Developing countries around the world have been nudged by entities like the International Monetary Fund (IMF) and the World Bank for decades to encourage economic growth to overcome deprivation. However, the automatic effect of top-down growth to address inequalities has become increasingly suspect.
Consider for instance the recent work by Thomas Piketty, the prominent French economist, on inequality and tax policy as elaborated in his new book Capital in the Twenty-First Century. Not only has this book quickly become a bestseller, it has sparked endless debates in the Western press. Even the White House and the US Treasury held talks with the Frenchman to discuss his proposals for fiscal reform.
Piketty is essentially arguing that inherited wealth and inequality have soared in the West, which can now only be contained by much higher wealth tax rates. Piketty’s work is well researched and his findings refute claims by earlier economists who had argued that economies tend to become more equal as they mature. Piketty has pointed to the creation of ‘super-managers’, who can now capture a bulk of the wage income within advanced economies. The returns on this accumulated wealth supersedes the existing pace of economic growth, which in turn is witnessing disturbing levels of economic disparity in countries like France, the UK and the US.
The upshot of this line of argument is that people who are already rich are becoming richer and they pass on their wealth to their own families.
Such findings are particularly upsetting for countries like the US, which were founded on a national ethos that had rejected European traditions of inherited aristocracies and rentier wealth. According to Piketty, the US was more egalitarian than Europe in the past, but with its increasing reliance on big businesses, wealth in the US has become more unequally distributed than almost anywhere else in the world.
Piketty advocates the need for reducing inequality by using the power of government to impose very high taxes on the rich to lessen wealth concentration and provide a more ‘level playing field’. There are obviously many critics of Piketty’s approach who claim that levelling taxation schemes in the pursuit of addressing glaring inequalities would not only undermine the primacy of property rights guaranteed by the US Constitution, but also undermine incentives to save and invest, and slow down economic growth even further. Instead, his opponents argue that Picketty should be thinking of ways to create wealth by expanding opportunities for market exchange.
The very fact that Picketty’s work has been taken so seriously by US policymakers, academics and even the media, is intriguing. Whether this approach will alter the approach of US economic planners, or of US-backed international financial institutions like the IMF and the World Bank, and dilute their unflinching faith in economic growth being the panacea for poverty reduction, is hard to predict. While economic circumstances vary, it would still be encouraging if economic pundits in developing countries like our own, who remain enamoured by the US-exported economic growth models of unfettered capital accumulation as the means to address deprivation, were to also take a closer look at the work of this economist.
Published in The Express Tribune, May 16th, 2014.
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