Inequality and Development

Paper No. 5411                                   Dated 28-Feb-2013

By Kazi Anwarul Masud

Columbia University Professor Jeffrey Sachs suggests that because of the effects of climate change the developing countries should not follow the same path the developed countries had taken to reach the level of prosperity they now enjoy.

If the developing countries do emulate then the world economy will push the planet beyond safe operating conditions. As an example Sachs writes: “Today, there are seven billion people on the planet, and each one, on average, is responsible for the release each year of a bit more than four tons of carbon dioxide into the atmosphere. This CO2 is emitted when we burn coal, oil, and gas to produce electricity, drive our cars, or heat our homes. All told, humans emit roughly 30 billion tons of CO2 per year into the atmosphere, enough to change the climate sharply within a few decades.

By 2050, there will most likely be more than nine billion people. If these people are richer than people today (and therefore using more energy per person), total emissions worldwide could double or even triple. This is the great dilemma: we need to emit less CO2, but we are on a global path to emit much more”. Climate change is now globally accepted as clear and present danger and not science fiction.

Jeffrey Sachs recommends sustainable development that will focus on elimination of extreme poverty, sharing of prosperity by all, and protecting natural environment. To do that adoption of technology and its smart use have been recommended. The question that remains to be answered is whether technological advancement would necessarily create employment as it has been seen that computers and automation may increase efficiency but also cuts jobs.

Joseph Stiglitz whose book The Price of Inequality has been widely read and discussed spoke of his experience at the last Davos meeting. He wrote of a meeting on technology and unemployment: Can countries (particularly in the developed world) create new jobs – especially good jobs – in the face of modern technology that has replaced workers with robots and other machines in any task that can be routinized? Overall, the private sector in Europe and America has been unable to create many good jobs since the beginning of the current century. Even in China and other parts of the world with growing manufacturing sectors, productivity improvements – often related to job-killing automated processes – account for most of the growth in output. Those suffering the most are the young, whose life prospects will be badly hurt by the extended periods of unemployment that they face today.

Stiglitz, observes The Guardian, is one of those economists like Paul Krugman and Raghuram Rajan who are trying to inject morality into capitalism. Stiglitz demonstrates that in the US for roughly 30 years after the Second World War, the 1% had a steady share of the US cake. In the five years to 2007, however, the top 1% seized more than 65% of the gain in US national income. In 2010, their share was 93%. This did not create greater prosperity for all. On the contrary, much of this gain was "rent seeking", not creating new wealth but taking it from others; a modern wild west. In the last three decades, the bottom 90% in the US have seen their wages grow by 15%. The 1% has seen their wages increase by 150%. This has been made possible due to inordinate influence wielded by the rich, both politically and economically, through capturing political institutions through special interest groups and portraying false picture of a “free market” that effectively did not provide information equally to all. Resultantly those with advance information and politico-economic clout had a decided advantage over the others and reaped the benefits of an unequal competition. Added was the lack of accountability in the financial sector that brought the economies of the developed countries to their knees with tidal effects on the economies of the developing countries due to the dependence of the economies of export led growth on the importing economies of the West.

The emerging economies of China and India, for example, continue to register high growth rate, much more than the developed economies, due to resurgence of domestic demand and vibrancy of their large middle class. In the case of the US Joseph Stieglitz criticizes in an op-ed (Complacency in a leaderless world) of the US politically paralyzed by the Republicans’ infantile political tantrums, and Europe focused on ensuring the survival of the ill-conceived euro project, the lack of global leadership was a major complaint at Davos.

In the last 25 years, the global community has moved from a world dominated by two superpowers to one dominated by one, and now to a leaderless, multi-polar world It may be premature to sign off the preeminence of the US as a global economic power. The US still continues to account for about a quarter of the global GDP and despite the possibility of China overtaking the US and become the largest economy in the world the per capita income by IMF estimate for 2011 for the US was more than 47000 international dollars while that of China was slightly more than 8000 international dollars calculated on PPP basis. Evidently due to more than one billion people the per capita income of China was bound to be low.

The question is whether China can catch up with the US economically and militarily in the coming decades. Former US Defense Secretary Leon Panetta considered China’s military to be largely sub-standard. Panetta also reassured US allies discomforted by China’s “new belligerence” over Spratly Islands that the US was  going to remain a presence in the Pacific for a long time though   Pentagon’s report of 2011  assessed that less than 30% of China’s naval and air force and 55% of her submarine fleet could  be considered modern. 

Harvard Professor Joseph Nye Jr does not think any nation individually nor in concert with others can challenge the US might. Apart from the fact that President George W Bush had promised that the US would never allow an armed race to happen again and given the fact that the US defense spending is more than the combined defense spending of other major powers under President Barak Obama the American preeminence will remain unquestioned in the foreseeable future.

President Carter’s National Security Advisor Zbigniew Brzezinski (Foreign Affairs-Jan/Feb 2012) advises the US to have cooperative relations with China because “intelligent self-interest should prompt the United States and China to exercise ideological self-restraint, resisting the temptation to universalize the distinctive features of their respective socioeconomic systems and to demonize each other.

The U.S. role in Asia should be that of regional balancer, replicating the role played by the United Kingdom in intra-European politics during the nineteenth and early twentieth centuries”.

Contrary to Brzezinski’s advice on the US-China cooperative relations Chicago University Professor John Mearsheimer does not think that China can rise peacefully. He predicts that China will try to become Asian hegemon and would not tolerate the US or any other power as a contestant in the Asia-Pacific region. Mearsheimer advises the US to remain strong in order to confront possible Chinese threat to the US interests. China equally looks at the US moves to strengthen its presence in the Pacific as a threat and deplores US attempts to “encircle” China with strategic relations with Japan, India, South Korea and supporting the case of Vietnam and Philippines on Spratly Islands.

But some intellectuals ( Foreign Affairs-Sept/Oct 2012) argue that the US more than any other country has contributed to China’s modernization, given China access to markets, capital and technology, trained Chinese experts in different disciplines, prevented remilitarization of Japan, maintained peace in the Korean peninsula and helped avoid a war over Taiwan. First Obama administration introduced the idea of “strategic reassurance” which basically meant that while the international community would welcome China’s rise, China also at the same time must assure the international community that her buildup would not pose any threat to others. 

In recent past concerns have been expressed over China’s assertiveness over Spratly Islands dispute with neighboring countries like Japan, Malaysia, Brunei, Vietnam and the Philippines . The US has taken a position that does not favor China and has restated its intention to remain a Pacific Power. One must, however, admit that China has been supportive of the economic development of developing countries of Asia and Africa without seeking hegemonic advantage. Importantly China’s meteoric rise have impressed many developing countries to the extent of enthusing them to follow the “China model” described by The Economist as having one-party rule, an eclectic approach to free markets and a big role for state enterprise being among its commonly identified ingredients.

The Chinese themselves are reluctant to advertise the China model as an alternative to the Washington Consensus. More so as the fruits of China’s impressive economic development has not benefited large number of Chinese nationals. For the last many years China has stopped publishing Gini coefficient that measures inequality of income distribution. But it is presumed to be 0.5 well above the measure experts consider socially destabilizing. Besides China may be looking at an aging population mainly contributed by its one child policy and therefore would not have the advantage of demographic dividend that can sustain the level of economic development that has made China an example fit for emulation.

It appears that there exists a contradiction between equitable distribution of national wealth and the fast rate of growth of an economy. According to John Hopkins Professor Damien Ma China is prosperous but staggeringly unequal, strong but profoundly insecure (Foreign Affairs-Nov 2012). He observes that over the past ten years Chinese authorities primarily allocated money for economic growth and not for welfare needs of the Chinese people and those economic opportunities largely passed by those lacking political connections.

Like the US China too has become an unequal economy. But then equality in the living standard of a people can hardly be ensured under any economic system as all societies are class based either on  land ownership or money. What countries can aspire to acquire is to make available equal opportunity to all citizens. But given the basic human traits of selfishness to promote one’s own making available equal opportunity to all like perfect competition in the market would remain an intellectual exercise that cannot be translated into reality.

One of the fundamentals of sustainable development in the form of social equality is likely to remain a far cry. The other factor-economic growth-of course can be realized but the protection of environment at the same time as energy consumption being an essential component of economic growth would be difficult to ensure. Unless the production process can be made energy efficient an inverse relationship would exist between economic development and environmental protection. 

As stated earlier side by side with economic development social equality also has to be ensured. Jerry Mueller argues (Foreign affairs-March/April 2013) that inequality is an inevitable product of capitalist activity, and expanding equality of opportunity only increases it-because some individuals and communities are simply better able to explore the opportunities for development and advancement that capitalism offers. This difference in the ability to explore opportunities is due to difference in the inherent human potentials and also the encouragement or impediment that an individual gets from his environment or community. Regardless of the causes that may have been accountable for inequality peaceful coexistence of democracy and capitalism depends on reducing the inequality so that the conflict between 1% and 99% does not become the narrative of the 21st century.

The way to bring about equality is diverse. The left would like higher taxation on the wealthy and higher expenditure on social benefits that would reach the greater number of the people while the right would like lower taxation as an inspiration to the wealthy to invest that in turn would promote economic growth and employment. Unfortunately the super rich assured of the benefit of lower taxation may not necessarily be enthused to invest in his/her country but invest in countries that offer lower production cost. Besides surplus income may not increase consumption as the marginal propensity to consume by the rich has historically been found to be lower than that of the middle class.

Global efforts should, therefore, be directed at creating an egalitarian society defined as a political doctrine governing that all people be treated as equals and have the same rights and a social philosophy advocating the removal of economic inequalities between individuals as well as groups of people. At the end of the day only a socially and politically stable society can prosper.

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