Dubai: The gap between the rich and the poor has widened further with the wealthiest one per cent of the global population now accounting for around 10 per cent of total income in advanced economies.
The International Monetary Fund (IMF), in its latest report, expressed concerns that the income disparity in advanced economies is “at its highest level in decades”.
Income gaps are growing at a fast rate in several markets, including the Middle East and North Africa (Mena) and India.
The IMF staff discussion note, released in June, suggests that governments need to focus on finding ways to help the poor and the middle class expand their income, citing that how the world’s wealth is distributed can affect economic growth.
The report pointed out that if the world’s wealth is increasingly concentrated at the top, while incomes of the poorest of citizens remain stagnant, growth and sustainability will suffer.
“Specifically, if the income share of the top 20 per cent (the rich) increases, then GDP growth actually declines over the medium term.”
In contrast, if low-income people are given the opportunity to make more money or improve their income, the economy will also expand. “An increase in the income share of the bottom 20 per cent (the poor) is associated with higher GDP. The poor and the middle class matter the most for growth,” the report said.
A number of studies have shown that rich people’s fortunes are growing every year. Oxfam earlier reported that the wealthiest one per cent of the population have seen their share of global wealth expand from 44 per cent in 2009 to 48 per cent in 2014. Those who belong to this elite club had an average wealth of $2.7 million each last year.
“Estimates suggest that almost half of the world’s wealth is now owned by just one per cent of the population, amounting to $110 trillion – 65 times the total wealth of the bottom half of the world’s population,” the IMF report said.
The authors of the report identify a number of things that will likely happen and certainly discourage investment if the trend continues:
Financial crisis
There is enough data to establish a link between widening wealth disparity and financial crisis. “A growing body of evidence suggests that rising influence of the rich and stagnant incomes of the poor and middle class have a causal effect on crises, and thus directly hurt short-and long-term growth.”
“In particular, studies have argued that a prolonged period of higher inequality in advanced economies was associated with the global financial crisis by intensifying leverage, overextension of credit and a relaxation in mortgage-underwriting standards.”
Conflicts
If the rich continue to amass millions and the poor don’t see any improvement in their living conditions or incomes, “trust and social cohesion” will likely be damaged. Conflicts are bad for investment, the authors warned.
“Conflicts are particularly prevalent in the management of common resources where, for example, inequality makes resolving disputes more difficult. More broadly, inequality affects the economics of conflict, as it may intensify the grievances felt by certain groups.”
Inequality breeds more poverty
What happens if poor people continue to suffer from stagnant incomes? They won’t be able to send their children to a good school or provide a better financial future. When these children become adults and have kids of their own, the cycle continues. This doesn’t happen to everyone, but the risk of poverty is high for those who were born into a poor family. “Income inequality hampers poverty reduction,” said the report. “Growth is less efficient in lowering poverty in countries with high initial levels of inequality or in which the distributional pattern of growth favors the non-poor.”
Policies that undermine growth
One of the dangers of letting the wealthy citizens gain more power is that it can lead to “poor public policy choices.” “For example, it can lead to a backlash against growth-enhancing economic liberalization and fuel protectionist pressures against globalization and market-oriented reforms,” the report said.
“At the same time, enhanced power by the elite could result in a more limited provision of public goods that boost productivity and growth, and which disproportionately benefit the poor.”
