The Inequality Nightmare

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ABU DHABI – “The poor cannot sleep, because they are hungry,” the Nigerian economist
Sam Aluko famously said in 1999, “and the rich cannot sleep, because the poor are
awake and hungry.” We are all affected by deep disparities of income and wealth,
because the political and economic system on which our prosperity depends cannot
continue enriching some while it impoverishes others.

During hard times, the poor lose faith in their leaders and the economic system; and
when times are good, too few enjoy the benefits. The GINI coefficient, a measure of
economic inequality, has been rising for many years in developing as well as
developed countries, including the United States. In Europe, inequalities have
intensified as a result of rapidly rising unemployment, especially among young
people. Some have reacted by rioting; others have backed far-right xenophobic
political parties; many more seethe quietly, growing ever more resentful of
politicians and the system they represent.

The problem is starkest in the world’s megacities, which account for around 80% of
global GDP. But even in the most developed cities, disparities can be marked. For
example, as you travel on the London Underground just six miles (or 14 stops) east
from the heart of government at Westminster to Canning Town, the life expectancy of
the inhabitants at each successive stop falls by six months.

But inequality is most acute in emerging economies where urbanization has been
fastest. By 2030, an estimated 2.7 billion more people will have migrated to cities,
almost entirely in developing countries. Many will encounter hopelessness and
exclusion there, rather than the good jobs and better life for which they came.

Megacities like Mumbai, Nairobi, and Kinshasa are essentially small cities
surrounded by huge slums – pockets of wealth in a sea of despair. None resembles the
likes of Tokyo, New York, or London, which, despite areas of deprivation, are
notable for a more equitable distribution of wealth.

Such disparities are equally apparent at the national level, especially in some of
Africa’s resource-rich countries. While demand for private jets is booming, 60% of
the population lives on less than $1.25 a day. As the world overall grows richer,
the benefits continue to flow overwhelmingly to a tiny elite.

As a result, efforts to promote more inclusive growth have become crucial, not only
for moral reasons, but also to ensure the survival of the global economic system.
This involves more than wealth distribution. It means bringing people – or
representatives of specific ethnic, religious, or regional groups – into
public-policy decision-making, in order to allay their sense of marginalization or
perpetual failure. It means creating real jobs to draw workers away from the
informal economy, so they can benefit from workplace protections (and pay taxes).
And it means framing policies that are appropriate to conditions on the ground.

Every country will have its own specific priorities, and the range of possible
policy measures is quite broad. It might include a social safety net, promotion of
gender equality, support for farmers, improvement of access to financial services,
or countless other initiatives.

But two overriding sets of policies appear to apply in almost all cases, according
to a recent World Economic Forum debate on how best to spread the wealth. The first
seeks to ensure that poor children have access to a reasonably good education as a
means to reduce intergenerational poverty. The second set of policies, which are
particularly relevant in resource-rich countries, aims at guaranteeing all citizens
– and especially the poorest – a share of revenues from what are unquestionably
national assets.

Such policies have been shown to work in places like Brazil, whose pioneering Bolsa
Familia (or family allowance) policy provides cash transfers to poor families on the
condition that their children attend school, eat properly, and fulfill other
criteria to improve well-being. Mexico’s “Opportunity” program performs a similar
function. Oil-rich Alaska pays dividends from its resource revenues to all of its
citizens, a model that several developing countries are seeking to emulate.

Although economists continue to debate the advantages and disadvantages of such
schemes, they are not particularly complicated to set up. The challenge lies in
forging partnerships and agreeing goals. Governments, businesses, non-governmental
organizations, and individual citizens, rich or poor, all have a role to play. If we
ignore the dangers of wealth disparities for much longer, the consequences will be
far more distressing than a few sleepless nights.

    Donald Kaberuka is President of the African Development Bank.

 Project Syndicate/World Econoic Forum, 2014.