Foreign Policy: Life Is Unfair: Inequality in the World

Foreign Policy
Summer 1998

Life Is Unfair: Inequality in the World _*

By Nancy Birdsall _**

Exactly 150 years after publication of the Communist Manifesto, inequality looms large on the global agenda. In the United States, the income of the poorest 20 percent of households has declined steadily since the early 1970s. Meanwhile, the income of the richest 20 percent has increased by 15 percent and that of the top 1 percent by more than 100 percent. In Asia, the high concentrations of wealth and power produced by strong growth have been given a new label: crony capitalism. In Russia and Eastern Europe, the end of communism has brought huge income gaps.

At the global level, the ratio of average income of the richest country in the world to that of the poorest has risen from about 9 to 1 at the end of the nineteenth century to at least 60 to 1 today. That is, the average family in the United States is 60 times richer than the average family in Ethiopia. Today, 80 percent of the world’s population lives in countries that generate only 20 percent of the world’s total income.

Ironically, inequality is growing at a time when the triumph of democracy and open markets was supposed to usher in a new age of freedom and opportunity. Instead, it seems to be having the opposite effect. Today’s global market not only seems to create a new divide between well-educated workers and their unskilled counterparts, it gives capital an apparent whip hand over labor and pushes government to unravel social safety nets in the name of global competitiveness. Regularly invoked as the handmaiden of open markets, democracy has made income gaps in regions such as Latin America more visible and looks more and more like an accomplice in a vicious circle of inequality and injustice. Technology seems to be making the situation worse, not better. The computer, for example, represents a whole new production process and creates a world in which the scarce commodities commanding the highest economic returns are information and skills.

Although the forces behind this trend are many and complex, the simple and painful truth is that inequality is nobody’s fault and cannot be fixed in our lifetimes. Only by understanding its causes can we help determine what will make matters better, not worse. For example, while the globalization of markets seems linked to inequality, policies that would hamper market integration and slow market growth are actually the most avoidable causes of inequality. The rhetoric of fairness can encourage false remedies--trade protection, worker rights, and cheap public services--that have short-run political appeal, but can, in fact, hurt the poor.

However, this does not mean the inequality problem can be left to the market. There is a role for government here—not only to avoid the creation of unfair advantages for the rich and powerful, but to guarantee equal opportunities that market forces will naturally neglect, especially for those individuals who will otherwise be left on the sidelines.

Remedies that can work will take time and patience. First, because economic growth based on the intensive use of labor reduces income inequality, governments should encourage worker-based growth by avoiding policies that directly or indirectly raise employers’ cost of labor. The United States, for example, could encourage more hiring of unskilled workers by reducing payroll taxes.

Second, in the increasingly service-oriented global economy, education and skills represent key assets. Without a jump-start from public policy, the rich will become educated and stay rich, and the poor will not, perpetuating the inequality of assets and income across generations. Educating the poor is the single best weapon against income inequality.

Third, though relatively low levels of income inequality in China, Cuba, and the former Soviet Union seem to suggest that authoritarian politics can at least produce equality, it is, in fact, the Western democracies that have over time generated sustained and equalizing economic growth. In today’s global market, good politics is good for equalizing growth.

Fourth, transfers and income subsidies for the poor are not a substitute for policies that enhance opportunity. Public spending should focus on programs that benefit the poor the most—in the United States, secondary education, child care, and immunizations—and that give the poor consumer power by providing tax breaks and vouchers for school, health, and housing.

Finally, because the poorest countries of the world are those least integrated into global markets, domestic policies for global integration must be strengthened. In poor (as well as rich) countries, this means creating an attractive environment for foreign and local investment and increasing spending for education and training to reduce the growing wage gap between the skilled and unskilled. In rich countries, it means significantly easing global inequality by lifting barriers to imports of agriculture and manufactured textiles

Any hopes for a quick fix to inequality are misplaced. During the long transition from agriculture to industry, changes in production and in the structure of employment caused wrenching inequality. Much inequality today may be the natural outcome of what is an analogous transition from an industrial to an information age.

The real danger is that growing inequality may become a lightning rod for populist rhetoric and self-defeating isolation. It would be unfortunate if such tempting but false remedies eclipsed the more promising policies, both international and domestic, that can help the world manage the long transition to a less-divided postindustrial future.

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