The Echoes of Davos on Economic Inequality

Davos, the picturesque Swiss mountain resort nestles in the pinnacle of Eastern Alps is often known as the highest town in Europe. Of course, for the rest of the World, Davos is better known for hosting the World Economic Forum (WEF), an annual gathering of global political and business elites at the end of ev

ery January. The meeting has attracted some crème de la crème of business leaders, politicians, economists, and industrial giants for years, brainstorming pressing issues facing the world since 1971. The mission of this nonprofit foundation is cited as “Committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agenda.” After nearly five decades of championing global issues such as Economic Inequality, wealth management, globalization, international conflicts and environmental catastrophes, has Davos achieved what it set out to do? Many would argue, Davos 2017 finally would go down in history of as the game changer that generates the paradigm shift in the landscape of world economy.

For the first time, the sparse US heavyweight representation is anything but, business as usual for the World Economic Forum. The change that took the limelight was undoubtedly the attendance of the Chinese President and his 200-Strong delegations. In his opening plenary statements that drew over-spilled crowds, Xi began by the acknowledgement that “Davos is the important pulse of global economy.” His speech was greeted with quite a stir, when Xi cited a quote from Charles Dickens describing the world after the Industrial Revolution as “It was the best of times, it was the worst of times”. He continued: “Today, we lived in the world of contradictions. On the one hand, with growing material wealth and advances in science and technology, human civilization has developed as never before. On the other hand, frequent regional conflicts, global challenges like terrorism and refugees, as well as poverty, unemployment and widening income gap have added to the uncertainties.”

Indeed, the widening income gap has become an issue that generated clouds of uncertainty globally. At the eve of the meeting, Oxfam published the report on “An economy for the 99 percent”. The rich poor divide is far greater than had been feared, as the headlines read “Eight richest men in the world own the same wealth as the 3.6 billion people who make up the poorest half of humanity”. The charity detailed how the elites are fueling the economic inequality by influencing politics, tax avoidance and driving down the wages. As usual, this raised the condemnations that the elites who are advocating changes in Davos are “all talks and no actions”, as they only cements the power of bankers, industrialists, technocrats and politicians serving the common interests: their own! In fact, such notion was also supported by a 2015 study published in the Journal of Commercial Research, concluding WEF do not have significant socio-economic impact on issues of poverty, debt and wealth distribution, as the solutions are never agreed upon and responsibilities often shifted back to the affected. Despite the damming headlines, the mood in Davos was subdued as the world is coming to terms with the rise of the populist movement, bearing nervous anticipations of the aftermath of Brexit and braising the impact of “Trump Armageddon”.

To be fair, the recurring theme in Davos over the last decade has been the echoes of concerns with the threats of economic inequality. Such phenomenon is defined as the disparity of economic wellbeing amongst individuals in groups, populations or countries. Economic inequality is synonymously referred to as income or wealth inequality or Wealth Gap. Obama once called the economic inequality “the defining challenge of our time”. The alarming signs of economic inequality were already apparent at the dawn of the Millennium. The World Institute for Development Economics Research at the United Nations University reported the richest 1% of adults alone owned 40% of global assets, and the three richest people in the world possess more financial assets than the lowest 48 nations combined in year 2000. The trend continued to worsen exponentially, as the combined wealth of the “10 million dollar millionaires” inflated to nearly $41 trillion by 2008. Last year, Oxfam already revealed data citing the wealthiest 1% owning more than half of the global wealth.

In reality, how did we get to such state of crisis and should economic inequality really be considered one of the most prioritized political agenda remains the subjects of intense debate? Beyond the concerns about alleviating poverty, should there any other reasons for government to be concerned about Economic Inequality?

The renowned US Historian, Michael Beschloss once described Barack Obama as “Probably the smartest guy ever to become President.” There was no doubt Obama was eager to secure his place in history amongst the Giants. This is a man with such political savvy and meteoric rise to the White House from the background of seven unremarkable years at the Illinois Senate. This is a man making “revolutionary” speeches to tens of thousands of adoring crowds. Obama has grandiose intent to leave his legacy in solving the worst financial crisis since the Great Depression, withdrawal from the War in Iraq, reconcile the United States to a less dominant role in the world. And above all, this is the President who wants to be “transformational” by putting millions of American back to work, redistribute wealth and reducing economic inequality as the top of his domestic and global agenda. Judging from the figures, Obama failed spectacularly! Globalization under his presidency had witnessed further widening of rich-poor divide and spelled the worst Economic disparity in history.

The irony is that Obama’s vision for the reduction of Economic Inequality is modeled against Ronald Reagan. In an interview with Reno Gazette Journal, Obama confessed: “I think Ronald Reagan changed the trajectory of America in a way that Richard Nixon did not and in a way Bill Clinton did not. He put us on a fundamentally different path because the country was ready for it.” He added: “I think they felt like with all the excesses of the 1960’s and 1970’s and government had grown and grown, but there wasn't much sense of accountability in terms of how it was operating.” Obama concluded: “Reagan just tapped into what people were ready feeling, which was we want clarity and optimism. We want a return to that sense of dynamism and entrepreneurship that had been missing!”

There is little doubt Reagan and Thatcher changed the trajectory of America and the rest of the world. The 1980’s economic liberation, deregulation and decline of the union, arguably was the very beginning of Economic Inequality. The 2015 study conducted by International Monetary Fund (IMF) also echoed the findings of the decline of unionization and neoliberalism in 1980’s indeed fuelled the unstoppable rise of the Economic Inequality. If past eight years of Obama influences in Davos had not made any impact in equilibrating the economic disparity, are we witnessing the potentials of the populist movement and protectionism correcting the income gap instead?

The French Economist, Thomas Piketty, whose expertise is based on wealth concentration and income inequality over 250 years, stipulates the rate of capital return in developed countries persistently overwhelm the rate of economic growth is the source of Economic Inequality. He argues such worsening economic disparity is an inevitable consequence of free market with labor market outcomes, regressive taxation and globalization.

The determination of wages by free market capitalism is an unachievable Utopia. The competition, skill and opportunity distribution are never equal, which inevitably results in market failures. With such discrepancy, the market concentrates wealth, pass the environmental costs to the society, and take advantages of the highly abundance low skill workers. The Neoclassic economic theory often implicates inequality in wages and salary is the most obvious culprit for economic inequality. The Marxian economics theory also attributes inequality to job automation and increase in capital intensity within capitalism aiming to minimize cost and maximize profits. In modern era of computerization and technological advancement replacing human labour, inevitably exerts reduction in employment opportunities. Both the labour market outcomes invariably widening the rich-poor divide in the society.

Polarization of wages cannot be the only explanation of the emergence of income inequality. The role of tax policies fueling wealth disparity has been an age-old debate between the politicians and economists. Economists such as Krugman and Orszag argued appropriate progressive taxation leading to social spending is the key to minimize inequality. On the other hand, regressive taxation, which naturally favours the rich, is often the incentives taken by politicians to gain votes and attract investments. Such initiatives are clearly contributing towards the rise of economic inequality.

Trade liberalization or better known as globalization, has recently been largely implicated for shifting the inequality from a global arena to a domestic platform. Innately, when a rich country trade with the poor, the low-skilled laborers will see employment opportunities and wage increase, while similar workforce in the rich nations bear the consequences of wage stagnation or reductions. In addition, globalization is believed to reward firms in particular niche providing more opportunities for the elites, resulting in increasing international influence and decreasing local affects.

This year in Davos, the Chinese President, steadfastly defended globalization in the face of endless challenges. Xi highlighting “Economic globalization was once viewed as the treasure cave found by Ali Baba in the Arabian Nights, but now become the Pandora’s box in the eyes of many.” Acknowledging globalization as a double edge sword and describing global economy as “the big ocean we cannot escape from” and “Voices against globalization have laid pitfalls in the process of economic globalization that we need to take seriously”. So, what are the pitfalls? The analysis has indicated that the global top 1% and the middle class of the emerging economies, such as Brazil, India and China, are the real winners of globalization. On the other hand, the middle class of the developed nations experiencing little real growth over time, widening the income gap domestically.

Not all experts share the catastrophic vision of economic inequality, as some argue the inequality is a “non-issue” and the equilibrium will ultimately be reached in due course. The opponents highlights measures had been taken by the establishments such as United Nation Development Program in 2014, asserting greater investments in social security, formulating laws that protect vulnerable individuals and generating jobs for the poor.

Some researchers even claim the global income equality is decreasing, as the economic growth in some emerging Nations remains strong and sustained. Nevertheless, the member countries of the OECD (Organization for Economic Co-operation and Development) reported otherwise. Contrasting data demonstrated the income disparity indeed is higher than it has ever been, even within OECD member nations, and at increased levels in many emerging economies.

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The Nobel Prize winning Economist, Robert J Shiller summed up the destructive impacts of economic inequality. “High and persistent unemployment, in which inequality increases, has a negative effect on subsequent long-run economic growth. Unemployment can harm growth not only because it is a waste of resources, but also because it generates redistributive pressures and subsequent distortions”. He further warned inequality “drives people to poverty, constrains liquidity, limit labour mobility and erodes self-esteem promoting social dislocation, unrest and conflict”.

Indeed the evidence consistently supports Shiller’s views. Empirical economists support the evidence of a negative correlation of about 0.5-0.8 percentage points between long-term growth rates and sustained economic inequality. Researchers in both sides of Atlantics have also found inequality generated higher health and social problems including drug abuse, teenage pregnancies, incarceration, obesity and suicide. The same studies also highlighted negative correlations with life expectancy, educational performance and social mobility. Moreover, multiple studies have concluded inequality to be “the single factor most closely linked and consistently related to crime.” Unsurprisingly, the studies also supported inverse link between income inequality and social cohesion.

The 19th century American theologian and author, James Freeman Clarke, once said: “A politician thinks of the next election. A statesman, works of the next generations.” Nearly five decades of the World Economic Forum had witnessed both politicians and statesmen, ranging from Reagan and Thatcher to Clinton and Obama, whether campaigning for the elections or championing for the course for the next generations. The players of Davos would have changed the landscapes of economy at the time, and ultimately the progression of mankind in the future.

Davos 2017 will undoubtedly go down in history as the cornerstone that marked the beginning of change. Whether the emergence of protectionism is like “locking oneself in a dark room, keeping out the light and air” described by Xi, or light at the end of the tunnel that is “Making America Great again” by putting millions of American back to work, redistribute wealth and reducing economic inequality, remains to be judged in due course.

The founder of the world Economic Forum, Klaus Schwab, who already had the foresight in predicting the rise of populists as the consequence of inequality. As Xi’s joked about the idealism of “Schwab-onomics”, Schwab read out the text he himself had written more than two decades ago. He warned “against populism and demanded that globalization must benefit the majority of the population and not just a small elite.”

Beyond the anxieties of alleviating poverty, the establishment should really tackle the problems economic inequality seriously. The wealth disparity is shown to stifles growth, diminishes access to health and educations, provoke ethnic and gender discrimination amongst the “masses”. On the other hand, the concentration of power and wealth amongst the “elites” continues to support nepotism and plutocracy. Facing such adversity of inequality, some studies even cautions unequal society ultimately results in politically instability, as interregional inequality has the tendency to increase the risk of coups. Of course, the lack of robust data, it is difficult to support the correlations between inequality and political violence. However, upon reflection on Hobson, Luxemburg and Lenin’s argument that World War I was triggered by inequality, and the economic stratification of society into “elites” and “masses” eventually brought about the downfalls of civilizations of Roman, Han and Gupta empires, can the ruling governments still ignore the potential apocalypse of the economic inequality?

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