Time to realize economic principles for reducing inequality

Oxfam recently launched a report showing that 8 individuals own as much as half of the earth's population. The extreme inequality is impossible to justify, but the report blames outdated assumptions. Leading economists no longer believe that poverty can be eradicated through growth that "seeps down". If current economic thinking is put into use, an inclusive development is possible, write Elina Scheja and True Schedvin in Sida's chief economist team.

On January 16, Oxfam launched its annual inequality report. Reports shows that economic inequality in the world has reached an extreme level, as illustrated by the fact that "8 people own as much as the poorest half of the world's population". The negative trend is worrying. It is morally impossible to justify economic development that leads to extreme benefits for a few, while the benefits for the vast majority are very limited. The income gap between the poorest and the richest has grown far beyond what can be explained by differences in productivity or effort - differences that are often used as arguments to defend persistent inequalities. In fact, inequalities are often cross-generational, structural, and very worrying.

Economic inequality is nothing new, neither as a phenomenon nor as a societal challenge, but the recent debate has raised awareness of its negative effects. Research and experience have highlighted the costs of inequality, both in terms of direct financial costs and social and political costs such as the risk of instability and lack of social cohesion. Reducing inequality has an intrinsic value, but combating extreme inequalities also helps to reduce extreme poverty.

Reduced inequality on the agenda

According to the World Bank, it is impossible to meet the Global Goals through economic growth alone. The World Bank believes that reducing relative inequality is necessary to eradicate poverty. The global resources are more than sufficient to immediately eliminate the extreme income poverty, but since a few individuals sit on half of all resources, the rest of the world's population can manage on less. This view is reflected in the World Bank dual goals for the eradication of poverty and inequality as well as in the Global Goals, where Objective 10 emphasizes in particular socially sustainable development and reduced inequality, both within and between countries.

But if we all agree that this development is problematic, why do inequalities continue to increase? Oxfam blames false neoliberal assumptions and theories that economic growth "seeps down" and ultimately benefits everyone. According to the Oxfam report, these erroneous assumptions lie; such as that the earth's resources are infinite, that the market is always right, and that inequality is a sign of success; behind many current policies. But do these assumptions still dominate among economists?

Beyond neoliberal assumptions

In September 2016, Sida and the World Bank took a joint initiative to take a closer look at the current development paradigm, ie how we view development and what leads to inclusive and sustainable development. The result of the initiative was the so-called "Stockholm Statement”, Developed by four former World Bank chief economists - including Nobel laureate Joseph Stiglitz - along with nine leading development economists. The "Stockholm Statement" clearly states that today's leading economists do not share the underlying assumptions mentioned above. Instead, 8 key principles for inclusive and sustainable development are identified:

  1. GDP growth is not an end in itself. It is needed, but rather as a means to contribute to the fulfillment of societal goals.
  2. Development must be inclusive. The sharp increase in inequality, both in terms of finances and opportunities, is ethically indefensible.
  3. Environmental sustainability is a prerequisite, not a choice!
  4. We must balance the market, the state and society. The state is indispensable when it comes to setting the rules of the game. Unregulated markets are the explanation for a number of negative outcomes, such as financial crises and unsustainable levels of inequality.
  5. We need macroeconomic stability.
  6. The effects of global technology development and inequality require special measures.
  7. Social norms and attitudes play a role in economic development and must be taken into account.
  8. We need global agreements and a responsible international community. All countries have a responsibility to take into account and promote development opportunities for those who are in the worst position in the world.

Today's economists and economic theories have clearly advanced beyond the assumptions that promote an economy for the most privileged, and several of the principles in the "Stockholm Statement" coincide with Oxfam's recommendations for "an economy for the 99 percent". Instead of blaming erroneous assumptions from the past, current economic thinking needs to be used, in decision-making as well as practical implementation.

Elina Scheja & True Schedvin

This is a debate article. The author is responsible for analysis and opinions in the text.

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