Worse Than Poor; Invisible

SOCIAL WELFARE STATES CAN’T SEE THE POOR, TO PROTECT THEM

This past half century has seen remarkable economic growth in the global economy. Rich countries have become richer, and once poor countries – from superstars like India and China, to countries with slower rates of growth — have also shared in global development.  But even as rich and poor states both saw their wealth grow, the wealth gap between them has grown even faster.

A broad survey of states reveals that inequality is on the rise among and within nations. The income gap between the richest and poorest countries has grown to a factor of sixty. The widening disparity between states is tracking the widening disparity within states as measured the Gini coefficient’s distribution of household income. Rapidly developing economies such as Russia, China, Brazil and India are tracking especially greater levels of internal inequality.

It is thus heartening to see that social policy agendas continue to embrace the widely accepted principles of welfare states, despite earlier predictions that economic globalization and capital mobility would make the idea of the welfare state obsolete. But the welfare state, worldwide, is facing a host of growing problems. Aging populations make it more difficult and more expensive for poor and rich societies to manage health and social care. Genders roles are changing in many societies; good news, of course, that nevertheless challenges traditional social safety nets. And quite simply the poor – notably in the Global South – are becoming very poor.

Rural populations today are losing their land and livelihoods, and the number of urban slum dwellers has ballooned to over 1 billion people worldwide, with an estimated 15,000 slum communities in the five largest South Asian cities alone.  Nine out of 10 urban dwellers in the global South are squatting illegally on their land. Though China’s year-on-year growth over the past two decades has hovered around 10% and has lifted hundreds of millions out of poverty, 550 million Chinese still continue to live on less than $2 per day. In Indian cities there is one toilet for every 500 people. Ninety-nine percent of urban residents in Ethiopia live in slums.

Clearly, raw economic growth is not enough to address these problems. States need to deepen their social policies too.

The greatest policy invention of the 20^th century was the modern welfare state, an important corrective to the Dickensian misery of the 19^th century industrial revolution. The welfare state combined public and individual measures to protect the vulnerable and workers against market vagaries and uncertainties. It proved an effective mechanism for re-distributing income among those employed in the formal labor market. The welfare state created a sort of existential floor below which modern societies would not allow the weakest to sink. Rising inequality today makes these same principles as relevant now as they were in Dickens’ Britain.

But today’s poverty isn’t quite the same as what Dickens witnessed. Being poor today – especially in the Global South — means being invisible to state and society. In countries like China, Indonesia, Mexico or India, the rural poor are likely to have actually lost their land and have few prospects for employment. Urban poor in the Global South are unlikely to have job prospects in the formal employment sector, and probably lack access to clean water, electricity and basic nutrition. Rural or urban, the global poor today are not likely to share much in the economic growth of their own societies, because they are most likely to work as migrants or casual labourer, neither any entitlement to social benefits or access to the few benefits to which they may be entitled. All this renders them invisible even to states that might wish to protect the poor with the kinds of social policies that grew in 19^th century Europe. Today, the welfare state cannot “see” the poor to protect the poor.

This proliferation of “grey” or “black” income – income that is generated from illegal means – exacerbates inequalities in the distribution of wealth. Corruption and the proliferation of grey income run rampant in advanced democracies (USA), developing democracies (India), flawed democracies (Russia) and autocracies (China) alike. Estimates suggest that the amount of grey income in China today, for instance, equals about one-third of GDP or approximately $1.5 trillion, of which over 80% is held by the richest 20% of Chinese households. The challenge for the welfare state is that grey income is technically invisible: it is not taxable and thus cannot be re-distributed in the form of social policy. This problem is not unique to China alone.

The welfare state remains a noble project of the last century but appears less and less viable in the face of today’s new kind of inequality. It is not only less able to “see” the poor it is intended to protect, it also cannot “see” the huge amounts of grey income and wealth that might potentially be re-distributed. The industrial welfare state and its variants were predicated on the visibility of both its beneficiaries (i.e. formal sector workers) and revenue sources (i.e. income taxes or VAT).

The new kind of inequality described here demands a new kind of welfare state and new social policy instruments. It is critical to make the actual distribution of wealth – and not just reported income – visible. Recognizing the realities of informal and casual labor is the only way to make visible the very poor. Generating and investing in new kinds of employment up and down the value chain are required to support the welfare state. A coordinated effort among states to tax the super rich – rather than shelter assets in tax-free havens – ought to be considered. Innovative programs targeting the very poor and which are sensitive to their needs has to be developed.

In the end it is all about transparency and accountability.  So if even the poor report their earnings – let them shelter parts of earnings tax-free.  Additionally, governments need to set income exemptions high enough so that the poor don’t pay taxes where income taxes remain.  Finally governments should take steps to tax consumption and not incomes.

RELATED MATERIAL FOR THE WEEK OF MAY 9

BACKGROUND

The Gini coefficient was invented by the Italian statistician, Corado Gini. It is a number between zero and one that measures the degree of inequality in the distribution of income in a given society. A Gini coefficient of 0 indicates total equality and applies to a society in which each member received exactly the same income whereas a Gini coefficient of 1 indicates maximum inequality and applies to a society where one member received all the income and the rest nothing. Thus, a high Gini coefficient indicates high inequality while a low Gini coefficient implies the opposite.

The Gini coefficient is calculated using the Lorenz curve, in which cumulative family income is plotted against the number of families arranged from the poorest to the richest.

A country’s distribution of family income is calculated using the Gini Index, which is the ratio of the area between a country’s Lorenz curve and the 45-degree helping line to the entire triangular area under the 45 degree line (see diagram below). If income is distributed with perfect equality, the Lorenz curve falls on the 45-degree line and the Gini Index is 0. If the income is distributed with perfect inequality, the Lorenz curve falls on the horizontal axis and the right vertical axis and the Gini Index is 100.

Similar to the Gini coefficient, a high Gini Index indicates high inequality of income distribution, while a low Gini Index indicates low inequality.

At the moment, the lowest Gini Index is found in Denmark at 24.7 and the highest is found in Namibia at 74.

Tables: Distribution of Family Income (Gini Index)

RELATED MATERIAL

• The Chartsbin has created an interactive map showing the degree of inequality in the distribution of family income (Gini index/coefficient) in each country.
• CIA’s World Factbook has a field listing of Gini Indexes (distribution of family income) for every country.
• Nicholas Timmins of the Financial Times discusses the OECD warning about rises in income inequality worldwide. The article suggests that better jobs, education and training for the low skilled and those from poorer backgrounds is necessary to prevent rises in income inequalities.
• The Economist cites a report from OECD that suggests income inequality in rich countries has increased in the past two decades.