Stalling growth and development – The consequences of inequality
Inequality hinders sustainable economic growth, allows the rich a disproportionate share of political power, and fosters violence and criminality. Unequal societies have lower life expectancies and suffer more from diseases than more equal societies.
Take, for example, a brilliant child living in a Delhi slum, unable to fulfil her potential to become a successful businesswoman because her parents cannot afford to send her to school. Or a child born in rural Zimbabwe who has a much greater chance of dying before the age of three than the child of well educated parents in a wealthy neighbourhood in Harare. Or the staggering discrepancies in educational opportunities between a Swiss child and a child from a South African slum.Many politicians and academics believe unequal opportunities like this are unfair. But why? The World Bank’s World Development Report 2006 ‘Equity and Development’ argues that there is a difference between deserved and undeserved inequalities. Deserved inequalities reflect your efforts, what you have done with the talents you were born with. Undeserved inequalities arise and persist due to circumstances beyond your control. The report concludes that everyone should have equal opportunities and people should be compensated for undeserved inequalities.1 This article looks at unequal opportunities and other consequences of inequality, including criminality, lack of sustained economic growth and democracy, economic crises and political instability. It distinguishes between economic, social and political consequences.
Social consequences: higher incidence of societal and psychological problems
Wellbeing, human development and happiness
Generally speaking, although high inequality makes people unhappy, inequality only really starts obstructing happiness when absolute poverty has already been reduced. The World Happiness Report (co-authored by economist Jeffrey Sachs of Columbia University’s Earth Institute) describes how the poor report rising satisfaction as their incomes increase. If you live in a Belgrade Roma settlement made from cardboard and blankets, with rats nibbling at your baby, you will be much happier if you have more dinars per day to spend, no longer have to wander the streets at night to collect trash and can afford a safer house and better food for your children.Happiness is not only about absolute income, but also about how income is divided. Although average household income in the US has doubled since 1962, Americans are not happier now as they consider wealth to be unfairly distributed. According to psychologists Shigehiro Oishi, Selin Kesebir and Ed Diener, a high level of inequality makes Americans unhappy. Their research on American happiness between 1972 and 2012 links this to people’s sense of trust and fairness.17 Affluence, however, also brings its problems, including obesity and shopping addictions. A rising income does not always make people happier: “While higher income may raise happiness to some extent, the quest for higher income may actually reduce one’s happiness,” the World Happiness Report finds.18 Furthermore, everybody may get richer, but inequality remains the same.Wellbeing or the quality of life are influenced by many other factors than income and income distribution. The UN Human Development Index, based on the work of economist and philosopher Amartya Sen, uses life expectancy, education and income indices to provide a much broader view of the quality of life than income inequality only. Bhutan’s Gross National Happiness Index measures health, education, good governance, psychological wellbeing, ecological diversity, cultural diversity, community vitality, time use and living standards.
Andrey Diarra / Image from the documentary ‘Land Rush’, shown at the Amsterdam IDFA festival 2012. Huge tracts of land in Africa have been sold or leased to the highest bidders. This film, shot in Mali, explores how it is possible that, despite the tangible wealth, the country and its farmers still live in poverty. This photo shows Mr. Massa and his family in the village of Tein. Watch the trailer.
Political consequences: representational inequality
In societies with high income inequality the rich often have the most political power. Economists like Joseph Stiglitz, Jacob S. Hacker and Paul Krugman argue that inequality not only “violates moral values, but that it also interacts with a money-driven political system to grant excessive power to the most affluent”.19 The powerful misuse their power to obtain lower taxes and government-¬protected market share. According to Stiglitz, regulatory authorities are heavily influenced by money.20 Existing inequality undoubtedly reinforces the political influence of the rich and their institutions. The disproportionate weight of wealthy people in US political life has been the subject of significant research, most notably by the American Political Science Association’s (APSA) Task Force on Inequality and American Democracy. The Task Force concludes that: “public officials […] are much more responsive to the privileged than to average citizens and the less affluent”.21 This ‘representational inequality’ in the USA has been verified by academics including Princeton professor Martin Gilens, who concludes that in terms of federal government policy, the affluent are far better represented than the poor. 22One of the oldest and best established insights of political science is the importance of a “relatively equal distribution of economic resources across citizens”23 for a stable democracy. From Aristotle to de Tocqueville, from founding father James Madison to political scientist Robert Dahl, there is general agreement that democratic regimes depend on relatively high equality. Higher levels of inequality tend to lower the political engagement of citizens. Because the rich have a disproportionate share of influence, the non-rich feel that their views no longer matter and withdraw from politics.
Neoclassical economists focus on inequalities in productivity among individuals. They start from the moment when inequalities in productivity have already been distributed. As some individuals are more productive than others, income inequalities are justified. The more productive you are, the more you earn. Neoclassical economists do not wish to disturb the distribution of productivity by income redistribution. People need incentives to work hard and be competitive. That is why inequality is not a bad thing: it helps people to become competitive. This does not mean that neoclassical economists are in favour of unequal opportunities or unequal access to education. Their argumentation simply starts after distribution has already taken place.
Other economists focus more on inequality between labour and capital. They all agree that the rich save more than workers do. Saving by the rich ensures capital accumulation, which is good for growth as it makes investment possible. Economists like Ricardo and Marx take existing income distribution1 as their starting point. The way incomes are distributed determines saving patterns, which determines the amount of investments. Post-Keynesian economists like Nicholas Kaldor consider investments independent from existing income distribution. More investment leads to more jobs and more profit. It is important to note that for post-Keynesians jobs depend on investment, not on profit, as they do for neoclassical economists convinced of the trickle-down theory. Post-Keynesians who want to reduce inequality argue for more investment, while neoclassical economists wishing to reduce inequality advocate economic growth.
Inequality can also impede democracy by obstructing the development of ’social capital’2, non-financial capital encompassing a wide variety of social contacts and networks, together with social values like mutual trust.3 As Harvard sociologist Robert Putnam shows in his Making Democracy Work on regional democracy in Italy, social capital is necessary in a well functioning democracy.4 Inequality makes it difficult to develop this type of generalized trust and reciprocity.5 Unequal societies have less of the social capital required for effective collective decision-making.6
It is not completely clear to what extent Putnam’s thesis also applies to non-industrialized countries. In Nigeria and Ghana, according to political scientist Michelle T. Kuenzi, the causality works in the other direction, with trust in political institutions being the most important determinant of interpersonal trust.7 In addition, social capital is determined by many other factors than inequality and it is unclear how it can be developed. Is it possible, for example, when democratic institutions do not function well? Or is it the result of long-term historical developments?
Social capital does, however, seem to be important for economic development. In a working paper on household incomes in rural Tanzania, the World Bank’s Deepa Narayan and Harvard professor Lant Pritchett find that social capital in rural Tanzania raises household income: “a one standard deviation increase in village social capital increases a household proxy for income by at least 20 to 30 percent.”8 They add: “Households in villages with more social capital are more likely to enjoy better public services, use advanced agricultural practices, join in communal activities and use credit for agricultural improvements”, which then leads to higher income.
- Kaldor, N. (1955), “Alternative Theories of Distribution,” Review of Economic Studies, 23(2), 83-100.
- Birdsall, N. (2005), The World is not Flat: Inequality and Injustice in our Global Economy, p17.
- The term social capital is used by various scholars, next to Putnam and James Coleman most notably by Pierre Bourdieu. For the differences between Putnam and Bourdieu, see Siisiäinen, M. (2000) Two Concepts of Social Capital: Bourdieu vs. Putnam.
- Putnam, R. (1993), Making Democracy Work. Civic Traditions in Modern Italy, Princeton: Princeton University Press.
- Knack, S. and Keefer, P., “Does Social Capital Have an Economic Payoff? A Cross-Country Investigation”, in: The Quarterly Journal of Economics, Vol. 112, No. 4 (Nov., 1997), pp. 1251-1288
- A low amount of social capital also hampers economic growth.
- Kuenzi, M.T., “Social capital and political trust in West Africa”, Afrobarometer working paper, no. 96.
- Narayan, D. and Pritchett, L. 1996. “Cents and Sociability: Household Income and Social Capital in Rural Tanzania”. Policy Research Working Paper 1796, Washington, DC: The World Bank.
Quality of institutions
High inequality has harmful effects on the quality of institutions. There is widespread evidence that “greater economic inequality makes transitions to stable democratic regimes much less likely to occur”.24 In the aftermath of the mass privatization in post-Soviet Russia, for example, a small group of entrepreneurs got rich very quick, acquired political power and used it tor their own benefit. That was bad for bureaucratic quality, government stability, democratic accountability and corruption.25 Although bad institutions can cause inequality, a study by economists Alberto Chong and Mark Gradstein covering a sample of 121 developed and developing countries found that inequality determines the quality of institutions more than the other way around.26 The two reinforce each other, however: high inequality will make institutions worse, and bad institutions will augment inequality.27A high level of equality is thus good for democracy and for the quality of democratic institutions. The same applies to having a substantial middle class (for more on this, see Putting Inequality on the Map). Some sociologists and political scientists, including Max Weber, Seymour Martin Lipsett and Samuel Huntington, attribute certain values to a middle class. Middle-class people value hard work and are thrifty. They value political stability, so they demand quality institutions. And they demand good education as it gives people the opportunity to climb the social ladder; countries with a large middle class therefore often have a good system of public education. The middle-classtheory also has its critics. Lipsett himself famously described German fascism as a middle-class movement,28 while political scientist Ergun Özbudun describes the Turkish pro-Islamic Welfare Party and the ultranationalist Nationalist Action Party as typical middle class movements. “[They] are stronger in small- and medium-size towns and among the downwardly mobile self-employed middle classes as well as among the recent rural migrants to the big cities. In fact, the Welfare Party’s rising appeal in the 1990s combined a defense of Islamic values with that of the interests of small businessmen and merchants of Anatolia as opposed to the big business interests concentrated in major cities.”29
Social change and unrest
Inequality plays a role in the social change and unrest. According to UNRISD, it was one of the underlying causes of the Arab Spring: “While locally speciﬁc factors underpin the recent uprisings in Tunisia, Egypt, Syria and neighbouring countries, high rates of unemployment, precarious livelihoods and repressive state practices are common sources of discontent that feed popular unrest.”30 This claim does, however, need to be qualified. There was rather low inequality and little overt unrest in pre-1978 China and in the Soviet bloc before 1989. Although repression had much to do with that, the lack of large differences in wealth was also significant and uprisings occurred anyway. Revolutions can probably be better explained by rising expectations than growing disparities.31 Inequality may, however, play a role in interplay with ‘collective humiliation/collective dignity’ – the “ability to go without shame”. The sometimes volcanic power to mobilize people – for example in the Movimento Sem Terras (the Brazilian Landless Workers Movement) and probably also the Arab Spring – might stem from that interplay.32 This would mean there is no direct causal relation between inequality and uprisings but that it is intermediated with other factors such as expectations and a sense of dignity.
Arjan de Haan, Program Leader, for ‘Inclusive Growth’ at the International Development Research Centre. Stephan Klasen, Professor of Development Economics at the University of Göttingen, Germany. Shobha Raghuram, independent researcher who has specialised in development studies and philosophy. David Sogge, independent researcher based in Amsterdam, the Netherlands, where he is board secretary of the Transnational Institute, a worldwide fellowship of scholar activists.
- World Bank, World Development Report 2006: Equity and development.
- Berg, A.G. and Ostry, J.D. (2011), Equality and Efficiency, in: Finance & Development 48 (3). Idem (2011), Inequality and Unsustainable Growth: Two Sides of the Same Coin?
- Wade, R.H. (2011) “Income Inequality: Should we worry about global trends?” The European Journal of Development Research, Special debate section: The politics of poverty and inequality, 23(4).
- Ravallion, M. (2012) “Why Don’t We See Poverty Convergence?”American Economic Review.
- Milanović, M. (2006), Global income inequality: what it is and why it matters?, World Bank Policy Research Working Paper 3865.
- There are three requirements for global redistribution. 1. Funds should flow from a (mean-income) rich to a (mean-income) poor country. 2. The tax-payer ought to be richer than the beneficiary of the transfer. 3. Transfers be such that inequality decreases in both countries, donor and recipient. (see Milanović, note 3, p 27)
- Getting a government that pursues such policies is not that easy as inequality tends to lower the political engagement of citizens. Oxford professor Frances Stewart found that to overcome this inequality a democratic system with universal suffrage is a first requirement, but is by far not enough. Mass participation of the poor is necessary and to obtain this, they probably need to have more characteristics in common than being poor (for example having shared class characteristics). Next to that, the type of democracy matters. “Majoritarian winner-takes-all democracy can disempower minority groups completely. This is one reason why an election is so often the occasion for violence and cheating in multi-ethnic societies.” Stewart considers proportional representation therefore desirable. See Stewart, F., “Inequality in Political Power: A Fundamental (and Overlooked) Dimension of Inequality”, in: European Journal of Development Research, Vol. 23, 4, 541-545, p542. See also the final section of this article in which the political consequences of inequality are discussed.
- Treeck, T. van and Sturn, S. (2012) Income inequality as a cause of the Great Recession? A survey of current debates.
- “Brazil household credit”.
- See Wilkinson, R. and Pickett, K, (2009) The Spirit Level.London: Allen Lane. Wilkinson and Pickett focus their research on industrialized countries and mobilize a huge quantity of statistics. They do not generalize their conclusions to other countries.
- UNODC (2011), Global Study on homicide.
- UNODC, 2011, p79-81.
- Kelly, M. (2000), “Inequality and crime”, The review of economics and statistics, 82(4), Pages 530-539.
- Thorat, S. and Newman, K.S. (2007),”Caste and Economic Discrimination: Causes, Consequences and Remedies”, in: Economic and Political Weekly October 13, 2007, p 4122.
- Jacob, K.S., “Caste and inequalities in health”, in: The Hindu, August 22, 2009.
- Neckerman, K. and Torche, F. (2007)”Inequality: Causes and Consequences”, Annual Review of Sociology 33:335–57, p350.
- Oishi, S., Kesebir, S., and Diener, E. (2011), Income Inequality and Happiness,Psychological Science 22(9) 1095–1100.
- Helliwell, J., Layard, R. and Sachs, J. (eds.) (2012), World Happiness Report, p4-5.
- Edsall, T.B. (2012), “Separate and unequal”, New York Times.
- Stiglitz, J. (2012), The price of inequality, London: Penguin Books Ltd.
- Jacobs, L. and Skocpol, T. (2005), Inequality and American Democracy: What We Know and What We Need to Learn. New York: Russell Sage Foundation.
- Gilens, M. (2009), `Preference Gaps and Inequality in Representation’. PS: Political Science & Politics 42(2):335-241.
- Solt,F. (2006), Economic Inequality and Democratic Political Engagement, March 28, 2006.
- Chong, A. and Gradstein, M. (2007), “Inequality and institutions”, The Review of Economics and Statistics, 89(3): 454–465.
- India appears to be an exception to this rule. Although the country is very unequal and highly corrupt, it is still considered a democratic country. Political scientist Robert Dahl gives three main reasons for this. First, every Indian is a member of a cultural minority that is too small to govern the country alone. Second, these groups do not live together in the same places, but are spread throughout the country. Third, Indians do not see an alternative for democracy – it is their national ideology, even among the military and police forces. Clearly, other factors than inequality can be more important for the establishment or survival of democracy. See Dahl, R. (2000), On democracy, New Haven & London: Yale University Press, p160-163.
- Lipset, S.M. (1963), Political Man: The Social Bases of Politics, Garden City, New York: Doubleday, Anchor Books.
- See Özbudun, E. (2005) The Role of the Middle Class in the Emergence and Consolidation of a Democratic Civil Society. Ankara Law Review 2(2) 95-107, p 101.
- UNRISD (2012), Research and policy brief, October 2012
- Davies, J, (1962) Toward a Theory of Revolution, American Sociological Review, Vol. 27, No. 1, pp. 5-19.
- Zavaleta Reyles, D. (2007), `The Ability to go about Without Shame: A Proposal for Internationally Comparable Indicators of Shame and Humiliation’. Oxford Development Studies 35(4):405-430.