The economic growth seen in many countries over the past few decades, coupled with increased globalisation, has not only underpinned some of the wealth creation discussed in the previous pages but it has also helped to halve the number of people living in extreme poverty and narrow wealth inequality between countries on a global scale. However, the gap between rich and poor is growing within many countries, especially in advanced economies.
The increasing power of the “one per cent” is not a new phenomenon. The first edition of The Wealth Report, published in 2007, highlighted the rise of “Plutonomies” – a concept that was coined by economists at Citi to explain the process where the wealthy saw their wealth levels rise more rapidly than other groups.
Since then wealth inequality has continued to climb the political agenda and is now one of the biggest issues facing politicians as they try to address those who feel disenfranchised.
Ultimately, feelings of social, economic and political inequality can ferment revolution, as in the case of the Arab Spring. The electorates in Western economies have also been making their feelings known, with the rise of populist right-wing politicians in the US, France and Hungary, while in the UK, the opposition Labour party has made a significant jump to the left with the election of Jeremy Corbyn as party leader.
Wealth inequality has continued to climb the political agenda and is now one of the biggest issues facing politicians as they try to address those who feel disenfranchised
A more fractured political landscape can cause economic uncertainty, and this can impact overall economic growth. As Lynn Forester de Rothschild says in her interview in the Attitudes section, entrepreneurs and wealth creators function best in a stable society.
So what is behind the recent rise in wealth inequality and how can it be addressed? French economist Thomas Piketty received worldwide attention in 2014 when
he suggested that wealth was not flowing down from the rich to the rest of society. Inequality, he said, should be addressed by taxing wealth held by individuals around the world, to allow a share of that wealth to be redistributed. Anthony Atkinson, a British economist, goes a step further, calling for robust taxation of the wealthiest, as well as government intervention in markets, to ensure even wealth distribution and guaranteed public employment.
However, the globalisation of wealth creation has made it easier for individuals and businesses to choose where and how to invest, making it more difficult for national tax legislation to have an impact on national outcomes. There are also arguments that the digital revolution is exacerbating the concentration of wealth among those who “own” – whether it is shares, or companies – as opposed to those who work. In their paper Technology at Work, Dr Carl Benedikt Frey, Dr Michael Osborne and Citi argue that this is explained by the changing nature of innovation.
While the industrial revolution benefited consumers and workers (as large pools of labour were required to build and assemble new products), they point out that the technological revolution is primarily of benefit to consumers. “In the digital age, innovators and entrepreneurs, not workers or investors, will be the main beneficiaries.” This chimes with those economists and commentators who have said that wealth taxes are not the best way to ensure economic opportunity for all.
Dr Pippa Malmgren, a former US presidential economic advisor, said in last year’s edition of The Wealth Report that governments should be focusing on cutting rather than raising taxes in order to foster entrepreneurship. “It is essential that policy-makers focus on innovating and growing their economies,” she said.
Another view that has received much attention is that of Matthew Rognlie, a researcher at Massachusetts Institute of Technology, who believes that the answer to inequality actually lies in property planning policy.
Rognlie does not agree with Piketty that returns on capital investments will continue to grow ad infinitum. Instead, he says it is property, particularly residential, that helps underpin the net worth of the ultra-wealthy. He says that the “super-normal” returns experienced by those holding property are bolstered by restrictive planning policies, especially in advanced economies in and around economically dynamic towns and cities.
“Policy-makers should deal with the planning regulations and NIMBYism that inhibit house building.” A recent paper published by Era Dabla- Norris and other economists working at the International Monetary Fund (IMF) has highlighted that “better access to education and health care and well-targeted social policies…can help raise the income share for the poor and middle class”.
But Oxfam says that the work towards addressing inequality should go further than purely economics, arguing that tackling climate change should be one of the key goals of policy-makers, as weather events such as heat waves or flooding affect those who depend directly on crops for their livelihoods hardest.
The globalisation of wealth creation has made it easier for individuals and businesses to choose where and how to invest, making it more difficult for national tax legislation to have an impact on national outcomes
The UN has also highlighted that many other vulnerable groups are also at risk. “People who are socially, economically, culturally, politically, institutionally or otherwise marginalised are especially vulnerable to climate change,” it said in a report from 2014.
The ground-breaking global deal struck on climate change late last year in Paris may go some way to helping alleviate these concerns, but the wider debate around inequality is set to run for some time yet and will have long-term implications for UHNWIs and their advisors.