The old saying that the rich are getting richer and the poor are getting poorer continues to manifest itself globally.
IN THE MONEY WITH with NESBERT RUWO & JOTHAM MAKARUDZE
A recent report by anti-poverty organisation Oxfam revealed that, based on data from the Credit Suisse Global Wealth Datebook 2013 and 2014, and the Forbes’ billionaires list, much of the world’s wealth is in the hands of just 1% of the world’s population. Oxfam went on to say that those in this top tier had seen their share of wealth increase from 44% in 2009 to 48% in 2014 and is poised to reach 50% in 2016. They found that the wealthiest 80 individuals have the same wealth as 3,5 billion people or 50% of the world’s population.
This phenomenon of widening inequality has been particularly evident in emerging economies such as South Africa and Brazil which reflect among the world’s highest Gini coefficients. A Gini coefficient is a measure of the gap between the rich and the poor.
While this manifestation has largely been engineered in the developed world through tax regimes designed to attract the wealthy resulting in tax havens for the rich, it has not been so for the less-developed and emerging countries where this has arisen largely from perpetuation of historical imbalances.
In some instances, those in power have abused their positions to accumulate wealth for themselves, widening the income gap.
While it is human nature for people to be envious of those that have more than them, increasing inequality is potentially dangerous for any economy over the long-term as it kills capitalism by drowning the middle class and destabilises the social cohesion within a society.
Some economists will argue that an increase in wealth among the rich is better for all as investment and spending by the rich has a trickle-down effect that results in job creation and better livelihoods for the poor.
However, the counter argument is that the wealthy spend their money largely on goods and services that disproportionately benefit them and thus entrenching their position which serves to widen the gap even further.
The rich continue to have capital to risk and will continue to generate a greater absolute return on their capital than the poor can ever achieve.
They also have the added advantage of being able to minimise their effective tax rate through often much lower capital gains taxes, elaborate tax avoidance schemes and more often than not, through their ability to influence policy makers. This ultimately results in much of the tax burden being borne by the poor and middle class.
Does the solution to these issues lie in increasing taxes for the wealthy? The ideal, it seems, would be to find a way of transferring some of the wealth to the poor without making the richer poorer in the process.
Empirical evidence in the UK and US has actually shown that every time taxes on the rich were increased, they have paid less taxes. So it is such that many tax regimes continue to be skewed in favour of the rich with a focus on incentivising the owners of capital to take risks and create wealth. As such, the wealthy are seen to be “dragging the poor up” through their investments and spending. In the words of Margaret Thatcher, “No one would remember the Good Samaritan if he only had good intentions; he had money as well.”
What we know is that wealth itself is not a finite construct and that by having one small section of society that is richer than the majority does not necessarily detract the ability of society to increase the size of the pie.
It is theoretically possible to have a society where there is improvement in wealth for all. However, to move towards a semblance of this ideal, there has to be a few things in place that start with education moving up to having equal access to opportunities, what Obama (2013) calls the endeavour “to deliver equal opportunity — the idea that success doesn’t depend on being born into wealth or privilege, it depends on effort and merit.”
In the case of Zimbabwe, inequality appears to be firmly entrenched with the rich continuing to increase their net worth, while the middle class and poor continue to be squeezed down.
The so-called trickle-down effect of the spending by the rich does not seem to benefit the local poor people as much of the money goes towards the purchase of imported luxury goods across the spectrum of basics such as foods to luxury vehicles, furniture and other durable goods.
Hence, it may be argued that the current inequality levels in the economy are even more unsustainable. While the difficulties in the Zimbabwean economy over the past decade or so have seen some become wealthy over short periods of time by exploiting the inefficiencies and anomalies of the economy, the poor continue to have stagnant or declining real incomes.
The population is largely educated, but the environment continues to be skewed in the favour of the rich and those in authority, and provides very few opportunities for the poor to rise to the limits of their talents and create wealth.
Industry continues to struggle to create formal employment. While most people have now taken up micro-entrepreneurship for survival, the middle class is being squeezed thin.
The ultimate result will hence be sluggish economic growth for as long as there isn’t a robust and thriving middle class that drives demand and supports industry.
Definitely, US President Obama was right when in 2013 he called income inequality “the defining challenge of our time”.
Nesbert Ruwo (CFA) and Jotham Makarudze (CFA) are investment professionals based in South Africa. They can be contacted on email@example.com