The main reason behind the current Occupy Wall St. protests and others like it is the idea that societies have become far too unequal. Whilst inequalities between countries may be falling-thanks largely to the rising average incomes of the two most populous countries, China and India, over the last decade-it remains true that people are more concerned about inequalities in their own countries and communities.
Recent evidence by economist Nancy Birdsall suggests that income inequalities between households and regions have, for a large number of countries, actually been increasing. For example, in the U.S. the top 1 per cent now own 40 per cent of the nation’s wealth and their incomes have increased by nearly 20 per cent over the last decade whilst that of other groups has stagnated. A similar story holds for U.K. and Japanese salaries and for many other countries across the world as well. In Britain, for example, the average pay of the CEO in a top 100 company is nearly eighty times that of the average salary of a full-time employee.
Of course, it may be that inequality per se isn’t what we’re interested in. After all, if everyone has enough to lead a decent life then inequality isn’t a very forceful concept of justice. The problem is that everyone doesn’t have enough and one reason why they don’t is because the 1 per cent have been exploiting the system for themselves.
If we look in our own context we see the same type of pervasive inequalities that are found in many developing countries. Fairly large income inequalities (though not as skewed as those in some Latin American countries), hold across households, regions, city and village, and within households themselves. To give one stark example of the levels of inequality: in comparison with countries of a similar per capita income Pakistan has 20 per cent fewer children in elementary school (the figure rises to 40 per cent if we just look at girls). What that suggests is that in more developed countries there is less inequality between those who get an education and those who don’t, and there’s less gender inequality in education attainment levels as well. Some of these patterns are shared by countries in Latin America and East Asia, where by the age of 24, children from the richest 20 per cent of households have at least six more years of formal schooling than the poorest 20 per cent.
Of course, inequalities in income are just one of the many types of inequality we should be concerned about. Inequalities in happiness, well-being, and opportunities give us an idea of how well a society is doing, whether it is ‘flourishing’ or not. And unequal distributions of land, assets, educational attainment levels, and nutritional status mean there’s less chances of a society flourishing. But why is that so?
One of the most important things to think about is how inequalities reinforce one another, so that disadvantages in one area (lack of education, say) can sustain or reinforce disadvantages in another: wages, or health status. But inequalities in different areas can interact in other ways. Some of the most relevant for Pakistan are the ways in which inequality is related to market and government failures.
In societies where markets are not working very well it is possible that even those people with some innate skills and assets don’t get the opportunity to invest and they, therefore, remain poor. This could happen for the simple fact that because of poor information (market failure) these people, relative to others, don’t get loans.
But even if markets did work better, even if the poor could invest, inequalities might still be a problem. One feature of poor, unequal societies is that public investment in the social sector is weak. And here we come to a crucially important feature of unequal societies, namely: inequalities in income can be related to inequalities in power. An unequal distribution of income might mean that the elites (the 1 per cent), the rich and powerful, subvert the political, regulatory, and legal institutions for their own benefit. This might be inefficient and lower overall income growth, but since they’re concerned about their relative position in society that’s not a problem.
It is no surprise, then, that the elites should not care about subsidising and improving the public sector, or have any notion of ‘the common good’, since they are only concerned about their own private gains. But if history has taught us anything it is that such extreme inequalities end up destroying the fabric of social life and the possibility of democratic politics. At the very least, the elites should realise that in a time of revolution the 99 per cent comprises an awful lot of people.
The writer is a professor of economics at LUMS
