Moises Naim takes a closer look at inequality anxieties in his latest FP piece. The major point?
In truth, in some places inequality has become far worse, and in other places the changes are fairly minor. But what is most clear is that whereas the statistics about inequality do not show major variations, our collective awareness about it has changed substantially.
He goes on to identify the major reasons for this newfound “anxiety over inequality” which is replacing our ‘anxiety’ over poverty, such as improved access to information and the rise in the number of democracies with their tolerance for free media and electoral agendas which play to the masses. But his next point is a more interesting one,
Let’s stop fighting a battle we can’t win and concentrate all efforts on a fight that can succeed. The best tools to achieve a long-term, sustained decline in inequality are the same as those that are now widely accepted as the best available levers to lift people out of poverty. Provide access to better education and healthcare, clean water, justice, steady jobs, housing, and credit. The recipe is well known, even boring. These goals are not good fodder for a rousing speech. And they will not bring down inequality as quickly as one would wish. But focusing on these indispensable goals will certainly close one important gap: the gap between our good deeds and our best intentions.
Moises Naim makes a rather important statement – strategies to reduce inequality can’t fall far from strategies to reduce poverty – they are one side of the same coin.
In the simplest of terms, there are two distinct approaches to inequality. One, is income redistribution. If you have $400 and I have only $100, we can simply transfer $150 worth of income from your pockets into mine, equating our incomes at $250. The strategy, of course, can be quite beneficial in the short term, at least for one of the parties, in terms of making inequality disappear. If you think such things are a legacy of the Soviet past, think again. But, in the end of the day, where do you think such a strategy leads? Just ask Argentina, where redistributive fiscal policies have led to corruption, instability and…inequality.
Redistribution approach fails to take one issue into the account. While it deals with consequences (disparity in incomes) it does not address the root sources of the disparities in income. As in the previous example, it would be foolish to simply add up $400 and $100 and divide it between the two people with taking a closer look at why one of the has $400 and the other one only $100 worth of income. Adressing the root sources of income disparities, in the simplest of terms, is the second – alternative – strategy.
Getting into the “why?” question opens up a host of possibilities for reducing inequality. Not intending to make generalizations, but I do believe that more often than not in emerging economies there is a divide between the people who have access to the system and the people who don’t. For more, you can of course read up on some Hernando de Soto – the point that he makes and what we’ve observed in country after country, is that you can’t assume market reforms benefit everyone across the board. Even in the same economy, there are people who can invest and grow their $400 incomes and there are people who are stuck at the bottom of the pyramid with no opportunities to increase their $100 income. The sources of these discrepancies are regulatory burdens and weak market and democratic institutions.
Frederic Bastiat wrote about this problem 150 years ago. In his world, the principal cause of inequality was discrimination in (read overregulation of) markets and violation of property rights. His words are still relevant today:
Whence will come the leveling of classes which is the ardent desire of our era, and which is one of its most honorable characteristics? It will come from simple justice, from the fulfillment of this law: Service for service. For two services to be exchanged according to their real value, two things are required of the parties to the transaction: clarity of judgment and freedom of exchange. If the judgment is not clear, in return for real services, sham services will be accepted, even freely. It is still worse if force intervenes in the transaction.
This much being granted, and admitting that there is an inequality among men of which the causes are historical and can disappear only with the passage of time, let us see whether at least our century, in making justice prevail everywhere, will finally banish force and deceit from human affairs, allow the equivalence of services to be naturally established, and bring about the triumph of the democratic and egalitarian cause of property rights.
Published Date: May 15, 2006