It is amazing to witness protests and processions in New York. This is the capital of capitalism where one is accustomed to seeing free and swift movements of the suit-clad investment bankers and not of protesting masses. However, since September 2011, this ever busy city seems to have got a whiff of Kolkata’s way of life. Protests have been seen at the corners roads, in the parks and on the pavements. It seems from the slogans that public outburst is not aimed at scams and scandals but at the capitalist system.
Few intellectuals, however, claim these protests do not have a definite demand while a few are of the opinion that the whole problem is the result of a global crisis. They point fingers at the so-called sophisticated bankers at the Wall Street for their wild gambling and endless greed, claiming that’s the root cause of this debacle.
However, a critical examination would reveal that these protests are not aberrations. Over the past three decades, economic disparity has widened significantly across the developed western countries, particularly the US. The gulf between the rich and the poor has been widening steadily.
Between 1993 and 2006, the per capita income in US increased by 28 percent. A major chunk of this increase has, however, has gone to the rich, comprising just one percent of the population. During George Bush’s tenure (2002–06) the inequitable distribution of growth in per capita income became more conspicuous—75 percent of growth was pocketed by one percent of the rich.
Now let us examine this trend from a historical perspective.
Before the Great Depression of the 1930s, economic inequality in the US was very high. During that period, 10 percent of the population enjoyed 45 percent of national income. Post World War II, this was reduced to around 31 percent and continued till the end of 1970s. However, over the last three decades, inequality has become more acute and 10 percent of population now enjoys 50 percent of national income. A finer analysis of the statistics reveals that top one percent currently enjoys 25 percent of national income.
According to one school of thought, though US may witness income inequality it nevertheless provides ample opportunities to all; it recognizes merit and labor and believes that the source of a wealth is a person’s talent; caste or lineage counts for little. However, statistics do not support this claim. There is enough evidence that economic status is normally permanent across generations and the poor mostly continue to remain poor.
There are two major theories about the reasons behind inequality.
Firstly, to overcome the stagflation of the 1970s, capitalism had to be more productive and innovative. Ronald Reagan and Margaret Thatcher ushered in an era of deregulation, free trade and free capital flows that spawned a global economic boom. A steep rise in inequality had been witnessed during this period. The second reason could the incredible development of Information Technology and the accompanying globalization.
Over the past 30 years, the welfare and social security aspects of a state have witnessed a gradual decline. The burden of taxes on the rich has been reducing; the funds required by the government for the poorer sections of the society have dwindled because of lower tax revenues. In 1960, the highest rate of personal taxation was 91 percent which today is 35 percent for the higher income group. In the same period, corporate taxes were around 4 percent of the total national income, which currently accounts for only 2 percent.
“Reaganomics” argues that with lower tax rates investments would increase and result in higher economic activity. This in turn would indirectly help the common man. But in reality, a different picture has emerged. When taxation was much higher during the 1950s and 60s, the growth in national income was higher too.
Let us now look at the advancement in technology and the globalization that it ushered. In the rich western countries, a major chunk of capital was controlled by a few. Despite this, during the 20th century common people of these countries saw substantial improvement in their living standards. There was abundance of capital and inadequate supply of labor as a result of which wages increased manifold. The traditional industries of Britain and US are now on the wane. These have been replaced by computers, electronics, information technology, etc. which are more cerebral and demand more technical education.
In 1990, US imports from developing countries were about 2.5 percent of national income, which jumped to 6 percent in 2009. The major exporting countries are China and Mexico. Both have abundance of cheap labor and in order to remain competitive, income of the labor community in US has seen a progressive contraction.
Nevertheless, it would be wrong to assume that the capitalists have amassed wealth by generally depriving the laborers. In fact, in US the laborers have divided themselves into two classes during the past two decades—one a highly educated class, including doctors, scientists, engineers and finance professionals; the others merely ‘O’ level workers engaged in small jobs. This has brought about a huge disparity in their incomes and consequently, lifestyles. However, the proportion of capital and labor in US national income has not changed much even now.
Despite much criticism, capitalism has eradicated poverty on a grand scale; propelled innovation in medicine, information and transportation; and stitched together a global community through trade and finance. Today, amidst the protracted downturn, capitalism has reached another infliction point. The world’s financial sector remains highly vulnerable and the pain inflicted on the average family has been so great that capitalism needs to morph yet again to become more inclusive and balanced and less prone to recurrent meltdowns. The question is not whether capitalism must be reformed but rather, ‘how’.
Some argue that the woes of the global economy were caused not by a failure of capitalism but by a failure of governance. This is a theory that applies across the world. Nepal is currently in a state of political transition. In the period, it needs to proceed judiciously to decide the right governance model. Deciding the country’s governance and its economic policies call for a lot of caution and forward thinking—perhaps what the country needs is a reformed capitalist model which can ensure balanced and inclusive growth to eradicate poverty and catalyze social development.
The writer is a former CEO, Standard Chartered Bank Nepal Ltd