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Mind the Gap – the Issue of Growing Inequality

The issue of growing inequality has become more and more pressing in the last few years. Three years ago, the poorest 50 percent of the world owned as much as the 85 richest people. This year, the eight wealthiest men of the world own an amount equal to that of the poorest 50 percent. In other words, last year the people who owned as much as the poorest 50 percent could fit in a double-decker bus. This year they could share a minivan.

We have reached a point where the wealthiest ten percent of the world own 89 percent of all global assets, while the poorest 50 percent collectively own only one percent of the total wealth. Could it be that all people have become richer, even if the wealthiest have benefited most? It does not seem like that is what happened in 2016. For while the rich became richer, the average wealth per adult in the world remained unchanged last year, according to a Credit Suisse report.

The management consultant Peter Drucker wrote in 1977 that a CEO should not make more than 25 times the average salary at his company. Passing that limit would bring negative effects, such as resentment and failing morale. His limit recommendation has been way passed in countries all over the world. In America for example, in 2015 the average CEO pay compared to the average worker pay had a ratio of 303:1.

A Brexit rally outside parliament in November 2016. (Picture: Bulverton; Wikimedia Commons)

The issue of growing inequality has become so pressing that, before this year’s World Economic Forum (WEF) meeting in Davos, the WEF put income and wealth disparity first on the list in their annual global risks report. Furthermore, they said that the gap between rich and poor is behind Brexit as well as Donald Trump’s election in the U.S. The question is whether the world leaders meeting in Davos actually mean to change anything. For while WEF hail Sweden for having become the best country for business, between 1985 and 2010 it was the OECD country in which inequality was increasing the most.

Some mean that a slowing growth and increasing inequality lower support for globalization and allow for populists to gain ground in multiple countries all over the world. For example, Donald Trump did well among white blue-collar workers. The chances that a populist such as Trump will improve equality and benefit the blue-collar workers who voted for him are, however, close to non-existant. Since winning the U.S election, billionaire Trump has proposed ”what appears to be the wealthiest Cabinet in modern U.S history”. Trump has also begun the undoing of Wall Street regulations such as Dodd-Frank (a regulation to prevent what produced the 2008 financial crisis) and the fiduciary rule. So Wall Street seems to be in for a treat with Trump as president, and is responding to it. Simon Smiles of UBS Wealth Management remarked that 2016 ended up being a spectacular year for risk assets. For example, Warren Buffett increased his assets by 19 percent two days after Trump’s victory.

Warren Buffett. (Picture: Stuart Isett; Flickr)

As inequality grows, the gravity of the situation increases. Studies have demonstrated that economic inequality leads to negative effects for democracy, such as lower political interest and lower participation in elections. Growing inequality also risks leading to resentment and lowering the legitimacy of the political system. We can see that the support for democracy has decreased among youth in countries across North America and Europe, while the support for authoritarian rule has increased. Nobel Peace Prize winner Muhammad Yunus has called the world’s growing inequality ’’a ticking time bomb’’. Adrian Woolridge, writing for The Economist, went so far as to say that the circumstances of today resemble those producing the Russian Revolution, and names one of the reasons being that the liberal order has delivered too many of its benefits to the richest.

Whether his comparison is true or not can be debated, but the pressing issue of growing inequality remains. It seems as though the time for leaders to act is now, for the support of our political system relies partly upon its ability to create wealth for more people. The 1930s provide evidence of how the legitimacy of democratic systems can become challenged during times it fails to do just that.

Hannes Berggren

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