Are we looking wrongly at inequality?

Inequality is the issue of the day. President Barack Obama made it a key issue in his state of the union address, it was a key theme at the World Economic Forum, and in this publication the President of the African Development Bank, Donald Kaberuka, said inequality was a threat to global stability. The facts regarding inequality can be quite startling and there can be no debate that everyone must endeavor to ensure that no person is ever born into poverty. But is inequality the issue that should be tackled or is it perhaps the size of the opportunities that are available? In January, an Oxfam report stated that the richest 85 individuals on earth are worth, in monetary terms, the same amount as the poorest 3.5 billion. According to the Department of Labour in the United States, 74.2% of wealth growth in the United States went to the top 5% over the last 30 years. Majority of the most unequal countries in the world are in Africa, including South Africa. In fact, in South Africa, the top 1% makes 110 times the amount of the bottom 10%. Solutions to inequality include higher taxes on the rich, executive pay caps, controls on uses of capital, among others. However, the option remains that society is looking at this injustice in the wrong way. Perhaps it is not the level of inequality that needs to be changed but the size of the economic ‘pie’ available to all. Opportunity for wealth creation may be more fundamental than wealth redistribution. Looking at the world’s five richest people, three made their fortunes in fields that did not exist at their births (such as mobile telecommunications). Of the top 10, only three inherited their companies (two of them are brothers). The point here is that a lot of wealth, and therefore jobs, have been created by human ingenuity and perseverance. The perception of wealth is as a zero-sum situation, which is to say “if one individual has it, then another person must not have it” is false as constant human innovation creates more wealth that can be shared. In the last 20 years, over 1 billion people have been pulled out of extreme poverty worldwide (majority of these were in China). Even Oxfam’s report stated that inequality levels between countries is dropping and has been for years. Good signs are shown throughout the world, exemplified by Rwanda’s achievement of pulling one million people, about 10% of the population, out of poverty in just five years (2007-2011). Markedly, Rwandan officials plan on making extreme poverty history in their lifetimes and seem on course to achieve that goal. If one removes the top 1% of income earners, inequality levels drop significantly. The fact remains that the very richest of the rich have gotten richer. This skews the data to give people the perception that they are being left behind. However, fortunes in internet companies and financial services have made billionaires in fields that never existed. In 2013 the United States had 334 billionaires compared to 35 in 1985. Simply put, the world has more very rich people. This is a fact that should be lauded and not vilified. Governments’ role should be to increase the opportunities for individuals to attain that same wealth. Social safety nets regarding education, health care, and housing should be implemented and encouraged. As the world’s population increases economic growth will increase naturally. What therefore becomes fundamental is ensuring that everyone participates in that growth. Taxing the top 1% of the world’s population, and their employers, may be one tool but it does nothing if society doesn’t put in place the foundation to allow more people to become members of that group. No one should sleep easy in a world where people go to sleep hungry. That is not an inequality issue but a fundamental human rights issue. As the world continues to encourage greater innovations, it is unclear what the next frontier that will create a new batch of billionaires. What is vitally important is that the next group of billionaires, the world over, as they grow up, is given the opportunity to take advantage of their gifts and join that group. The writer is an economist based in Washington, D.C Twitter: @adamkyam