Davos Forum experts say inequality hinders substantial growth

Economists and activists at the World Economic Forum in Switzerland, confirmed on Friday that excessive income inequality represents an obstacle to substantial economic growth.

“Inequality is not conducive to sustainable growth,” the Managing Director of International Monetary Fund, IMF, Christine Lagarde, said during a debate at the Davos World Economic Forum on the concentration of wealth.

Income inequality was reflected in recent data that reveals that the 80 richest people in the world control 50 percent of the world’s wealth, Lagarde noted.

She said IMF economists have conducted studies suggesting that “if you increase the income share of the poorest, you get multiplier effect that you don’t get if you increase the income share of the richest”.

In this context, Lagarde added “redistribution policies are not counterproductive for growth”, an idea that until recently was not part of conventional thinking.

In a debate inspired by a recent Oxfam report, which revealed that in 2016, 1 percent of the wealthiest people in the world will possess more wealth than the remaining 99 percent, Robert Shiller winner of the Noble Prize in Economics for 2013, spoke of the need to reform the economic system, but not through socialism.

Shiller added that the problem of the economy, in terms of its inability to distribute wealth in a better way, lies in risk management and incentives (which it needs), but also saw it as part of a political problem.

The current economic system was defended as best for reducing poverty and creating opportunities by Martin Sorrell, CEO of the WPP multinational public relations company, and his counterpart Klaus Kleinfeld from Alcoa, one of the largest aluminum producers in the world.

Sorrell noted that the past fifty years witnessed unprecedented improvement for those who escaped poverty to enter the middle class, especially in countries with emerging economies, but admitted that corporations do not create opportunities because they are currently more focused on costs than expansion.

Kleinfeld cited numbers proving that the economic system has been successful in reducing world poverty, according to the data he presented, from 72 percent in 1950 to 14.5 percent in 2011.

He also referred to the expansion of the middle class, which now includes 44 percent of the world’s population.

On the contrary side of the argument, Oxfam International Executive Director Winnie Byanyma explained that the problem of wealth concentration lies in wealth utilization by the rich to influence political decisions for their own benefit.

As an example, Byanyma said that $400 million was spent in the United States in 2013 in an attempt to influence the decisions of political institutions through pressures applied by political blocs known as the “lobbies”, while $150 million was spent in the European Union for the same purpose.

“This is about shaping the rules of the market in their favor”, said Byanyma.

Participants in the debate agreed that inequality has worsened since the financial crisis of 2008. A few years ago the richest 85 people in the world used to control 50 percent of global wealth, and now this number has decreased to only 80 people.

Byanyma added that the reason is that companies and the wealthiest individuals do not pay their fair share of taxes, and this is something that has to be resolved, while she pointed out that $18 trillion is hidden away in tax havens to evade such liabilities.

Oxfam’s executive director explained that another possible solution can be based on raising minimum wages, considering Brazil a pioneer in this experience

She indicated that Brazil succeeded at increasing the minimum wage by 50 percent over 15 years, enabling it to achieve good results in reducing poverty.