Some of the world’s wealthiest business people are meeting this week in Davos, Switzerland with some of its leading power brokers. Their agenda: the rising gap between the rich and the poor. If you can resist the irony, it is becoming apparent – as pointed out this week in the Wall Street Journal – that the gap is widening.
And while this may be off-topic from our usual software-technology-business slant, there’s no denying the implications for all three. The Journal article highlights a few key discoveries in the most recent data.
Like the fact that increasing trade globalization has had huge benefits in ‘developing world’ countries by raising up a middle class that has moved millions from the ranks of the poorest to the middle-income. Unfortunately, it appears to have depressed income growth among lower- and middle-income individuals here in the West (i.e., North America, Europe). And indeed, in the West, the rich have truly become richer – the Top 1% has seen income growth of 65%, while the bottom 90% have been in the low to middle single-digits in income growth (over the decade from 1998-2008).
The new working and middle classes of countries like China, India and Brazil have been the biggest beneficiaries the past 20 years. And, no surprise, the biggest losers are the world’s poorest 5%, many in Africa. Those who study these things point out that “more unequal income and wealth distributions erode social cohesion and increase the scope for internal conflict,” according to the Journal’s Stephen Fidler.
Several reasons exist for this rising inequality, such as:
- Globalization hits unskilled labor hardest, as workers struggle to compete with lower-paid workers in the third world
- Highly skilled labor tends to be the major beneficiary of tech advances
- The rise of the financial sector, where huge banks have skimmed huge rewards, is a factor
But the most important factor of all turns out to be the growing importance of access to capital. Historically, the Journal noted, “the return on capital has exceeded economic growth.” Therefore, those with access to capital will see their incomes increase faster than those whose income depends merely on the growth of the economy – in other words, the Average Working Joe.
And so it has been that income and wealth have become – and will continue to be – more concentrated. As countries and economies mature, access to income drives wealth, and wealth disparity. In short, “Capital will be king,” notes Fidler.
The danger here is that this runs contrary to the concepts of meritocracy and equal opportunity so pervasive to our own American Dream. These are the pillars of our society, and the economic growth trends are running against them.
The poor will continue trying to become richer, and if they can’t, they’ll seek other shores where they can. Branko Milanovic, a former World Bank economist and now with City University of New York puts it like this: “Either poor countries will become richer, or poor people will move to rich countries. And migration is likely to become one of the key problems – or solutions, depending on one’s view of the 21st century.”
So actually, the effect will be felt in business, in tech, and in software – and so maybe this post wasn’t so ‘off-topic’ after all.