The truth about extreme global inequality

18 April 2013 by Jason Hickel

The World Bank and the IMF have the power to impose economic policies on developing countries even when voters and elected politicians in those countries unanimously reject them [AFP]

The crisis of capital, the rise of the Occupy movement and the crash of Southern Europe have brought the problem of income inequality into mainstream consciousness in the West for the first time in many decades. Now everyone is talking about how the richest 1 percent have captured such a disproportionate share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of wealth in their respective countries. This point came crashing home once again when an animated video, illustrating wealth disparities in the US, went viral last month. When an infographic catches the attention of tens of millions of internet users, you know it is hitting a nerve.

But the global scale of inequality remains largely absent from this story. So we at /The Rules decided to put together a video that would give it some attention.

While this information is not new, it is still startling. In the video we say that the richest 300 people on earth have more wealth than the poorest 3bn - almost half the world’s population. We chose those numbers because it makes for a clear and memorable comparison, but in truth the situation is even worse: the richest 200 people have about $2.7 trillion, which is more than the poorest 3.5bn people, who have only $2.2 trillion combined. It is very difficult to wrap one’s mind around such extreme figures.

But we wanted to do more than just illustrate the brutal extent of inequality; we also wanted to demonstrate that it has been getting progressively worse. A recent Oxfam report shows that “the richest 1 percent has increased its income by 60 percent in the last 20 years, with the financial crisis accelerating rather than slowing the process”, while the income of the top 0.01 percent has seen even greater growth.

The video shows how this widening disparity operates between countries. During the colonial period, the gap between the richest countries and the poorest countries widened from 3:1 to 35:1, in part because European powers extracted so much wealth from the Global South in the form of resources and labour. Since then, that gap has grown to almost 80:1. How is this possible?

Capital flows from poor to rich

The gap is growing in part because of the neoliberal economic policies that international institutions like the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

, the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
(IMF) and the World Trade Organization (WTO WTO
World Trade Organisation
The WTO, founded on 1st January 1995, replaced the General Agreement on Trade and Tariffs (GATT). The main innovation is that the WTO enjoys the status of an international organization. Its role is to ensure that no member States adopt any kind of protectionism whatsoever, in order to accelerate the liberalization global trading and to facilitate the strategies of the multinationals. It has an international court (the Dispute Settlement Body) which judges any alleged violations of its founding text drawn up in Marrakesh.

) have imposed on developing countries over the past few decades. These policies are designed to forcibly liberalise markets, prying them open in order to give multinational corporations unprecedented access to cheap land, resources and labour. But at a serious cost: poor countries have lost around $500bn per year in GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
as a consequence of these policies, according to economist Robert Pollin of the University of Massachusetts.

Millions of Americans still mired in poverty

As a result we see a clear net flow of wealth from poor places to rich places. We designed the video to help people visualise this flow, and to show how it pumps up the Global North at devastating expense to the Global South.

Few people know about this constant siphoning of wealth. One reason for this is that the discourse of aid takes up so much space. Consider the enormous publicity captured by Jeffrey Sachs and the Millennium Development Goals, or Bono and Bob Geldof, or even big charities such as Save the Children, Christian Aid and Action Aid.

Governments of rich countries constantly celebrate how much they spend in aid to developing countries, and multinational corporations splash CSR credentials across annual reports and product lines - neither of them confess how much they take out of developing countries.

The video highlights the fact that aid disbursements from rich to poor pale in comparison to the amount of capital that flows the other direction. Tax avoidance alone accounts for more than $900bn each year - money that corporations steal from developing countries and hide in tax havens (or thiefdoms, more accurately), of which the City of London is the global hub. Debt service Debt service The sum of the interests and the amortization of the capital borrowed. accounts for about $600bn each year, much of it paid on the compound interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. of illegitimate loans accumulated by dictators long since deposed. Both of these flows can be understood as direct transfusions of cash from poor to rich.

There is much more that we could have included in the video. Land grabs, for example: Fred Pearce’s new book, The Land Grabbers, shows that land exceeding the size of Western Europe has been grabbed from developing countries by corporations in the past decade alone. If we could quantify the value of that land, we could have added a huge amount to the $2 trillion stack of cash that the video depicts flowing from poor to rich.

Or consider climate change: A 2 degree rise in global temperature will cost regions like Africa and South Asia about 5 percent of their GDP, much more than rich countries will suffer despite the fact that they bear most of the responsibility for causing this disaster. Losses on this level make aid seem insignificant.

These are the ultimate drivers of poverty and inequality. These are the problems that we need to tackle.

Democratic deficit

It bears pointing out that the geographic divide that the video depicts between the Global North and the Global South does not make as much sense today as it once did. We tried to show how both China and Russia embody this divide within their borders. But to be even more accurate we would have had to depict a small wealthy core of corporations and individuals - a global elite versus the majority of the world’s people. It is no longer only about the West versus the Rest; the class divide is now internationally dispersed.

It remains true that the institutions that control the global economy (the World Bank, the IMF, the WTO and various bilateral Free Trade Agreements, or FTAs) are monopolised by Western countries. But that does not mean that they represent the interests of voters in those countries, for the people who run these institutions - central bankers, trade representatives and their corporate lobbyists - are not elected by any democratic process.

The richest 1 percent has increased its income by 60 percent in the last 20 years, with the financial crisis accelerating rather than slowing the process.

Oxfam report

The World Bank and the IMF have the power to impose economic policies on developing countries even when voters and elected politicians in those countries unanimously reject them. On top of this, they enjoy “sovereign immunity” status that protects them from lawsuit when their loans fail and their policies cause economic crisis and human devastation.

In other words, not only are these institutions undemocratic, they also trump local democracies and override the will of voters in independent nations. The people affected have no recourse to justice.

We see the same democratic deficit in corporations. The majority of the world’s biggest economic entities are now corporations, not countries. They are run by CEOs who are unelected and unaccountable to any citizens; they are responsible only to their shareholders, and their mandate is to turn as much profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. as possible at whatever cost to human life or the planet.

These corporations often have more power than the governments of the countries in which they operate. One reason for this is that the WTO and most FTAs enforce “investor-state dispute agreements” that allow corporations to sue local governments for legislation that compromises their profits, like minimum wage laws or pollution laws.

We need to change the rules

The point here is that corporate power regularly transcends national sovereignty. We have to face the fact that the democratic institutions we worked so hard to shore up during the 20th century are no longer sufficient to protect us in this brave new world.

We need to change the rules, and we need to do it quickly. Given that real power is now routinely wielded at the supra-national level, we need to start building global democratic capacity that can keep rampant greed and profiteering in check.

This might mean a global corporate minimum tax that will put an end to trade mispricing and tax havens. It might mean a global minimum wage that will put a floor on the “race to the bottom” for labour. It will certainly mean wresting control of international trade laws from the hands of IMF bankers and WTO technocrats and placing it under new institutions that are transparent and democratic.

If we are going to have a global economy, we need to have global democratic oversight. Can we accomplish this? Yes. And anyhow, we have no choice; the future of humanity, and of the planet, depends on it. They will say we are dreamers for demanding these changes. But the dreamers are those who imagine that we can feasibly carry on with the status quo.

Dr Jason Hickel lectures at the London School of Economics and serves as an adviser to /The Rules. He has contributed political critique and analysis to various magazines, including Le Monde Diplomatique, Foreign Policy in Focus, The Africa Report, and Monthly Review. He is currently working on a new book titled The Development Delusion: Why Aid Misses the Point about Poverty.

Follow him on Twitter: @jasonhickel



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