The clear and present danger of inequality

opinion August 21, 2014 01:00

By Andrew Sheng
Special to The N

This month marks the 70th anniversary of the Bretton Woods Conference held in 1944, in preparation for the post-war global financial architecture. Last month marked the 70th anniversary of the Allied invasion of Normandy that eventually ended the second w

The war in Asia ended only after the US dropped two atomic bombs on Japan.
Both turning points confirmed the rise of the US as the dominant economic and military power, centred on the dollar as the primary reserve currency.
Much has changed since 1944 – not least the emergence of the European Union, the collapse of the Soviet Union and, of course, the recent rise of the emerging markets, notably China, India, Southeast Asia, Brazil, Turkey, Saudi Arabia and South Africa.
Five mega-trends account for the major shift in geopolitics – demographics, economic rebalancing, technology, “financialisation” and climate change.
First, the world population has more than tripled, from about 2 billion in 1944 to 7.3 billion this year and is forecast to rise further. The advanced economies are ageing very fast, whereas populations in emerging markets are growing.
Second, faster growth in the emerging markets has narrowed the gap between the rich and poor countries, while the widening gap between the rich and poor within almost every country has created growing social and income inequality.
Third, telecommunications and computing technology has networked the world, changing social behaviour through social media and empowering civil society and new institutions that challenge the established order.
Fourth, “financialisation”, defined as the size of the financial sector relative to the real sector, has risen sharply as a result of financial liberalisation and innovation.
Most governments brought down their domestic government debt after the second world war, but domestic debt (mostly private debt and debt incurred by the financial sector ) rose from 100 per cent of gross domestic product in 1980 to an average of 370 per cent in 2012. Financialisation has enabled the big and powerful to concentrate wealth.
Fifth, climate change is already apparent, as temperatures rise and polar ice caps melt. With extreme weather creating more natural disasters, food and water shortages are potential trigger points for social unrest and conflicts. Even if the US military has no peer, as President Barack Obama pointed out recently in his speech at West Point, the US is facing three fronts simultaneously in Eurasia.
In Eastern Europe, the events in Crimea and Ukraine suggest that armed conflict may escalate. In the East China and South China seas, the US pivot to the Pacific, coupled with the rise of China, has stirred up a hornet’s nest of tensions. And in Central Asia, a large part of Iraq is being overrun by Islamist insurgents.
If the current Iraqi government in Baghdad cannot hold, then the US plan to withdraw from Afghanistan this year will be in jeopardy. If both Iraq and Afghanistan fall to insurgents, then the entire Middle East would be destabilised.
These are dangerous times. Politics in many countries is becoming more fractious and polarised. The European parliamentary election results in May suggested a swing in the votes towards both the far right and far left, at the expense of the centrist parties.
People tend to forget that the global unrest is partly due to growing social inequality. In many of the regions with growing social conflict, unemployment is on the rise and the inequities are being blamed on immigrants, foreigners and other racial or religious minority groups. Moderate voices are ignored.
Thomas Piketty’s best-selling book “Capitalism in the Twenty-First Century” made a fundamental point that, historically, rising inequality in income and wealth was reversed mostly by either war or revolution.
We have got into this dismal state because dysfunctional politics does not allow tax and other policies to address such inequities.
While Piketty’s book highlighted inequality as a critical factor in global tensions, there is as yet insufficient discussion on how to deal with such inequities. Strengthen the “bulge bracket” of middle income masses, and they will be the stabilising force for peace and stability. It is the polarisation of income and wealth that leads to fragmentation and conflict.
In 1919, after the end of the first world war, the Irish poet WB Yeats penned the “The Second Coming”. Nearly 100 years later, the words remain apt: “Things fall apart; the centre cannot hold; Mere anarchy is loosed upon the world.”
Politics is the art of compromise. Without compromise, there is only conflict. If peace and stability are to prevail, the centre must hold. As Winston Churchill famously proclaimed, “To  jaw-jaw is always better than to war-war.”