GLOBAL POLITICAL ECONOMY- Inequality

How have inequality dynamics across and within countries been changing over the last decades and why?

• The emergence of China and India as economic powerhouses, has been the main factor in reducing global relative inequality.
• The UK experienced an increase in relative inequality of 38% while France decreased inequality by 16% showing that there is variation even between similar economies.
• China and other Asian countries have enormous trade surpluses that funded the US’ trade deficit. This demonstrates the global imbalances and the contrast between debt led and export led economies.
• Not just credit  expansions,  but  also  excessive  current  account  surpluses  can  give  rise  to  macroeconomic  instability,  and both can be linked to income inequality.
• In the US real wages have remained stagnant while consumption has dramatically increased, showing the trasition into debt led economies.
• A number of Asian countries are exhibiting similar tendencies as the US such as South Korea and Malaysia, who have modelled their economies around the debt led model of growth.
• Between 1979 and 2007, inflation-adjusted income, including capital gains, increased $4.8 trillion — about $16,000 per person: demonstrating a soar of productivity.
•  Of this, 36 percent was captured by the richest 1 percent of income earners, representing a 232 percent rise in their per capita income: the failure of “trickle down” economics.
• Globalisation – the increasing movement and integration of goods, capital, labour and technology at a global level that has brought higher growth but also greater inequality, resulting in winners and losers.
• Associated with globalisation are two related processes – financialisation and the international relocation of production – that weakened the bargaining power of labour in developed and less developed countries. This has also meant profit margains for businesses have grown as they can pay low wages in export led countries while selling in developed countries.
• In the US and the UK, the Reagan and Thatcher regimes broke the back of organised labour.  Governments in many Asian countries openly repressed labour and wages in order to compete for foreign direct investments.

How does it relate to the global economic crisis?

• Limited investment potential in the real economy due to weak consumer demand as those who consume most or all their incomes received proportionately much less. Poorer people spend more.
• As the benefits of rising income since the 1980s were confined to a relatively small group of people at the top of the income distribution, the consumption of the lower- and middle income groups was largely financed through rising credit rather than rising incomes.
• When debt is the critical driver of economic growth, it is possible to create ‘credit bubbles’ in industries such as the sub-prime housing sector. These bubbles are not backed by real assets and are characterized by reckless lending in the hopes of returning a profit or security. Borrowers who had low credit scores and a higher risk of defaulting on loans were sold loans they could not pay back.
• Bubble burst.
• They owed more on their mortgages than their homes were worth—and could no longer sell their homes if they couldn’t make their mortgage payments. Instead, they lost their homes to foreclosure and often filed for bankruptcy in the process.
• The overindebtedness of the US personal sector finally became apparent and the debt-financed private demand expansion came to an end which caused economic downturn.
• When this debt burden from elites on the lower/working became unsustainable, the financial system collapsed and was bailed out by taxpayers, furthering income inequality.
• After the financial crisis, income inequality came down slightly however it cemented wealth inequality as you can see stocks were bought up by wealthier individuals.
• Rising inequality has meant stagnant demand for products:
• In debt led countries this has led to unsustainable credit bubbles whereas in developing ‘creditor’ nations it has led to capital leaving their economies.

This leads to weak domestic demand and an export-oriented growth model, which means wealthy creditors continue lending to overseas.

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