Prosperity paradox: more wealth leads to higher inequality

 

Douglas McWilliams believes China is a classic case of the paradox at the heart of the global economy.

 

Although it has delivered 800 million people out of poverty in the past 40 years, the gap between rich and poor has also grown, something the Chinese government is very determined to deal with.

 

This, though, is a global phenomenon and one that the British economist addresses in his new book, The Inequality Paradox: How Capitalism Can Work for Everyone.

 

“China has made the biggest single contribution to the fall in global poverty in human history, and progress is still being made,” McWilliams, 67, said.

 

China aims to eliminate extreme poverty by the end of next year.

 

“But within China, as with other countries, inequality has increased as poverty has decreased. This is the paradox.”

 

Inequality is now a central issue of economic debate. It is a particular problem in the West, where many feel left behind since the global financial crisis of 2008. And this has given rise to increasing disaffection and rising populism.

 

It was also addressed by the French economist Thomas Piketty in his seminal 2013 book Capital in the Twenty-first Century. He blamed the problem on the rich seeing a greater rise in the value of their assets than the increase in wages of those who have to work for a living.

 

McWilliams, who was speaking at the central London office of the Centre for Economics and Business Research, the economics consultancy he founded more than 25 years ago and of which he is executive deputy chairman, thinks Piketty is only partly right.

 

“What he argues is about 20 per cent true. IMF studies that have looked at this carefully do point to people with assets exploiting others being part of the story. I think, though, Piketty’s explanation misses the real driving point.”

 

McWilliams said that what has driven inequality is globalisation — which China has largely benefitted from — and technology, with the Fourth Industrial Revolution threatening to destroy jobs in the developing world as well as the developed one.

 

“With globalisation, you have had nearly three-quarters of the world’s population suddenly becoming economically active in just a few decades. This is bound to be disruptive. It has created increased inequality in the West, but it has also been associated with a significant reduction of poverty in the East.”

 

McWilliams insists Donald Trump-style protectionism is no answer to globalisation.

 

“King Canute had similar ideas. But it didn’t work, did it? China, in fact, is one of the best examples of isolationism not working. It looked in on itself after the Ming Dynasty (1368-1644) voyages of Zheng He and hardly developed for several centuries afterwards.”

 

McWilliams believes technologies such as artificial intelligence and robotics, which will destroy vast swathes of jobs, pose huge challenges to policymakers if societies do not become more equitable.

 

“It is no longer just about machines replacing people but machines making the machines that replace people.

 

“People will just have to find new things to do. In the UK we have actually had the growth of the lifestyle economy, with the number of people claiming to be musicians going up nearly five times and, similarly, writers three times.”

 

He believes the only solution may be that everyone becomes entitled to a universal basic income and that this may be more imminent than many think.

 

“In some of the oil states in the Middle East there is already an effective basic income. My maths said the economics in the US start to add up in about 10 years’ time, and in Europe and China in about 20 to 25 years’ time.”

 

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