth and fuel economic instability – a point made this week by the head of the IMF, Christine Lagarde. Far from being ‘beside the point’ when it comes to absolute poverty, rising wealth disparities dampen the effects of economic growth on poverty reduction. This is true both for rich countries such as the United States and, as Kofi Annan’s Africa Progress Panel and the World Bank have highlighted, for sub-Saharan Africa

What of the wider view that governments should focus not on wealth disparities but on disparities in opportunity? This is the ultimate false dichotomy. Some economists would argue that an increase in top incomes is acceptable, provided that it doesn’t diminish the wealth of others – the so-called Pareto principle. But as Angus Deaton has argued, rising wealth disparities tend to go hand-in-hand with less equal opportunities for health, education, political participation and other dimensions of well-being. The Pope’s economics may not be infallible, but his basic argument on wealth inequality as a source of wider injustice is sound.

That brings us back to Davos. In their day jobs, many of the corporate leaders and governments in Davos are actively fuelling the very inequalities that apparently cause them such consternation. Public policies that respond to fiscal pressures by providing tax cuts for the rich and welfare cuts for the poor are one example. Similarly, tax evasion by global companies is hollowing out the revenue base of rich and poor countries alike, making it more difficult to finance the public services needed to expand opportunity.

This interface between extreme inequality and public policy has been widely neglected. As Fuentes and Galasso argue, the influence of the very rich tends to rise with their wealth, often to the detriment of the public interest. To take one example, Pakistan’s elite has legislated to minimise its tax liabilities and maximise opportunities for tax evasion. The resulting revenue shortfalls, allied to weak governance, help to explain the chronic under-provision of basic health and education services.

It is time to move from statements of concern over inequality to action. Elsewhere, I have argued that the post-2015 development goals should include equity targets. These could take the form of pledges to cut disparities in child survival, school attendance and learning outcomes, and provision of health care. They could be supplemented by public reporting on the share of growth captured by people living in poverty and other wealth-inequality indicators. The post-2015 framework could set the broad parameters, with each country – developed and developing – setting out detailed targets, identifying policies for achieving them, and reporting to their citizens on the results.

Of course, targets don’t change the world. What they can do, though, is turn the spotlight on our deepening global divides – and on what governments and the participants in the Davos alpine retreat are doing to close them.

Kevin Watkins