Inequality is the defining challenge of our time

By mei 24, 2016 Algemeen

Rapid technological advances, shifting political movements, changing economic dynamics and accelerating societal change are seldom far from the news headlines and many of us struggle to understand their implications on day-to-day life. Such are the challenges that it seems clear that the major issues facing our planet are of such a magnitude that no single institution or organization can truly understand their impact alone. As change accelerates in an increasingly connected world, we must get a better understanding of emerging opportunities and challenges.

The immense challenge has caused myopia among a lot of politicians, sending them into a self-destructive state of denial and losing sight of the ways that human beings lay a heavy hand on the planet. In all the turmoil little attention is paid to the true causes and effects of social economic exclusion and inequality. Fuelled by inequality, feelings of social exclusion, mistrust and marginalization threaten social stability.

Social exclusion is multidimensional: it encompasses social, political, cultural and economic dimensions, and operates at various social levels. It is dynamic, in that it impacts people in various ways and to differing degrees over time. It is also relational: it is the product of unequal power relations in social interactions. It can produce ruptures in relationships between people and society, which result in a lack of social participation, social protection, social integration and power. Technological progress and the resulting rise in the skill premium (positives for growth and productivity) and the decline of some labor market institutions have contributed to inequality in both advanced economies and emerging markets and developing countries. At the same time, advances in technology and rapid digitization are fundamentally transforming societies, economies and ways of doing business. This Fourth Industrial Revolution presents great opportunities for all actors involved and a previously unimagined solution space for some of the world’s most pressing problems. Yet it also presents elusive risks related to changing employment patterns, widening income inequality and rising cyber dependence. Managing the paradigm shift and transition process will be critical to securing stable economies and ultimately thriving societies.

Widening income inequality is the defining challenge of our time. In advanced economies, the gap between the rich and poor is at its highest level in decades. Inequality trends have been more mixed in emerging markets and developing countries, with some countries experiencing declining inequality, but pervasive inequities in access to education, health care, and finance remain and are persistent in developed countries. Not surprisingly then, the extent of inequality, its drivers, and what to do about it have become some of the most hotly debated issues by policymakers and researchers alike. Equality, like fairness, is an important value in most societies.

Irrespective of ideology, culture, and religion, people care about inequality. Inequality can be a signal of lack of income mobility and opportunity―a reflection of persistent disadvantage for particular segments of the society. Widening inequality also has significant implications for growth and macroeconomic stability, it can concentrate political and decision making power in the hands of a few, lead to a suboptimal use of human resources, cause investment-reducing political and economic instability, and raise crisis risk. The economic and social fallout from the global financial crisis and the resultant headwinds to global growth and employment have heightened the attention to rising income inequality. Inequality is a deep rooted and generational problem.

High and sustained levels of inequality, especially inequality of opportunity can entail large social costs. Entrenched inequality of outcomes can significantly undermine individuals’ educational and occupational choices.

Policies that neglect or deepen inequality can exacerbate the combination of less sustainable economic growth, weakened social cohesion, and citizens feeling disenfranchised from democratic processes. Policies that focus on the poor and the middle class can mitigate inequality. Irrespective of the level of economic development, better access to education and health care and well-targeted social policies, while ensuring that labor market institutions do not excessively penalize the poor, can help raise the income share for the poor and the middle class.

There is no one-size-fits-all approach to tackling inequality. The nature of appropriate policies depends on the underlying drivers and local-specific policy and institutional settings. In advanced economies, policies should focus on reforms to increase human capital and skills, coupled with making tax systems more progressive. In developing economies, ensuring financial deepening is accompanied with greater financial inclusion and creating incentives for lowering informality would be important. More generally, complementarities between growth and income equality objectives suggest that policies aimed at raising average living standards can also influence the distribution of  income and ensure a more inclusive prosperity. Reforms aimed at raising average living standards can also influence the distribution of income.

Tackling inequality goes beyond the remit of labor, social welfare, financial inclusion, and tax policies. The key to minimizing the downside of both globalization and technological change in advanced economies is a policy agenda of a race to the top, instead of a race to the bottom—an agenda that includes policies to encourage innovation, reduce burdensome product market regulations that stifle competition and technology diffusion, move goods produced upwards in the value chain, and ensure that this rise benefits everyone. In developing countries, raising agricultural productivity, rapid accumulation of capital, and technology diffusion in labor-intensive sectors can substantially lift growth and ensure that the fruits of prosperity are more broadly shared.