Emerging economies such as China, India and South Africa cannot afford to wait to tackle inequality caused by two decades of rapid economic transformation, says the Organisation for Economic Cooperation and Development (OECD).
In its Perspectives on Global development 2012 report, published on Monday, the OECD says recent social unrest from Thailand to Tunisia shows it is not enough to prioritise economic growth and pursue technocratic policymaking while disregarding people’s desire to participate in the political process and share in the benefits of growth.
Economic growth has helped lift more than 500-million people out of extreme poverty over the past 20 years. Last week, a Chinese government white paper said the country’s rural development programmes had lifted more than 67-million people — roughly the equivalent of the population of France — out of poverty over the past decade.
But while this growth has reduced inequalities between rich and poor countries, it has increased inequalities within many of the fastest-growing developing economies.
“While the absolute living standards of the poor may have improved, thanks largely to shifting wealth, the number of people who are socially excluded through some form of relative poverty has in fact grown over the last two decades,” says the report. Economic inequality had “increased dramatically” in China, India and South Africa over the last two decades, and increased in Russia over the past 10 years, it added. However, inequality had “declined markedly” in Brazil — albeit from very high levels — over the past 20 years.
The high-income OECD group also saw income inequalities widen in at least 17 of its 34 countries since the mid-1980s.
Beyond a focus on tackling extreme poverty, fast-growing developing countries and emerging economies should pay much more attention to their top earners and their “fragile” middle classes, says the report. Rising top incomes, for example, can offer policymakers the opportunity of increased tax revenues to raise money for social services.
Important risks
In Argentina, the richest 1% of the population accounted for 17% of the country’s national income in 2004 — a jump from 12% in 1997. The richest 1% of China’s population, meanwhile, accounted for nearly 6% of the country’s national income by 2003, up from 3% in the early 1990s. And in India, the richest 1% held 9% of the country’s national income, nearly doubling its share since 1980.
“Both poor and middle-class populations are increasingly alienated from the richest in many societies. Stark inequalities persist between groups defined by sex, working status and ethnic origin. Both rising inequalities and their persistently high levels can sow the seeds of future conflict and social unrest,” says the report. It warns that “the emergence of a global elite that is isolated from less fortunate echelons of the societies from which its members originate is an important risk that policymakers must be aware of”.
Much attention has been directed towards the potential of the emerging middle classes in the world’s developing economies, seen as offering the hope of new consumer classes to stimulate domestic demand and drive economic development. The middle class in non-OECD economies is projected to almost quadruple from one billion today to 3.9-billion in 2030, representing 80% of the then 5 billion-strong global middle class, defined as those living on between $10 and $100 a day.
But the report finds these “emerging middle classes” are largely without stable employment and reliable incomes. They cannot, says the report, be taken as a sign of social progress, and their consumption cannot be counted upon to drive national development unless governments act to secure their position.
Earlier this year, a report from the African Development Bank suggested that one in three Africans is now “middle class”. But it also stressed the “vulnerability” of this growing African middle class, among which durable goods such as family cars remain a rarity. Recent OECD research also argued that the middle classes in Latin America are often quite economically vulnerable, at risk of slipping down the economic ladder.
Recently popularised innovations, including cash transfers, pensions and new forms of health coverage, have been remarkably successful in reaching some of the world’s poorest communities, says the report, although they can often create “dual systems” where the poorest are covered by public social assistance and the wealthiest by contribution-based or private alternatives.
This leaves a significant gap, what the report calls a “missing middle”, where the growing numbers of middle-income workers are left without coverage. Governments of fast-growing developing countries should consider using recent windfalls to finance universal benefit systems in health, education and other social services, says the report. —