Last month, international development organization Oxfam released a startling figure about the wealth gap between richest people in the world and the poorest half. According to the report, 85 of the wealthiest people in the world own as much wealth as the poorest half of the world. The figures are disturbing to anyone regardless of their political inclinations and their profession. As usual, the leftists rushed in to embolden their criticisms against capitalism and free market system. Nepalese media and public intellectuals have too picked up the issue. The issue is of utmost importance to Nepal as well since it ranked 157th in the Human Development Index 2013 and the Gini Coefficient is 32.8 suggesting a significant income inequality.
High levels of inequality are not desirable for any society wishing to achieve sustainable growth and peace. Inequality does not only have economic implication but also social and political implications. Desiring a more equal society, therefore is justifiable. But the question here is: does free market capitalism create inequality or it is because of lack of free market capitalism inequality arises? The question here is not just why 85 richest people own more than the poorest half of the world but also, more so in my view, why does the poorest half of the world produces and owns so little?
It is interesting to note that majority of the poor in the world live in societies that are miles away from free market system and are supposedly pursuing policies aiming equality and wealth redistribution. India alone hosts one-third of the world’s poor and until 1990s, its major policy thrust had been wealth redistribution and state control of the economy. China which is another major home for world’s poor, started down the path of market economy only after disastrous 3 decades of anti-market and supposedly pro-poor policies. By moving towards market economy and promoting growth rather than redistribution, India has reduced its poverty rates from 51% in 1991 to 22% in 2013. China has achieved an ever more impressive progress by reducing poverty rates from 84% in 1981 to around 12% in 2013. What critics of market system have left out is the fact that the wealth distribution around the world was even more skewed before 1990s when many countries around the world started moving towards market economies.
Empirical studies conducted in the context of developing countries have also found that economic freedom and income inequality have inverse relation suggesting that higher degree of economic freedom would result in lesser income inequality. For instance, a study titled “Economic Freedom and the trade-off between inequality and growth” conducted by economist Gerald W. Scully has found that economies with higher economic freedom not only enjoy higher growth rates than less free economies but they are also more equal. Economic freedom reduces inequality by increasing the share of market income going to the poor and lowering the share going to the rich. Economic Freedom of the World Index, a cross-country study on economic freedom conducted by Fraser Institute of Canada also shows that freerer societies are comparatively more equal than societies with lesser economic freedom.
Therefore, gap between rich and poor either in terms of income or in terms of wealth stems from the fact that many of the societies that are home to the world’s poorest people do not have as much economic freedom as the richer societies. In this context, it is imperative that governments and civil society focus on spreading economic freedom to the poorer societies rather than using inequality as an excuse to push more populist and redistribution policies which will ultimately harm the poor even more despite having noble intentions.