The rich-poor gap is growing and is a major source of global concern according to two recent reports by the United Nations and Oxfam. Here's a look at what's fuelling the divide and the dangers it poses
EUROPE
Danger of globalisation backlash growing
By Jonathan Eyal, The Straits Times, 3 Feb 2014
LONDON - No continent is better equipped or more experienced at fighting inequality and poverty than Europe. The Europeans came up with the cradle-to-grave welfare system designed to transfer resources from rich to poor. The continent is also unique in operating a system of massive transfers of cash from wealthy states to their poorer neighbours. Equality in Europe is seen not only as an imperative for individuals, but also for entire nations.
Perversely, however, the outcome has been more inequality. The wealth gap between the richest and the poorest European Union states is growing. And last year, the number of people who slid into poverty in Europe was larger than in any other continent, except for Africa, according to a recent global poverty report from the International Red Cross.
To be sure, the roughly €1 trillion (S$1.72 trillion) spent by the EU over the past quarter of a century alone in direct grants to poorer members made a huge difference: Countries such as Greece or Spain may be financially stricken, but they are still better off than they were a generation ago.
Still, the reality is that Germany remains about a third richer than the European average, while Greece is about a quarter poorer; Europe's centuries-old northsouth divide not only remains, but has also been reinforced by the EU financial crisis.
More significant, however, have been the growing poverty indicators within each European nation. Throughout the continent, poverty is defined as an income level of less than 60 per cent of the national median household income. In the former East Europe communist countries, up to a fifth of the population lives under this threshold. Around 15 per cent of the citizens of France, Germany and Britain are classified as poor.
Overall, there are more than 18 million people receiving EU-funded food aid, 43 million who do not get enough to eat each day and 120 million out of a total EU population of 500 million deemed "at risk of poverty" by Eurostat, the continent's statistical agency. "We see a quiet desperation spreading among Europeans," warns the International Red Cross report.
Wealth inequalities are also rising, often in tandem with growing prosperity, as Ireland's example shows. Two decades ago, just before it embarked on its furious economic growth which earned it the nickname of the "Celtic Tiger", the richest 10 per cent of the population owned 30 per cent of the national wealth. Today, that figure is 36 per cent, the second-highest wealth differential in Europe.
The continent's disparities and social exclusion trends are only likely to increase, given record-high unemployment. Over 12 per cent of Europe's labour force is currently without a job, with youth unemployment double that rate; in countries such as Spain or Greece, half of all those aged under 25 have no jobs.
There are many reasons for these developments. Mismanagement is one: huge transfers of cash from wealthier to poorer European countries cannot compensate for bad governance. A European welfare system which just keeps people at the poverty level but offers no incentives for progress does not help either. And a rigid, unionised labour force raises the entry bar for youngsters.
Yet a key cause for these growing inequalities is globalisation: Skilled people have prospered since they were the best-placed to adapt to changing technologies and working environments, but the unskilled in Europe have been hit hardest, since their jobs have gone to lower-paid workers in the developing world. The most vulnerable group of people in Europe today are not migrants or ethnic minorities but young, uneducated white males, often both unemployed and unemployable.
World leaders are right to fear the political consequences of this phenomenon. Social exclusion creates a disenchantment with existing political institutions and a yearning for seemingly simplistic new approaches: The growth of racist and anti-capitalist political movements of both the left and right in Europe is an early warning.
Mr Alexis Tsipras, leader of the extreme left Syriza party in Greece, demands the arrest of all bankers and the confiscation of their assets; he controls almost a third of the country's parliamentary seats. Meanwhile, Ms Marine Le Pen, leader of France's right-wing National Front, regards immigrants as "occupiers" and wants white Frenchmen to be given priority in employment.
"There is nothing politically more explosive, more dangerous and more destabilising than having a whole generation of young people being very frustrated," said Mr Angel Gurria, the boss of the Organisation for Economic Cooperation and Development, at the recent Davos economic forum.
And, as the middle classes get increasingly squeezed, the danger of a backlash against globalisation and free trade increases.
The problem for European leaders is that there is little they can do, at least in the short term. Taxing the rich sounds nice, but it never produces enough cash and leads to capital flight. Increasing social expenditure has been tried for decades, and is no longer affordable.
And, sadly, matters look set to worsen as the continent's overall wealth continues to shrink. According to the EU's own official projections, if nothing is done to reverse the current decline, living standards on the continent will be lower by the middle of the next decade than they were in the mid-1960s.
And fighting for a slice of an increasingly shrinking pie will get messier.
The wealth divide
- The richest 85 people in the world own as much wealth as its 3.5 billion poorest.
- Almost half of the world's wealth is owned by just 1per cent of the population.
- The wealth of the 1per cent richest people in the world amounts to US$110 trillion (S$140 trillion). That's 65 times the total wealth of the bottom half of the world's population.
- Seven out of 10 people live in countries where economic inequality has increased in the last 30 years.
- In the United States, the wealthiest 1per cent captured 95 per cent of post-financial crisis growth since 2009, while the bottom 90 per cent became poorer.
SOURCES: OXFAM, EUROSTAT
U.S.
Growing wealth gap 'reaching point of hurting society'
By Melissa Sim, The Straits Times, 3 Feb 2014
THE Obama administration has devoted countless campaigns and speeches, and political muscle to the issue of income inequality, but the gap between the very rich and everyone else continues to grow.
In his latest State of the Union address last week, United States President Barack Obama noted that "today, after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged".
Indeed, "inequality has deepened" and "economic mobility has stalled", he said.
Some figures to consider: From 2009 to 2012, the incomes of the top 1 per cent grew by 31.4 per cent, according to a study by economist Emmanuel Saez from the University of California, Berkeley. But for the remaining 99 per cent, incomes grew by a meagre 0.4 per cent.
Dr Dimitri Papadimitriou, president of the Levy Economics Institute, said: "If you look at the income distribution among the top 0.1 per cent, they control close to 12 per cent of total income. This doesn't exist in any other country."
The top 5 per cent of households, with incomes of US$191,157 (S$244,000) or more, took home 22.1 per cent of earnings in 2012, census bureau figures show. In contrast, a similar proportion of income - 27.2 per cent - was shared among the bottom 60 per cent of households earning US$64,584 and under.
Professor James Galbraith, who directs the University of Texas Inequality Project, attributes the rise in inequality over the last two decades in large part to the growth of two sectors: finance and information technology.
Dr Papadimitriou noted: "Finance has controlled a big part of the economy... and most of the highest paid are getting more than 100 times the average salary."
According to a survey done last year by the Pew Research Centre, 47 per cent of Americans say inequality is a "very big problem". "It's difficult for people to be oblivious to what is happening around them… people are working hard, playing by the rules, but they are not on a level playing field," said Dr Papadimitriou.
The growing wealth gap and the anger it causes have had rippling effects, which surface in varying forms such as the Occupy Wall Street protests and the trouble Republican presidential candidate Mitt Romney faced fending off attacks that he was an out-of- touch plutocrat.
Besides unhappiness on the ground, experts point out that inequality has other far-reaching consequences.
Dr Galbraith said that "extravagant gains by the already rich" causes inequality which "affects the distribution of political power". In particular, he points to the finance industry's lobbying power and ability to influence policy.
For example, after the 2008-2009 financial crisis, the Dodd-Frank legislation was signed into law in 2010 with the intention of providing greater controls. But till today, many parts of that law have not been implemented because of the pushback from the financial industry.
Many proposals have been offered as ways to narrow the wealth gap, including raising the minimum wage and tax reform. "The top tax bracket is only 35 per cent and in Scandinavian countries it is double (that)," says Dr Papadimitriou.
But raising taxes for the rich is hugely difficult given the fraught relations the Obama administration has with Congressional Republicans. It also runs against an American mindset that supports rewarding enterprise.
As Harvard professor Larry Summers put it at the recent World Economic Forum in Davos: "America succeeds by raising everybody up... The rhetoric of envy and the rhetoric of tearing down, I don't think, is the right rhetoric for America's leaders." He argued that it is easier to allocate resources while growing the pie, rather than cutting up a "stagnant pie".
Some observers have cautioned that longer-term trends such as the rising cost of college education and the tendency of people of the same educational attainment to marry one another will make even more intractable the problems of social immobility and wealth disparity.
Princeton professor Alan Krueger, who is noted for creating the "Great Gatsby curve", which traces the link between higher income inequality and lower income mobility, recently warned that while inequality may act as useful spur, a growing imbalance, driven by globalisation and technology, is reaching the point where it hurts society, the Cornell Chronicle reported.
CHINA
Real gap 'may be even greater'
By Grace Ng, The Straits Times, 3 Feb 2014
IT SHOULD have been a proud moment for China. On Jan 20, Beijing announced that its rich-poor gap had narrowed last year to the lowest level in a decade.
On top of this, farmers' incomes were growing faster those of city-dwellers, while the relatively undeveloped central and western areas of the country were catching up with prosperous eastern regions, senior official Ma Jiantang disclosed at a press briefing on China's 2013 economic performance.
But the good news couldn't mask the fact that - still - the "urban-rural gap in China is greater than in any country in the world", World Bank economist Branko Milanovic wrote in a post on Harvard Business Review Blog Network.
Farmers' median incomes last year were less than a third of their urban counterparts', even after climbing 12.7 per cent to 7,907 yuan (S$1,650) last year. Urban incomes rose 10 per cent to 24,200 yuan.
Last year, China's Gini coefficient - a measure of inequality on a scale of 0 to 1 where 1 represents complete inequality - was 0.473.
This was down slightly from 0.474 in 2012, when China was No.29 on the world rankings, with Lesotho being the most inequitable country in 2012 with a score of 0.632, according to the CIA World Factbook. Only three economies in Asia ranked higher than China: Singapore, at No. 26 with 0.478, Hong Kong, at No. 11 with 0.537; Thailand was at No. 12 with 0.536 in 2009.
A 0.4 score marks the threshold above which social tensions start to rise, according to the United Nations.
So it is no surprise that President Xi Jinping has pushed with great fanfare reforms to tackle inequality across many fronts, from rolling back state monopolies to curbing overheated property prices to raising taxes on the rich and increasing welfare services for the poor. Corruption, which exacerbates the problem, is also one of his targets.
Given the lessons from the fall of imperial dynasties throughout China's 5,000-year history, the country's top leaders would be well aware of the dangers of letting inequality fester.
To be sure, the widening wealth gap is happening across the region. The Gini coefficient for the region as a whole has widened over the past two decades from 0.39 to 0.46.
What's troubling about China is that its score might be much higher, given the hidden grey income of many households - especially officials. According to the Samsung Institute, China's real Gini reading could be as high as 0.6 in 2012, putting it on par with Latin America.
Professor Wang Xiaolu of the China Reform Foundation found in 2012 that grey income could amount to 6.2 trillion yuan - roughly the size of Australia's economy.
And the richest 10 per cent of Chinese households had an annual income 21 times that of the lowest 10 per cent. This was significantly higher than the official estimate of 8.6 times.
A key reason for China's inequality is the dominant role of the government in allocating resources - and keeping the biggest slice of the cake for itself, say analysts.
In particular, in 2009 and 2010, a chunk of the government's 4 trillion yuan stimulus was converted into grey income, due to inadequate checks which allowed "state money to be easily channelled out into private purses", noted Prof Wang.
State-owned firms also enjoy unfair advantages over private firms such as "access to cheap loans and land and dominant positions in lucrative markets", said Beijing-based social welfare researcher Zhang Yiqin.
Property ownership today has become a key symbol of the disparity. Land grabs and property disputes were a key reason behind the estimated 180,000 "mass incidents" such as demonstrations and riots that erupted in 2010, when part of China's stimulus was funnelled into speculative real estate investments, leading to a gross overheating of the property market.
Now Mr Xi's administration has pledged to make the country more equal. It won't be easy.
"Implementing the reforms will be difficult amid opposition from vested interests", said Mr Zhang.
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