Last July, more than 320 economists from around the world signed a letter to United Nations Secretary General António Guterres and World Bank President Ajay Banga. In it they expressed concern about the explosive rise in inequality, which has recently grown more rapidly than at any time since the Second World War.
The economists pointed out that, even as extreme wealth has increased to incredible levels, absolute poverty has also risen, with an unprecedented increase in inequality that has many adverse, even destructive, consequences.
As the letter notes, inequality “corrodes our politics, destroys trust, hamstrings our collective economic prosperity, and weakens multilateralism. It also hinders attempts to prevent climate breakdown and address the impacts of climate change”.
Inequality has been a bone of contention since the time of the French Revolution, with its call to arms in support of liberté, égalité, fraternité. Those on the left have always argued that capitalism tends to engender economic inequality, which can be challenged by collective social and democratic political action. Those on the right have contended that inequalities are just the product of natural differences between individuals or social groups which should not be the subject of interference.
Hats off to former Prime Minister Joseph Muscat for the unprecedented growth in GDP under his administrations, but I never agreed with his notion of “trickle down economics”, nor with his more recent statements about this policy having created “small rich people”. In my view, these are notions reminiscent of the Gospel story about the poor man Lazarus who lived for what he could eat from scraps falling off the rich man’s table.
Inequality still matters today
How do we measure inequality? The most recognised measures are the Gini coefficient (which encapsulates the dispersion of incomes across the entire distribution and ranges from 0 for total equality to 100 for infinite inequality) or the Palma ratio (the share of the top income decile divided by the income share accruing to the bottom 40 per cent).
The chart shows how the Gini coefficient in Malta vs the EU and selected other countries has changed since 2005. The figures are not too kind to Malta. Whereas the coefficient declined by just 0.7 p.p. in the EU, in Malta it increased by 4.1 p.p. (the higher the figure the more inequality). The contrast with some countries is striking, with the coefficient declining by 4-5 percentage points in Ireland and Slovakia.
Incidentally, it is appropriate to ask whether the very large support programme enacted in 2020 during the Covid pandemic may have contributed to a substantial increase in income inequality, given that three-quarters of the increase in the coefficient occurred in the last three years.
The causes of worsening inequality are varied and may include a failure to adapt to technological change, shifting tax policy, and lower bargaining power among workers. Similarly complex are the effects of inequality, and they have been intensified by the pandemic and deepened societal divisions.
Inequality’s effect on the economy
Inequality is a drag on economic growth and promotes political dysfunction. It does this because income and wealth concentration reduce the level of demand in the economy when rich households tend to spend less of their income than poorer ones. The other side of the coin – less opportunities for low-income households – can also hurt the economy. As economist Joseph Stiglitz says, “when those at the bottom of the income distribution are at great risk of not living up to their potential, the economy pays a price not only with weaker demand today, but also with lower growth in the future.”
Mind you, not all experts agree that the harms from inequality are so serious. For instance, the libertarian Cato Institute argues that inequality does not matter so long as everyone is doing better. This is Dr Muscat’s point. Apart from that, entrepreneurship benefits society as a whole even as it makes some individuals wealthy. Again, this reminds me of Dr Muscat’s admission that there is “no shame in being pro-business”. There is something in this too. After all, the At Risk of Poverty Rate anchored in time – that is the rate adjusted for real prices in 2008 – has come down by four percentage points over a decade.
In 2015, the conservative political analyst Ramesh Ponnuru wrote that preferably we should live in a society with a reasonable degree of mobility rather than one where people are born into relative economic positions they can never leave. “So long as those conditions are met,” he argued, “the ratio of the incomes of the top one percent to the median worker should be fairly low on our list of concerns.”
What can we do about it?
A Central Bank of Malta survey shows that, in 2021, the richest 1% in Malta held over 10 times the median net wealth – a ratio that was significantly less than the one four years earlier. On the other hand, the wealthiest 5% of households possessed a median net wealth more than four times greater than that of all households combined, a ratio very similar to that of 2017. It is no wonder, therefore, that inequality still ranks high in people’s concerns. What can we do about it?
Proposals to address income and wealth inequality have included supporting unionisation, raising the minimum wage, making the tax code more progressive, taxing wealth alongside income; and increasing access to education.
One tool for addressing income inequality that has received significant attention is a more progressive tax code, meaning that higher incomes are taxed at a higher rate than lower ones. Here the argument is that shifting more money from the rich to the poor would reduce inequality and benefit society overall. This seems to be a no-no for both major political parties in Malta, since in their view it would stifle economic growth and innovation. Mind you, both of them emphasise tax rates, ignoring the fact that rates may remain flat at the same time that the tax burden itself increases, as has happened in Malta.
Increasing the minimum wage is another policy intervention. Research shows that higher wages for the lowest-paid workers have the potential to lift a number of people out of poverty. While some economists argue that minimum wage increases hurt employment and retard economic growth, the evidence for this is rather sketchy. Discussions about an increase within the Low Wage Commission this year led a few weeks ago to an announcement that the minimum wage will increase by up to €8 weekly (on top of the €12.81 COLA increase) or 10.8%.
While this is welcome, it appears that, while it will lift certain minimum-wage households out of risk of poverty, others (particularly those with more than one child) will remain at risk, even though their wage will be supplemented by certain social benefits. Again, there has been progress towards the target of 60% of the median wage, but it is rather limited.
As usual, employers whined that any increase would lead to higher prices of products and services to cover their increased labour costs. More likely, it would threaten their profits-gouging in the wake of the pandemic. In any case, the number of workers on the bare minimum wage is now around 6,000 full time employees or just over 2% of those in employment.
The Malta Chamber still expressed reservations and said that raising the minimum wage and cost of living adjustments cannot be expected to tackle poverty alone. I agree that this is so, but I strongly object to this “alone” proviso being a licence for some enterprises to survive through payment of miserly wages. It is true that low productivity can limit their ability of pay higher wages, but it is not that they cannot do anything about it. Sometimes, low wages themselves can limit productivity in a vicious circle.
This puts the onus on both businesses and the Government and its specialised agencies (Malta Enterprise and Jobsplus, among others) to engage in efforts to raise productivity and efficiency in small and medium enterprises. The source of low productivity may be the organisation of the work process, job quality, and market access. For example, in certain countries government agencies have been instrumental in pursuing the development and use of management curricula for different types of small enterprises. Research by the International Labour Organisation (ILO) has shown that there are a variety of ways in which a more cooperative, empowered, and contented workforce can help to increase productivity.
Policies that encourage higher savings rates and lower the cost of building assets for working and middle-class households can provide better economic security for struggling families. Automatically enrolling workers in retirement plans and providing better savings credit for retirement savings accounts could help lower-income households build wealth. Again, progress is excruciatingly slow.
Differences in early education and school quality are extremely important components contributing to persistent inequality across generations. Investments in education, beginning with early childhood with programmes, can increase economic mobility, contribute to increased productivity and decrease inequality. We can’t say that we are excelling.
According to the latest United Nations’ Human Development Index (HDI), our education score is 0.83, putting us 33rd in the world, while the school achievement index is 19.25 (39th). Compare that with Ireland’s education score of 0.92 (9th) and school achievement of 30.03 (12th), not to mention Finland’s education index of 0.93 (2nd) and school achievement of 25.29 (24th). But mention emulating the practices of our best peers and the dinosaurs in the Education Ministry get an apoplexy.
Getting policymakers to prioritise these policies is not easy. It depends on the actions of advocates, voters, and other supporters with a vision for a fair and inclusive society so strong that they overwhelm powerful forces that seek to maintain the status quo. Will they rise to the challenge? Will they ever climb the mountain?