The wealth distribution debate
After Obama’s last State of the Union address the inequality debate reached a crescendo in the developed world. In his address Obama described rising inequality as “the rising challenge of our time”. In a report about the concentration of wealth in a few hands — released ahead of this year’s meeting of billionaires and politicians at Davos — the anti-poverty charity Oxfam struck the same chord. The report warned that — on current trends — the wealth accumulated by the one percent of the richest would be more than half of the world’s wealth. The richest one percent had seen their share of global wealth increased from 44 percent in 2009 to 48 percent in 2014, the report said. These numbers exhibit that the concentration of wealth in few hands is quite simply staggering and the wealth gap between the richest and the rest is widening rapidly.
This focus on the inequality is largely the result of the louder chord struck against inequality by the rock star fame French economist Thomas Piketty. His dense, well-researched academic tome Capital in the Twenty-First Century put the menace of inequality back on the politicians’ and academicians’ agenda. Before Piketty’s book the debate about the inequality was almost in whispers in the corridors of power and the ivory towers of academia. Piketty’s academic work struck the chord with the situation in the real world, which generated the resonant frequencies.
In his book Piketty tracks the concentration of income and wealth deep into the past for the USA, Europe and some developing countries such as India, Argentina and Indonesia. After his analysis he purported that there is a fundamental logical contradiction in capitalism with potentially terrifying consequences for wealth accumulation and inequality. His central premise is that when the rate of return on capital ‘r’ exceeds the economic growth rate ‘g’ ie r>g, this leads to the concentration of wealth in few hands and inequality goes up.
In his book Piketty tracks the concentration of income and wealth deep into the past for the USA, Europe and some developing countries such as India, Argentina and Indonesia
In the support of his hypothesis Piketty argued that in capitalism forces of divergence and forces of convergence played a vital role in the accumulation and distribution of wealth. The main force of divergence is the situation in which ‘r’ is greater than ‘g’, this leads to a vicious circle of inequality in which the wealth of the individuals that inherited wealth increased exponentially as compared to those who don’t inherit wealth. On the other hand forces of convergence – diffusion of knowledge and skills – check the forces of divergence and reduce the inequality. However, Piketty found that forces of divergence are more powerful and dominant most of the time. There are few historical exceptions such as Golden Age 1945-73, when forces of convergence were more dominant than the forces of divergence. During this period the reconstruction and rebuilding activities after World War II, progressive tax policies and the labour friendly laws helped the forces of convergence to dominate, this resulted in less inequality. Towards the end of the twentieth century pursuance of the conservative policies by governments – reduced tax rates for the rich, low government expenditures, weakened labour unions – led the forces of divergence to dominate and inequality rises to unprecedented level.
The prescription provided by Piketty to tame the Frankenstein of inequality is the redistribution of wealth by adopting radical policies to tax the rich. He proposed a global progressive wealth tax where the rate of tax rises with the level of wealth. Along with progressive taxation it’s also vital for governments to make efforts to induce the forces of convergence through diffusion of knowledge and investment in policies and programs for enhancing skills of individuals. He argued that because of the political and social nature of inequality, it’s the function of political governments to solve this problem and it cannot be left to the forces of the market alone.
Piketty relied heavily on data from developed countries; however, the underlying concepts are highly relevant for developing countries like Pakistan. For instance, his proposition that inequality rises when the rate of return on capital exceeds the economic growth rate is painfully true in the context of Pakistan. We are witnessing this trend of concentration of wealth in one percent (in the form of big industrialists, industrialist-feudals and big land-owners) from the 1960s to the present day.
For a better understanding of the relationship between the rate of return on capital and inequality, in the context of Pakistan, the declaration of assets by Prime Minister Nawaz Sharif provides a good example. According to his statements of assets and liabilities submitted to parliament his assets recorded an astounding increase during the last few years. In 2011, his net worth was Rs95.6 million, in 2012, the net value of Sharif’s assets raised to Rs261.6 million, in 2013 it ballooned to Rs1.82 billion and in 2014, the total value of assets in his own name and that of his wife had jumped to Rs2.36 billion. Last year his investment in the Sugar Mills increased 600 percent while the remittances he received from his son also increased. Did labour wages see the same upward trend in Pakistan?
Pikkety relied heavily on data from developed countries; however, the underlying concepts are highly relevant for developing countries like Pakistan
Sharif’s statement of assets and liabilities clearly indicates that most of his wealth is inherited. This phenomenal increase in inheritance wealth happens when the rate of return on capital greatly exceeds the rate of economic growth and Piketty put it succinctly that in such situations “the past tends to devour the future”. This means that society inevitably tends to be dominated by inherited wealth.
The regressive tax policies and the declaration of only small part of income by the rich for tax purposes are other factors, which give boost to the forces of divergence and inequality. Similarly, inefficient tax machinery, low contribution of manufacturing sector towards creating employment and the businesses based on the exploitation of labour and natural resources are the major contributing factors for the domination of forces of divergence which consequently raised inequality.
On the other hand, factors which are important for the domination of the forces of convergence are not on the radar of Pakistan’s policymakers. An efficient wealth distribution system requires an efficient tax machinery, educated and skilled human beings and a socio-economic system which provides a ladder for upward social mobility.
The problem of inequality in Pakistan is more dreadful than the developed world because the solution is in the hands of the problem creators. In the developed world the political and economic elite is at least physically separated, which required a lot of political and financial bargaining before the politicians make policies which serve the interests of the economic elite instead of society as a whole. However, unfortunately in Pakistan the economic and political elite is physically and virtually clubbed in the same souls. Inherited politics leads to the increase in inherited wealth, which is concentrated in a few hands.
It is time for our policymakers, politicians and social thinkers to promote the forces of convergence in order to restructure the current political and social structures which are hindering the distribution of wealth and upward social mobility. Otherwise, it will be too late and as Piketty put it beautifully “the past will continue to devour the future”.
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