Extreme inequality is the outcome of government failure to distribute national economic pie equitably among its citizens. This widens the gap between haves and haves-not. In a society, individuals have different capabilities. Qualities such as intelligence, persistence and creativity make some individuals distinct and potentially rich. In the same manner, those with big inheritance have high potential of becoming rich. So inequality is in a way a natural process. It divides families into relatively poor and relatively rich.This inequality does not spoil social and economic order. Instead it makes people innovative and laborious. It also speeds up economic growth through healthy competition. But inequality created by other than this method disturbs smooth functioning of society, both in the short and long runs.
The world's richest 1 percent held 48 percent of global wealth in 2014; the remaining 52 percent was divided among the remaining 99 percent. Oxfam finds that if the current trend of growing inequality continues, the richest 1 percent of the globe will hold 50 percent of global wealth by 2016-end. According to the same study, the wealth of billionaires has tremendously increased between 2010 and 2014. In 2010, 80 billionaires held US $1.3 trillion. Their income has increased by 46 percent in only four years, to US $1.9 trillion in 2014. The rate of increase of income of 1 percent billionaires and the rest was identical between 2002 and 2010. But in the period 2010-2014, the rate of income growth of 1 percent billionaires increased whereas the income growth of 99 percent stagnated.
Unequal Nepal
The laissez fair polices after 1990 pushed Nepal into a near failed state. Privatization got priority, resulting in ownership transfer of a number of state enterprises, from public to private sector. But the private sector fails to participate in development as there are a number of investment risks, particularly from political instability. Among other things economic reforms become responsible for widening the gap between haves and haves not. The inequality trend of Nepal is moving in the same direction. The wealth is concentrated with the rich.
The upper 20 percent of our population in the wealth ladder holds 56 percent of wealth while the rest of 80 percent holds 44 percent. In 1995-96, the wealth of upper 20 percent was 10 times the lower 20 percent; by 2010-11 the gap has reached 14 times. This means the wealth of upper 20 percent is 14 times than the lower 20 percent. According to Nepal Living Standard Survey 2010-11, for the past 15 years, the rate of increase of wealth of the upper 20 percent outweighs the increase of wealth of the lower 20 percent. During this period, the annual income growth of the richest 10 percent was 512 percent while the same was 375 percent for the lowest 10 percent. Thus economic reforms widen the gap between rich and poor.
In Nepal politics is a lucrative business. Both educated and uneducated people have opportunities to earn and hold properties if they are involved in politics. Politicians themselves are able to create opportunities for themselves, at every level. No other profession is as lucrative.
Reducing inequality
According to economic theories, government has two means to reduce inequality. The first is heavily taxing income of the rich and the second is to provide incentives to the rich to invest. The former is known as liberal approach while latter is a conservative one. Obtaining high economic growth is the ultimate goal. In liberal approach, taxing the rich helps increase government revenue, which in turn enables government to undertake development works. Thus government invests to obtain high economic growth that in turn creates jobs to redistribute income through wages. This helps reduce the wealth of the rich and increase the share of the rest.
In the conservative approach, government reduces tax rate of the rich. It follows trickle down approach to development. Government provides incentives to the rich to undertake development works with their own investment. The wealth of rich is then automatically redistributed to the rest. Both approaches are equally effective in the developed world. But Nepal is among the poorest countries in the world. Jobs have not been created because the role of government has been limited to maintaining law and order. Liberal economic system requires a large number of entrepreneurs. But entrepreneurship is lacking in Nepal.
So the Nepali private sector alone is unable to undertake economic activities. The economic reforms of 1990s failed partly because they didn't boost entrepreneurship, resulting in sluggish economic growth. Jobs were hard to find, wealth was concentrated in the few; and the majority of people were pushed into poverty. Inequality increased. Nepal should give preference to liberal approach, with the conservative approach playing a secondary role. Both are important to achieve high economic growth and reducing inequality. Jobs need to be created for the poor through a combination of two approaches. To be specific, we need to guarantee employment for at least one member of every family that falls in the bottom half of the income ladder.
The author is a professor of Economics at the Central Department of Economics, TU
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