Five ways to shrink income inequality

Despite domestic and global efforts to narrow the gap, inequality between the wealthiest one percent and the remaining 99 continues to rise

 
According to a recent Oxfam report, the gap between the wealthiest one percent and the rest of the planet has increased by approximately $1.5trn in the last five years 
Author: Shardell Joseph
January 26, 2016

A recent Oxfam report showed that the 62 richest billionaires own as much as half of the world’s poorest people. On top of that, the wealth of the richest 62 has increased more than half a trillion dollars, while the gap between the wealthiest one percent and the rest of the planet has increased by approximately $1.5trn in the last five years.

As the inequality crisis escalates, so do the concerns shared by world leaders. And yet, regardless of the policies already implemented to combat inequality, the gap continues to widen. Mark Goldring, Chief Executive of Oxfam GB said in the report, “Ending extreme poverty requires world leaders to tackle the growing gap between the richest and the rest which has trapped hundreds of millions of people in a life of poverty, hunger and sickness.”

World Finance has complied five ways in which global inequality can be significantly reduced.

Eliminate tax avoidance

Tax havens have had a significant role in starving government coffers. The amount of individuals and multinational companies illicitly transferring their money into offshore accounts has nearly quadrupled between 2000 and 2014. Oxfam estimates that a total of $7.6trn has been placed in offshore accounts during this time. If this amount had been taxed accordingly, an extra $190bn would have been available to governments every year. Additionally, Global Financial Integrity recorded a total loss of $6.6trn in illicit financial flows from developing countries from 2003 to 2012.

International collective action has recently been taken to reduce illicit outflows of capital. In 2013, finance ministers from the G20 group backed plans to tackle international tax avoidance – but since then, the amount of aggressive tax avoidance has continued to rise. A far greater transnational effort, focusing on the harmonisation of tax policies between states, would create more transparency by introducing country-by-country reporting.

Increase investment in public services

The argument put forward by select European governments is that austerity will foster economic growth and therefore benefit all parts of society. Governments often wield the fear of debt and deficits to justify cuts. However, history has proven that in reality austerity has failed – fiscally, economically and politically.

A large part of Europe’s coping mechanism for the financial crisis was to implement rigorous austerity measures. In contrast, the US resorted to financial stimulus, and is now reaping the benefits. Many of the European economies that adopted austerity are stagnant and struggling to repay their debts. Not only does austerity hinder economic growth, but it has also resulted in increased income inequality by putting the poorer parts of society at an even greater disadvantage.

Many economists have argued that investment in public services is a favourable alternative, and boosts private output, investment and employment.

Raising wages

The core issue of income inequality is that while the income of the select few continues to increase rapidly, the lion’s share of the global population is in work and still below the poverty line. In many countries, inequality starts in the labour market. The IMF claims that “the erosion of minimum wages is correlated with considerable increases in overall inequality”.

According to the International Labour Organisation (ILO), developed countries are most vulnerable to income inequality, while emerging economies have witnessed the largest declines in inequality, applying more equitable distribution of wages and paid employment. Even in the most advanced economies, minimum wages remain stagnant.

Businesses are often reluctant to raise wages, as a simple calculation would suggest that higher wages equals less profits. However, raising wages has proven benefits: better paid workers result in greater productivity, a fall in absenteeism and a decrease in turnover. Additionally, higher wages boost demand for goods and services.

International recognition of the living wage (a calculation according to the basic cost of living) would reap both societal and economic benefits, and employers could be incentivised to voluntarily raise wages to a basic living standard. Simultaneously, world leaders can be making collective efforts to implement a compulsory living wage for the near future.

Better access to capital

Despite the select few success stories of prosperous start-ups, the truth is that since the financial crisis, investors have largely avoided small companies. The risk of investing in small companies only benefits large enterprises and seriously hinders the ability of SMEs to source capital. Developed and developing economies alike are short on capital for entrepreneurs, thus preserving a cycle of dependency, lost productivity and increased inequality.

SMEs have a positive knock-on effect, from owners down to employees, customers and communities. Better access to capital would provide the required support to entrepreneurs on little or no income, and give them the capacity to become self-sufficient. Governments need to encourage investors to provide capital for small businesses, which can be done through public and private lending programmes.

Transparency of economic policy

A fundamental issue, especially in developing countries, is a lack of transparency when it comes to economic policy. A system lacking in transparency tends to breed high levels of corruption.

According to Transparency International, there is a strong negative correlation between corruption and the level of GDP per capita. Corruption prevents necessary government spending, which impacts social welfare and creates mass inequality.

In an IMF working paper, the organisation established the considerable impact of corruption on income inequality, where one standard deviation point increase in corruption resulted in an income reduction for the poor of 7.8 percentage points a year. The paper argues that lower economic growth, a biased tax system favouring the wealthy and well-connected, lower levels of social spending and unequal access to education and public services are all devices that increase inequality. Greater transparency could enhance government accountability, public understanding, reduce corruption, and thus significantly reducing income inequality.