Development Begins Where Inequality Ends

Many believe that the key development challenge is poverty reduction, and that inequality is not a key concern. The dominance of the pro-growth and trickle down thinking over the last decades led to the view that it is not a problem if the rich become increasingly rich; letting entrepreneurs become rich would also be the best way to address poverty reduction, as they would grow total welfare.  

But recent academic research shows that it is high time we abandon this view. Reducing economic inequality, especially the concentration of wealth and capital, must be seen as a direct goal, and not just as a desirable byproduct of other development efforts. In what follows I will argue for this claim, and draw some conclusions for what this requires for anyone working on development questions.

In general, there are many reasons why large economic inequality is undesirable. Excessive economic inequality leads to harmful outcomes, such as a lower than average life expectancy, higher levels of depression and other mental health problems, worse physical health in the population, lower levels of social trust, and so forth. Income and wealth inequality are also bad for the economy, as they lead to lower investments in innovation and often go side by side with higher levels of rent-seeking, which are inefficient.

Until about a decade ago, it was too often assumed that the only problem was poverty reduction, that  inequality would automatically become smaller when countries develop and become richer, and that globalized neoliberal capitalism was the best way to reduce poverty and create welfare for all.

The data show that these have been unwarranted assumptions. As the work done by the World Inequality Lab has shown, wealth inequality has been increasing in most countries since the decades after the second world war, especially by strengthening the position of the richest. Two general findings from the empirical economic inequality literature are that wealth inequality is much more pronounced than income inequality and that wealth is highly concentrated. The data from the World Inequality Lab show that in 2023, the bottom half of the world’s population owned 2.1% of all wealth, whereas the top 10% of the population had 73.8% of all wealth.

Recently, a helpful overview of key findings showed that inequalities between countries is still huge, and the most recent income growth has taken place in the regions that are the richest (North America and Europe). Income inequality within countries, especially in the Global South, is very large. Many poor countries, especially in Sub-Saharan Africa, have a negative net international income flow (due to debts). These sovereign debts limit what such countries’ governments can do in terms of making public and social investments: 52 countries spend more on interest repayment than on either health or education.

And the worries are not restricted to the lack of reduction of wealth inequality: there is now also  widespread concern that the Sustainable Development Goal of eradicating poverty will not be met by 2030. Moroever, inequality is one of the drivers of poverty, and inequality makes it harder to reduce poverty. Recent research showed that a 1% reduction in inequality has a greater impact on reducing poverty than a 1% increase in economic growth. Poverty is therefore to a considerable extent the consequence of political choices that directly affect inequality. And that is not only the case for extreme poverty in the Global South but also in rich countries, such as the USA.

The first assumption is the idea that if a policy leads to everyone gaining something, it’s a desirable policy change. Hence, there is a belief that win-win situations are beyond critical scrutiny and are always to be applauded. What is worse, such win-win situations are often judged in terms of monetary metrics and thus do not register problems such as violations of human dignity or fairness, or the democracy-undermining effects of extreme wealth concentration.  Moreover, assuming that win-wins are always desirable and that they are the only normative criterion that matters has led to the acceptance of many inequalities.

For example, when it comes to the gains made from global trade, the defenders of globalization and of global capitalism have pointed out that the number of people living in global poverty has drastically decreased. But using that as our main or only normative criterion is putting the evaluative bar too low.  The relevant question should be how many people could have been lifted out of poverty if the gains from international trade had been divided differently, even taking into account incentive effects (hence the question concerning how a different division of the gains from trade might affect the total volume of trade and welfare)? And we should also ask the following question: Of all the possible divisions of the gains made from international cooperation, which one(s) would have been preferable?

It is highly plausible that there could have been another, much less unequal, division than the one we have seen over the last few decades. As research has shown, the unequal terms of global trade exchange are much more advantageous to the Global North than to the Global South. Jason Hickel, Dylan Sullivan, and Huzaifa Zoomkawala estimated that between 1960 and 2017 these unequal terms of global trade exchange have led to a loss for the Global South of $US62 trillion, which is equivalent to 97% of the Global South’s GDP, or a loss of around $US9,951 per person. In the same period, the economies of the Global North gained $US68 trillion, or on average $US65,517 per person. Thus, it is not enough to ask whether we can eradicate poverty and make sure we “leave no one behind,” as Sakiko Fukuda-Parr has argued that the SDGs do. Rather, we must ask questions about whether the global economic institutions are fair, to what extent they are reducing economic inequalities, and whether feasible pathways are open that not only reduce poverty but also reduce economic inequality, and especially wealth concentration. 

The second assumption is that multimillionaires and billionaires are deserving of their wealth. But as I argued at length elsewhere, extreme wealth can never be justified on the basis of merit or desert because luck plays such an immense role in our success in life (and sadly also in our misery). Our inborn talents and impairments, our parents and social class, as well as the place where we are born all have a very strong effect on the odds that we can become successful; and for entrepreneurs market luck plays an additional role. Yet this view of human nature and the pervasive effect of luck on our lives goes very much against what neoliberal politicians and thinkers advocate, which is a view that centers around individual responsibility. And this second assumption matters, as believing it (despite it not being true) weakens the case for higher taxation of the wealth of billionaires.

The third assumption that we need to challenge is the view that governments are incapable of getting things done. Decades ago, academics launching the field of public choice theory, which is one of the foundational parts of neoliberal thinking, developed theories that argued that governments are incapable of addressing societal problems and challenges and/or ineffective even when they try to do so. This led to the neoliberal policies of privatizing and outsourcing what were previously tasks done by the government or public organizations. In academia, this view has been pushed by the more right-wing (and very influential) thinkers of mainstream economics as well as by libertarian political theorists. The shared assumption is that the smaller the government, the better; the tasks of governments should be limited to safeguarding physical security and protecting private property. The spread of neoliberal thought and policies, including neoliberalism’s view of the justified economic role of the government as merely an enabler of market competition, has weakened governments’ capacities to take action that could directly or indirectly reduce economic inequalities.

It is important that those who want a world without inequality and poverty, and with a different policical economy than the one that brought us where we are now, also must have a positive story to tell. That story should be about sustainable prosperity for all, human development, fairness, protecting basic liberties, enabling and supporting caring activities and the vulnerable, replacing GDP with accounts of wellbeing and quality of life, and so forth. Regarding better economic systems, multiple proposals are currently being worked out for alternative economic systems that claim they will give us a better world, including proposals for a green and multicultural democratic socialism, the doughnut economy, the wellbeing economy, and visions for postgrowth societies. We should investigate and critically analyze those proposals so that we are equipped to know which political economy we might choose to be working towards.  But whatever we choose, reducing economic inequality is key if we want to move to a better world. Any vision for the future must be one with a lower level of economic inequality, nationally as well as on a global scale, and it should put a limit on wealth concentration.

This will require various interventions, and here I want to hightlight two. First, we cannot reach a better world if we do not tax the rich much more. This will require coordinating regarding progressive taxation of wealth, doing what we can to close tax havens, making inheritance and gift taxation much higher and more progressive, and so forth. Possible instruments include not only a global wealth tax, but also include critically looking at structures of ownership and other institutional designs.

Second, if we take reducing global inequality seriously, we need to reinvigorate the global conversation about debt cancelling. This conversation is all the more important against the background of the previously mentioned extremely unequal division of the gains from international trade and the enormous burdens that debt interest and repayments place on poor countries, as well as the many historical wrongs that have never been properly compensated. The frame is very important here. In mainstream global media, debt is often portrayed as a mix of development support and charity towards the Global South. Yet if we acknowledge the extractive nature of significant parts of the international economy, the histories of coups in democratic regimes in the Global South, and the refusal of the rules of international trade to address questions of fairness, debt takes on a very different moral loading. The same amount of debt has a very different moral status if it emerged against a background of negotiations between equals as opposed to against the actual historical background, which has been extremely unequal. Therefore, debt cancellation should be back on the political agenda.

Finally, if we want inequality and poverty-reducing strategies to succeed, then we must think much more about the importance of language and communication in the realm of politics and development. It is not enough to merely seek the truth and defend it; political communication must also be considered, and therefore so must frames and other elements of rhetoric. Research on ‘framing’ has shown that conservatives (and right-wing politicians) are doing this much more effectively than progressives. This means that progressive countries and organizations that do not want neoliberalism, autocracy, or fascism but instead want a better world that brings ecologically sustainably human development for all will have to think about a name for the system or ideology that they want. They will also need names and frames for the things they criticize in politics and policies that do not focus on human development, on the reduction of economic inequality, on the strengthening of democracy, or on ecological sustainability. Strategies for a better world are not merely material but are also in part related to ideas and ideological notions. Words and ideas matter.