We’re all free to be poor

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According to the CIA World Factbook, political parties are prohibited in Bahrain, but don’t despair, freedom lovers, the “constitutional monarchy” formerly known as an emirate is the 13th freest country in the world according to the 2014 Index of Economic Freedom. Economic freedom? According to the Heritage Foundation, co-publisher of the Index with the Wall Street Journal, that’s “… the fundamental right of every human to control his or her own labor and property”, plus aspects such as “the ability of individuals and businesses to enforce contracts”. The CIA, always looking for something to moan about, claims that “Bahrain is a destination country for men and women subjected to forced labor and sex trafficking; […] domestic workers are particularly vulnerable to forced labor and sexual exploitation because they are not protected under labor laws; […] the government has made few discernible efforts to investigate, prosecute, and convict trafficking offenses; […] most victims have not filed lawsuits against employers because of a distrust of the legal system or a fear of reprisals.”

If it’s like that in one of the freest countries in the world, you can imagine what it’s like in hell-holes such as Norway, 20 places down the list from Bahrain. And what about those poor souls living in Italy, the least free OECD country? Italy ranks 70 places lower than Bahrain, just behind Kyrgyzstan (where’s the CIA’s continuing concerns include: “the trajectory of democratization, endemic corruption, poor interethnic relations, and terrorism.”).

Still, the Index’s “two decades of advancement in economic freedom, prosperity, and opportunity” haven’t been wasted on everybody. Oxfam says that 210 people have been lifted out of poverty in the past year, helping bring the world’s total number of billionaires to 1426, with a combined net worth of $5.4 trillion. And as you’d expect, some billionaires have more billions than others: the world’s 85 richest individuals own as much wealth as the poorest 3 billion people.

That’s worrying the World Economic Forum, finishing in Davos today. The WEF’s annual Global Risks Report ranks “severe income disparity” at number 4 in a list of ten global risks of highest concern. (The top three are fiscal crises, unemployment, and water crises.)  The WEF doesn’t go into detail, but it does point out that beyond the immediate impacts, income inequality interacts with and reinforces other socioeconomic and political trends.

Oxfam provides many concrete illustrations of what that means. For instance, their poll of low-wage earners in the US showed that two-thirds of them believe that Congress passes laws that predominately benefit the wealthy. And that was before last week’s news that most members of Congress are now millionaires (and to think, some people accuse the OECD of being a rich man’s club!). In another Oxfam survey in Spain, Brazil, India, South Africa, the UK and the US, a majority of people (8 out of 10 in Spain) believe that laws are skewed in favour of the rich. Similarly, the majority agreed that “The rich have too much influence over where this country is headed”.

You would have to be particularly naïve to imagine that the rich and powerful don’t use their wealth and power to influence governments, whatever the consequences for the rest of us. An IMF working paper  concluded that “prevention of future crises might require weakening political influence of the financial industry and closer monitoring of lobbying activities to understand the incentives better”.  The financial industry spent over $1 billion lobbying against regulation in the US after the crisis, but, please don’t tell anybody. In an OECD survey, only around 5% of lobbyists thought that “overall lobbyist expenditure” should be disclosed.

A crisis can have an immediate, long-lasting impact in terms of people losing their jobs and houses, but income inequality can cause less spectacular, but no less damaging, losses too. Oxfam quote an OECD report on Mexican telecoms on the consequences for the country of the monopoly position of América Móvil, owned by the world’s richest man, Carlos Slim. “Mexico, with the lowest GDP per capita in the OECD, a high inequality of income distribution, and a relatively high rural population, needs the socio-economic boost provided by greater access to more   services, in particular high speed broadband. The welfare loss attributed to the dysfunctional Mexican telecommunication sector is estimated at USD 129.2 billion (2005-2009) or 1.8% GDP per annum.”

What can be done about all this? The OECD’s answer is “inclusive growth”. Have a look at last year’s OECD Forum to find out more about what that is. Or consider this to find out what it isn’t: the richest 1% increased their share of income over 1980-2012 in 24 out of 26 countries for which data are available. Calculations using figures from the Paris School of Economics’ World Top Incomes database suggest that if income shares had stayed the same over this period, the 99% would have an extra $6000 each in the USA today.

SOURCE: OECD Insights, January 25th, 2014, http://insightsblog.oecdcode.org/?p=6397