Global Wealth Disparities Threaten Global Order

Oct 28 , 2023
By Kaushik Basu

In these tumultuous times, it often feels like one shock quickly eclipses another. Before one problem can be solved, another crisis emerges. Just a few weeks ago, the war in Ukraine dominated headlines, but the recent outbreak of violence between Israel and Hamas has since taken centre stage.

To be sure, during times of crisis, our instinct is to focus on extinguishing the fire closest to us. But it is equally crucial to understand and address the root causes so that we have fewer fires to fight.

As populist forces have polarised electorates and deepened social divides worldwide, the global political climate has grown increasingly volatile. While determining the causes of this shift will undoubtedly take some time, one could argue that the rapid advance of digital technologies, unchecked globalisation, and rising inequality have transformed our political and economic systems, fueling sociopolitical unrest.

While the debate over whether economic inequality has increased over the past few decades is still ongoing, the question is moot. We know for certain that global economic inequality increased steadily between 1820 and 1910. Since then, it has fluctuated, and any estimate depends on researchers' specific methods and metrics. But the data clearly show that economic disparities have reached intolerable levels, with the world's richest one percent gaining 38pc of the increase in global wealth between 1995 and 2021, compared to just two percent for the bottom 50pc.

Moreover, regardless of the overall inequality, it is undeniable that the concentration of wealth continues to increase. Between 1995 and 2021, global wealth grew by 3.2pc annually. Over the same period, the wealthiest 0.000001pc increased their wealth by 9.3pc per year.

We are horrified by our ancestors' acceptance of practices like slavery and feudalism. When future generations look back at today's world, they will likely be shocked by the extreme levels of inequality and social injustice we have tolerated. But, beyond their inherent immorality, the political implications of today's economic disparities often go unnoticed. In this age of digital connectivity and globalised commerce, excessive wealth concentrations undermine democracy in two main ways.

The globalisation of finance and supply chains has enabled wealthy and powerful countries to affect the well-being of citizens far beyond their borders. But while the citizens of Burkina Faso, for example, cannot vote in US presidential elections, the decisions made by American presidents affect their daily lives as much as those made by their leaders, if not more. Imagine a scenario where only the residents of the District of Columbia were allowed to vote in a US presidential election – such a system could hardly be called a democracy.

This dynamic suggests that globalisation erodes global democracy. Yet, there is not much that developing countries can do to challenge American hegemony, given that the United States will not allow the whole world to participate in its presidential elections.

Given that extreme wealth often translates into political power, the concentration of wealth in a few hands is anathema to democracy. This is particularly evident in the age of Big Tech, when billionaires can gain an outsize influence on public discourse by taking over critical media platforms or manipulating search results. One can hope that advances in generative artificial intelligence will level the playing field in the tech sector and thus help curb inequality.

I recognise the potential damage poorly designed interventions can cause. History is replete with examples of well-meaning but ill-conceived policies that sought to reduce inequality, only to backfire and inadvertently bolster the right-wing narrative that all government intervention is inherently problematic.

Nevertheless, such policies can yield significant returns by combining moral intentions with thoughtful design. In a recent paper I co-authored with my students - Fikri Pitsuwan and Pengfei Zhang - we explore the megaprofits generated by Big Pharma and Big Tech companies.

While imposing patent waivers might reduce the incentive to innovate, just as placing profit caps can cause production to fall, it is possible to design mechanisms that limit excess profits without sacrificing efficiency. One such strategy is to use a commodity tax to cap the profit of a group of companies, such as all the Big Tech firms. This intervention can neutralise the incentive to cut production by heightening competition within the group.

We must also recognise that beyond a certain threshold, relative rather than absolute inequality matters most to people, including the wealthiest. We can levy significant taxes on the rich without reducing their incentives, provided they maintain their relative standing. As long as billionaires like Elon Musk and Jeff Bezos understand that taxation will not alter their rankings among the world's wealthiest individuals, they will remain motivated to increase their earnings, and the rest of us will reap the rewards of their efforts.

Neoliberals got it wrong: pursuing greater equality without reducing incentives is entirely feasible. We can establish a fairer society by mitigating inequality and curbing the outsize influence of a few ultra-wealthy individuals. If we want to save democracy, we cannot afford to wait.

PUBLISHED ON Oct 28,2023 [ VOL 24 , NO 1226]

Kaushik Basu, a former chief economist of the World Bank and chief economic adviser to the Government of India, is a professor of economics at Cornell University and a non-resident senior fellow at the Brookings Institution.

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