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Rising Tide, Sinking Boats — Economic Growth in G20 Nations is Increasing Inequality and Driving Climate Change

 

Slums next to high-rise commercial buildings in Cochin, India.
Slums next to high-rise commercial buildings in Cochin, India.

In a briefing paper released January 19 by Oxfam.org entitled, “Left behind by the G20? How inequality and environmental degradation threaten to exclude poor people from the benefits of economic growth,” the standard mantra of pro-growth policy — a rising tide lifts all boats — appears to be an economic myth (like “trickle down”) and is brought to task for its failures.

Focusing primarily on G20 nations (that is, the top 20 leading industrial democracies), the Oxfam report finds that economic growth among G20 member nations in the previous two decades has produced more income inequality amongst its poorest citizens, fueled by environmental degradation and resource depletion, and exacerbated climate change impacts.

Since 2010,  G20 has made a commitment to supporting “equitable and sustainable growth,” but analysis of the latest data from these countries indicates that most member states are not living up to this commitment. Specifically, the analysis finds that “income inequality is growing in almost all G20 members, while it is falling in many low- and lower middle-income countries.”

The Impacts of Economic Expansion on Poverty and Inequality in the Richest Nations

This growth in inequality comes at a time of great economic expansion and strong growth (amongst the G20 and even beyond). This might at first seem counter intuitive; are not the G20 nations the richest nations (G20 nations account for over 70% of the world’s GDP)? Surprisingly, more than one half of the world’s poorest people  live in G20 nations. Additionally, “G20 countries alone consume almost all the natural resources that the planet is capable of replenishing each year.”

Those living in poverty (a growing number amongst many G20 nations) will miss out on the benefits of this growth, while at the same time, the financial costs of economic expansion (resulting from depletion of resources and climate change impacts)  fall hardest on these people.

How Inequality Undermines Prosperity & Economic Growth

It is evident from numerous studies that high income inequality tears at the social fabric and creates a situation in which opportunities to escape poverty decrease proportionally. In these conditions, economic growth in the larger sphere has little if any impact on this entrenched poverty; in a “rising tide”, poor boats sink fast.

In fact, inequality acts as a drag on economic growth. Income inequality leads to socio-economic instability which acts as a deterrent to investment in these communities, and can further erode confidence in the government institutions designed to alleviate these conditions.

Inequality also limits access to education (especially for women and girls) and health care, which worsens the impoverished state and perpetuates the cycle of poverty.

Anyone keeping up with the news of protests here and abroad can see the effects of this inequality for themselves. We hear often about declining trust in the government, but little about why this may be so.

A Closer Look at the Data

Using new data sets, the analysis reveals that just four of the G20 nations (S. Korea, the highest income nation, Argentina, Brazil, and Mexico ) have managed to reduce income inequality since 1990 (which is not to say that significant inequality does not remain in these nations). Meanwhile, 16 of the G20 nations have seen their income gaps widen (e.g., Turkey, Germany, Indonesia, Australia, India, and South Africa; note: data for some G20 nations, including the U.S., on some metrics, was not available for this analysis).

Shockingly, a larger number of low and middle-income nations have made greater strides in reducing income inequality during this same period.

The G20 countries’ growth in GDP versus growth in CO2
emissions from production, 1991–2007

G20 Growth in GDP v ersus Growth in CO2
Source: World Bank 2011 (for GDP) and Peters et al (2011)

Despite this, no nation — whether G20 or not — has been able to demonstrate that it is possible to achieve both high average income and sustainable natural resource usage. A few nations, like France, Germany and the UK, are showing that they can grow economically and utilize a shrinking share of their natural resources.

However, a few countries have managed to show growth (measured in terms of GDP) while slowing the rate of resource depletion and environmental degradation (as measured by their CO2 emissions), or what the Oxfam report calls “a sustainable ecological footprint.” As  examples, between 1991 and 2007, Mexico’s gross domestic product (GDP) grew four times faster than its CO2 emissions, while China’s grew two and a half times faster.

In comparison, just four members of the G20 have managed to reduce their CO2 emissions: Germany, France, UK, and Russia (although this was due to industrial decline and slow growth). Australia, Canada, Italy, Japan, and the USA had an increase in CO2 emission, in absolute terms.

Note: In order to calculate the impact of changing levels of inequality, the authors of the paper used a model developed by Augustin Fosu of the UN University-World Institute for Development Economics Research,  which builds on modeling and empirical analysis by other economists, including Martin Ravallion, William Easterly, and particularly Francois Bourguignon (see link below to paper for more details on this model).

Other Dangers Emerging

Since poor communities depend more critically on available natural resources for their livelihoods, and, since they tend to live in areas most impacted by climate change, the dangers and costs of climate change, resource depletion, and environmental degradation fall on poor communities the hardest.

Adding to this is the fact that their poverty status leads to fewer rights and diminishes their power to secure access to said resources during times of scarcity. During such times, more powerful interests often move in to take control of resources, as evidenced in major “land grabs” (depriving poor communities of access) in places like Uganda, Indonesia, Guatemala, Honduras, and South Sudan, and now increasingly, in Ethiopia (see Oxfam’s recent report ‘Land and Power’).

The Rewards of Reducing Income Inequality

According to the report:

“The rewards flowing from increased equality are similarly dramatic. In Brazil and Mexico, bringing inequality down to the level in Indonesia (close to the G20 median) could, according to our calculations, reduce the number of people in poverty by 90 per cent in the space of a decade. “

Despite the old, established belief that inequality naturally follows growth, but is transitory and ultimately leads to greater equality (the so-called ‘Kuznets curve’), which implies that it is wasteful to attempt to alleviate said inequality, recent evidence strongly suggests that this notion is weak, at best*.

“…growing inequality is not an inevitable by-product of a particular stage of development. Falling inequality, and thus greater reductions in poverty, is possible at any stage of economic development.” (Oxfam)

According to recent report from the Asian Development Bank (ADB) “growth and equality can be seen as part of a virtuous circle.” Promoting equality, through sound policy, is good for (sustainable) economic growth (source: Asian Development Bank (ADB) (2011), ‘Asia 2050: Realising the Asian Century’, Manila: ADB).

Income inequality - Gini Coefficient - World CIA Report - 2009
Differences in national income equality around the world as measured by the national Gini coefficient. The Gini coefficient is a number between 0 and 1, where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with perfect inequality (where one person has all the income, and everyone else has zero income).

Recommendations — Towards Inclusive Growth

Noting that the right mixture of policy “levers” should be tailored to each national context (geography, population distribution, resources, etc.), and successful policies in developing nations, the Oxfam report recommends the following general starting points:
•  redistributive transfers;
•  investment in universal access to health and education;
•  progressive taxation;
•  removal of the barriers to equal rights and opportunities for women;
•  reforming land ownership, ensuring the right access to land and other resources, and investing in small-scale food producers.

The introduction to the analysis also notes that the examples of Brazil and Korea demonstrate that reducing inequality is entirely within G20 nations’ power, but cites the need for “political will” to make it happen.

Toward Sustainable Growth

Advising reforms and changes in G20 “production and consumption patterns across a wide range of natural resource,” the report asserts that such changes must be accompanied by additional policies “that protect the most vulnerable communities, workers and consumers from the impact of transition.”

Further, the analysis urges G20 leadership here by “going much faster and further in absolutely decoupling their GDP growth from natural resource use, including carbon emissions.” The good news is that most G20 nations have achieved “relative decoupling”, with Germany, France and the UK having achieved “absolute decoupling”, according to the analysis.

“Given that the planet’s renewable resources are already being used far beyond sustainable levels, absolute decoupling is needed quickly in order to prevent irreversible environmental damage. “

This is especially important in Australia, Canada, France, Germany, Italy, Japan, the Russian Federation, the UK, the USA, and other EU member states, which must cut their emissions “fastest and furthest”, citing a target of 90% reduction in carbon emission by 2050.

“A start can be made at the Rio+20 Sustainable Development Conference in June 2012.”

Oxfam policy recommendations are as follows:

•  Investment in public goods, such as research and development in clean energy;
•  Tax breaks, subsidies and other incentives to guide private investment to where it is needed;
•  Taxing undesirables, such as greenhouse gas emissions, to direct economic activity towards more sustainable alternatives;
•  Regulation to stop companies polluting or to encourage them to provide goods and services they otherwise would not.

Citing the need for greater leadership amongst G20 nations regarding the UN Framework Convention on Climate Change (UNFCCC), the report also advises that G20 nations:

•  ensure that developed countries commit, as a first step, to the high end of their current 2020 mitigation pledges, and give assurances that long-term mitigation financing will be mobilized to help developing countries implement their most ambitious pledges;
•  forge consensus on the fair shares of the global emissions cuts needed to prevent more than 1.5°C of global warming;
•  broker agreement on new and reliable long-term sources of climate finance, particularly a fair carbon charge for international shipping,
with a compensation mechanism for developing countries, and financial transactions taxes in developed countries.

Acting as parent to wayward children, the Oxfam analysis scolds the G20, saying:

“The G20 has an opportunity to establish itself as a group of countries that leads by example. They have committed themselves to pursuing inclusive and sustainable economic growth, and living up to this pledge is where they should start. “

and

“Without action, inequality will render the benefits of growth inaccessible to the poor, even as they bear the costs of this expansion through the impacts of a changing climate and environmental degradation. It’s time for the G20 to practice what it preaches.”

Download and read the Oxfam report for more: ‘Left behind by the G20? How inequality and environmental degradation threaten to exclude poor people from the benefits of economic growth’.

* This does not necessarily disprove Kuznets’ theory. It may be possible that another Kuznets’ cycle is occurring, specifically the move from the manufacturing sector to the service sector. This implies that it may be possible for multiple Kuznets cycles to be in effect at any given time. However, to this author’s knowledge, Kuznets’ theory does not include a sustainability metric or any external factors putting upper limits on growth.

Top Photo: (Cochin, India) by k r ranjith; CC BY 2.0 license

Chart/Graph: (The G20 countries’ growth in GDP versus growth in CO2 emissions from production, 1991–2007 ) Oxfam paper (cited above).




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