A column written by Kaliopate Tavola, published in Islands Business, Nov/Dec 2018
Dame Meg Taylor, PIFS Secretary General, presented the Keynote Address at the Pacific Preparatory Meeting for the 6th Asia Pacific Forum for Sustainable Development on 24 September 2018 at the Nadi Tanoa International Hotel. She listed seven challenges for the region, emanating from the First Quadrennial Pacific Sustainable Development Report (FQPSDR), including: “Economically, whilst we see trends of sustained growth, it is often inequitable.” The six other challenges deal with: climate induced natural disasters, poverty, violence against women, disability, NCDs and childhood obesity.
Dame Meg then discussed what the FQPSDR prescribed as what we can do to address these challenges. She pointed “to a need to accelerate our efforts at national and regional levels in particular areas if we are to address inequality and inclusiveness.” She added that three of these particular areas are: (i) strengthened efforts to plan for and build resilience to climatic events and ensure that development is risk-informed and protected against losses, (ii) effective utilization of available financing, and strengthening coordination, capacities and institutions. Increased adoption of multi-stakeholder engagements, greater use of peer learning modalities and the effective implementation and monitoring of genuine and durable partnerships, and (iii) enhance gender equality and opportunities for women, youth, the elderly and persons with disabilities by addressing intersecting patriarchal barriers, social and cultural norms.
This article proposes to focus primarily on the challenge of inequitable economic growth – inequality – and to discuss the economic and political forces that give rise to it. In doing so, the article will identify strategies and policy approaches that will, in addition to the above, address such inequality.
But first: an assumption. The article does not delve into any traditional and structural social order that might have caused inequality and has its roots in the past.
In terms of economic forces, economists have agreed that inequality can be explained by the ‘marginal productivity theory’ – those with higher productivities earn higher incomes that reflect their greater contribution to society. Economist Joseph Stiglitz (see http://evonomics.com/nobel-prize-economist-says-american-inequality-didnt-just-happen-it-was-created/) adds: “Competitive markets, working through the laws of supply and demand, determine the value of each individual’s contributions. If someone has a scarce and valuable skill, the market will reward him amply, because of his greater contribution to output. If he has no skills, his income will be low. Technology and scarcity, working through the ordinary laws of supply and demand, play a role in shaping today’s inequality.”
The above provides an analytical tool for economic policy advisors and policy makers to diagnose their respective economies, identify the factors that are increasing inequality, and formulate relevant policies aimed at, for example: education and training at all levels that increase skills and productivity; job creation; formulation, ease of implementation and enforceability of competition laws; technology for all; and better management of supply and demand of goods and services.
Apart from economic forces, there are also political forces that shape today’s inequality. These forces fall in the province of governments.
Governments, in our respective economies, set and enforce the rules of the game, for example: what is fair competition and what actions are deemed anticompetitive and illegal; bankruptcy laws and beneficiaries and victims of such laws; the liability of a debtor who cannot pay all he owes; what is fraud and what is forbidden.
Governments also give away resources – both openly and less transparently. And through tax concessions/breaks and social expenditures, they modify the distribution of income that emerges from the market.
Furthermore, governments alter the dynamics of wealth. Through free public education, for instance, an unskilled worker can increase his/her skillset which will be reflected in his/her remuneration, thus affecting their relativity to other skillsets. Through taxing inheritances, governments can affect the extent to which an individual’s opportunities, e.g. education depends on this inherited wealth.
Therefore, it can also be said that, without government support, many of the children of the poor would not be able to receive health care and proper nutrition, let alone the education required to acquire the skills to enhance one’s productivity and higher wages.
As regards competition in the economy, if laws do not create competitive forces, there can be large monopoly profits. Competitive forces should also limit disproportionate executive compensation. Such can be supported by effective corporate governance laws that, inter alia, circumscribe the power of the CEOs.
Progressive tax and expenditure policies that provide systems of social protection can limit the extent of inequality.
However, given the emerging inequality in the region, it can be said that our political systems may have been working in ways that increase the inequality of outcomes and reduce equality of opportunities.
One way through which this has come about is what economists refer to as ‘rent seeking’ – getting income not as a reward to creating wealth but by grabbing a larger share of the wealth that would otherwise have been produced without their effort; or seeking to increase one’s share of existing wealth without creating new wealth.
Taxpayers benefiting from tax breaks/concessions, for example, reduce their tax liability resulting in an increase in their share of the wealth. Similarly, recipients of government subsidies increase their share of the wealth from government tax revenue without creating new wealth.
Laws that make the marketplace less competitive give rise to monopoly and creation of monopoly profits or monopoly rents. Furthermore, lax enforcement of existing competition laws, and statutes allow corporations to take advantage of others or to pass costs on to the rest of society. Rent seeking applies also to when government gives a company the exclusive right to import goods through a quota. The extra return generated through this mechanism is referred to as a ‘quota rent.’
Other forms of rent seeking exist. Getting state assets (minerals etc) at below fair-market prices. The prospecting company then sells its products at market prices or higher thus making exorbitant profits for itself.
There is also the flip side of rent seeking, e.g. selling to government products or services at above market prices (non-competitive procurement). A government contractor increases his receipts and thus his share of the wealth without creating new wealth.
Not all rent seeking uses governments to extract money from ordinary citizens. The private sector can get into the act as well through monopolistic practices and exploiting those who are less informed and educated, e.g. banks’ predatory lending. This often happens because governments are not doing their regulatory role.
Similarly with economic forces, the discussion above on political forces acts as a diagnostic tool for policy advisors and policy makers. Political leaders can therefore be well informed to prescribing multifaceted solutions to address inequality; but guided specifically by the need to rein in the excesses at the top, strengthen the middle and help those at the bottom.
© Kaliopate Tavola and kaidravuni.com, 2024. Excerpts and links may be used, provided that full and clear credit is given to Kaliopate Tavola, kaidravuni.com and Islands Business with appropriate and specific direction to the original content.
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