Tuesday, 18 February 2014

Fighting poverty by closing the gap

Suddenly, it seems everyone is talking about inequality. A recent report by Oxfam shows the importance of fighting inequality to combat poverty. Working for the Few states that extreme inequalities threaten the possibility of a sustainable and inclusive economic and political development and perpetuates poverty. Today, almost half of the wealth in the world is owned by only 1% of the population, while the bottom half of the population owns as much as the richest 85 people.

The idea of inequality has also made its way into the power centres of the world. In his State of the Union speech recently, President Obama promised a set of 'concrete, practical proposals' to tackle the economic inequality in the country. The participants on World Economic Forum in Davos in January seemed similarly worried, expressing in their 14 AnnualAssessment of Risk their concern that increasing inequalities will lead to social and political unrest. Also, academics like Lakner and Milanovich, suggests that over the period 1988 - 2008 inequality between countries has decreased whereas the inequality within countries exhibits an increasing trend. Peter Edward and Andy Sumner and Paolo Liberati arrive to the same conclusion. Thomas Piketty adds more controversy to the debate by claiming in a new book that the increase in inequality is an inevitable outcome of free market capitalism, and could thereby threaten democratic societies.

Gini or Palma?

While inequality has made its way to the headlines, measuring it remains problematic. Gabriel Palma, the Chilean economist on whose findings Oxfam build their report, claims that ' (…) countries with high inequality are simply those in which the rich are more successful at subsidizing their insatiable appetite with the income of the bottom 40 per cent’. He considers that the question of inequality is largely about the battle between the rich and poor for the remaining part of the national income, and with which side the middle classes ally. Consequently, any action that aims to reduce inequality is inherently political; therefore there is a need for a measure that correlates wealth and politics. We need to, as Alex Cobham and Andy Sumner propose, put the Gini back in the bottle and complement the Gini index with a more politically relevant measure, the Palma ratio. The Palma ratio, named by Andy Summers of King's College, London, is defined as the ratio of the top 10% of population’s share of Gross National Income, divided by the poorest 40% of the population’s share of GNI. A 'Palma' of 7 is interpreted as the richest 10 per cent earn seven times the income of the poorest 40 per cent of a that particular country.

Could the 'Palma' inequality measure lead to a shift towards a political approach to inequality? We hope so. Economic growth is not enough; we need strong political action to address the unequal distribution between rich and poor.

The post-MDG framework a way forward

A global survey of 375 policy-makers from 15 countries conducted by UNDP shows that policy-makers consider the reduction of inequality as a major policy priority. Therefore, at national levels debates are taking place about the nature of tax systems and social protection programs. However, at the global level, actions to change the actual global inequality of opportunity and wealth accumulation are not on the political agenda. Many, including Piketty, acknowledge that the current state of global governance does not create space to reach consensus on a global redistribution mechanism.

While we do not have a global redistribution system, but we do have the global institutions such as the UN and the Millennium Development Goals (MDGs). As thoughts move to a post-2015 MDG framework, the world will have to agree on how these could be improved. According to ODI, '… the current set of MDG's, which focus on average progress measured at the country and global level, have masked the inequalities that lie behind these averages (…) another method of measuring progress is needed, which will provide more information about how that progress is distributed, and also provide incentives to focus on those groups which are being left behind'. Including inequality in the post-MDG's (the global development goals that will replace the MDGs after 2015) could be a step in the right direction. The post-MDG framework could, together with stronger accountability mechanisms, create a common ground for governments and the civil society to work together in the effort to tackle global distributional issues. Failing to do this, as mentioned in a background research paper for the Post-MDG’s UN high-level panel, could mean that the people still remaining in poverty will continue to be left behind.

By Woody Wong Espejo and Ulrica Hansson, Masters students of IDS