Inequality should be of central concern to advanced economies

Inclusive Economy,Poverty & Inequality06 Mar 2013Roel van Engelen

The economic crisis is being handled in a way that benefits a small and wealthy group of technocratic European politicians, investors and entrepreneurs. It therefore appears to serve as an instrument to cut down on democracy and to increase inequality.

Much of the contemporary debate about inequality focuses on the problems related to inequality in developing countries. This, of course, is an urgent issue and it seems obvious that it should be central to discussions on global development policies in the coming decades. However, while Europe is confronted with the deepest economic crisis in more than 80 years and given the policies designed and implemented to combat this crisis, I want to argue that the discussion on inequality should be broadened to include also ‘developed’ industrial economies in the West.

In the current context, it appears that a small number of private or bureaucratic actors is taking advantage of the European economic crisis, not only to enrich themselves at the expense of society, but also to increase their power and to reduce their accountability. This creates a vicious circle of concentration of wealth and power in the hands of ever fewer people, which leads not only to the deepening of the democratic deficit in Europe, but also to deteriorating living conditions for a majority of the European population. With inequality on the rise throughout the region, it is to be expected that European states will eventually have to deal with a resurgence of social and economic ills that were thought to have been eradicated from our ‘advanced’ part of the world: mass unemployment, poverty, hunger, crime and a lack of trust in political institutions.

At the same time, some developing economies are showing how inequality can be successfully tackled through active government intervention. Several Latin American countries have pursued activist redistributive social policies, and have been quite successful in equalising income distribution and hereby in tackling some of the problems associated with inequality. European countries as well as EU institutions should learn from these examples and acknowledge the responsibility of the state to correct a fundamental problem of the market system. The economic and financial crisis that continues to challenge the European Union shows that inequality is not only a topic important for developing countries, but is more and more becoming an equally important subject for wealthy, industrialised nations.

Toward the end of the 2000s, income distribution in Europe was more unequal than in the average OECD country, and income distribution within the EU-27 as a whole was larger than in India. As policies implemented to combat the on-going economic and financial crisis in the EU emphasise the importance of austerity, cutbacks and balanced budgets while basically doing nothing to advance a more equal distribution of income, boost consumer confidence or increase demand for goods and services, it is likely that inequality within and between EU member states will continue to rise in the coming years. As a result, many of the problems associated with inequality will become more relevant for European countries as well.

As has been rightly pointed out in Stalling growth and development, more unequal societies perform worse on indicators such as health, social and psychological well-being, and happiness. Moreover, crime figures tend to be higher in more unequal societies, and lastly, more inequality is associated with social unrest, institutional failure, and the concentration of political power in the hands of the rich. This latter development is especially visible in the European Union, where non-elected technocrats, often with a professional history in investment banking, in Brussels, Frankfurt and on the national level are gradually taking over responsibility for macro-economic policy from politicians accountable to the people. The other dangers of rising inequality are beginning to manifest themselves in Europe as well, most visibly in the Mediterranean countries but inevitably spreading to the wealthy northern countries as well.

As the crisis continues to smash the region, all these problems are essentially becoming more visible in European societies. In several countries, austerity means less investment in physical and mental health care, education, social services, and culture. Crime is on the rise in the Southern European countries that have been most severely hit by the crisis and in cities such as Athens or Madrid mass demonstrations and protests are the order of the day. People are venting their anger about their worsening situations not only at politicians, but also at social or ethnic groups, such as immigrants, that act as scapegoats. On the political level, we observe national institutions retreating from macro-economic management, unable to cope with growing unrest and shrinking budgets, as well as European institutions that fail to come up with sustainable policy solutions that can count on the acceptance of a majority of the population.

The austerity policies that are currently being designed and implemented sustain a vicious circle of decreasing democratic legitimacy and increasing inequality. The crisis is being handled in a way that benefits a small and wealthy group of technocratic European politicians, investors and entrepreneurs, whereas a growing number of Europeans face unemployment, deteriorating living standards and even outright poverty. The crisis therefore appears to serve as an instrument to cut down on democracy and to increase inequality. In a way, this vicious circle is therefore becoming a virtuous circle for the rich. But as long as the consequences of rising inequality are not addressed, the benefits will not be sustainable.

The obviously mistaken course of European macro-economic policy with regard to the socio-economic well-being of the population is unforgivable, not only because the disastrous socio-economic consequences of this course are crystal clear, but also because solutions and policies to avoid these consequences are available. European policy-makers should look to a number of developing countries, for instance in Latin America, where the rise of the ‘New Left’ led to a more interventionist macro-economic and social course by national governments, which succeeded in significantly reducing income inequality. The Bolsa Familia programme in Brazil is only one of the exemplary policies that show that a strong and socially concerned government can equip itself with the tools to genuinely reduce inequality and improve socio-economic well-being, without giving up the goals of economic development and investor confidence. Other Latin American countries such as Chile and Venezuela have implemented similar progressive schemes, reducing social and income inequality and thereby truly serving the interests of the people instead of those of the market only.

Inequality between the people of a nation is at the root of many social and economic problems, which constitute a massive burden on any society. Failure to recognize the relationship between inequality and social instability will eventually hurt all the indicators that are now presumed sacred for obtaining or restoring the confidence of the market. The failure, or outright reluctance, of many European economies to grasp the importance of reducing inequality is appalling, especially given shining examples of social policies targeted at substantially reducing inequality and increasing general well-being. Inequality, therefore, is not only a crucial theme to be included in any future agenda for the developing world, but is also a subject that should be paramount in any discussion in ‘advanced’ European countries about the political, economic and social future of the region.