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Bill Gates is wrong, the rich-poor divide is only getting wider

The 2014 annual letter of the Bill & Melinda Gates Foundation, titled 3 myths that block progress for the poor, opens thus:

“By almost any measure, the world is better than it has ever been. People are living longer, healthier lives. Many nations that were aid recipients are now self-sufficient. You might think that such striking progress would be widely celebrated, but in fact, Melinda and I are struck by how many people think the world is getting worse. The belief that the world can’t solve extreme poverty and disease isn’t just mistaken. It is harmful.”

Citing figures of growth in per capita income of developing countries, Bill Gates goes on to claim that the percentage of very poor people has dropped by more than half since 1990. “The global picture of poverty has been completely redrawn in my lifetime,” he says, before moving on to underline the importance of foreign aid.

 Bill Gates is wrong, the rich-poor divide is only getting wider

Image used for representational purposes only. Reuters

Gates runs the world’s largest private foundation that employs more than 2000 people and has spent nearly $30 billion in grants since 1997 in more than 100 countries “to reduce inequities around the world”. Theirs is a rare example of high philanthropy that has touched and changed thousands of lives.

But last week’s annual letter painted a very misleading picture. Predicting that there would be almost no poor countries left by 2035, Gates accepted that inequality would still be a problem – “there will be poor people in every region” – only to seek solace in the fact that “most of them (the poor) will live in countries that are self-sufficient”.

How does that help the poor, or the foundation’s goal of reducing inequality? How does living in a country where per capita income is on the higher side of some poverty index due to massive earnings by a tiny minority help the majority who are not even making just enough? Or is it only about periodically redefining what is ‘just enough’ and pulling down the poverty line like our Planning Commission has been up to?

Even globally, there is nothing to suggest that the world is getting less unequal. National incomes are certainly growing in most parts of the globe. But a comparison of the growth graphs of seven countries – India, Egypt, Brazil, Mexico, China, Germany and United states – based on World Bank data shows no sign of convergence in the last decade. The gaps are constant or growing.

It is now getting clearer than ever that inequality – global and national – is inbuilt in the economic system the world follows and the likes of Gates champion. In his new book -- Capital in the Twenty-First Century (due in English next month) -- Thomas Piketty of Paris School of Economics looks into inequality as the ratio between the rate of return on capital and annual total income flow. A higher ratio means greater inequality.

Barring a six-decade-long exception between 1914 and 1973 marked by the physical loss of assets in the two world wars, the great depression and a strong labour movement, the rate of return of capital has always been higher than the overall growth rate.

pikettygraph

In a review of Piketty’s book, Branko Milanovic of the World Bank wrote: “The process generates a changing functional distribution of income in favor of capital and, if capital incomes are more concentrated than incomes from labor (a rather uncontroversial fact), personal income distribution will also get more unequal—which indeed is what we have witnessed in the past 30 years.”

In short, money begets money begets more money. And the rich-poor divide keeps widening. One does not need to look beyond the USA, the high stage of capitalism, to bear out the trend. Frank Lysy, ex-chief economist and director of a World Bank agency, explains how:

“The rich have done very well since the 1980s and the start of the Reagan Revolution.  Even following the 2008 economic and financial collapse…the top 0.01% in 2010 earned 333% more in real terms than what they earned in 1980... They were doing much better in 2007 before the 2008 economic collapse, when their income was 570% above what it had been in 1980 in real terms.”

In contrast, the bottom 90 percent found their income to be 5 percent below what it was in 1980. It is not even the rich but only the super rich, points out Lysy, who have really benefited in this post-Reagan economic system.  The income of the less-than-super-rich, the 9 percent below the top 1 percent, rose by only 35 percent over this thirty year period.

USdata

And yet, Gates wants us to believe that “almost all countries will be what we now call lower-middle income or richer” in another two decades as “their labor forces, buoyed by expanded education, will attract new investments”.

Maybe Gates is right after all. There is no return on capital without investment. For the global rich to get richer, poor countries must get investment ready. And as the local rich get richer facilitating and managing those investments, per capita income of poor countries will rise above the poverty mark.

As for foreign aid, Gates is right again. It is necessary for saving lives and helping the poor nations get self-sufficient. Maybe that is why rich countries have doubled the amount of their aid budget as loans over the past decade reaching $16bn in 2011, while aid loans from multilateral development banks amounted to $42bn – twice as high as in 1995.

In a report last month, Eurodad said developing countries face interest payments of almost €600m a year on such loans to Europe, warning that the shift to loans from grants could threaten the success of debt relief initiatives.

Gates’ faith in the system that has rewarded him with all the money he now spends to fight inequality is moving. But for him to win the battle, that system in all its benevolence has to bridle itself. How about, as Piketty fancies, confiscatory taxes?

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Updated Date: Feb 03, 2014 11:52:36 IST

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