Inequality

During my time at Korbel I was introduced in an academic way to the concept of inequality. As a result, I ended up doing a paper on it for one of my classes, and following that, I decided to look at the issue of inequality in The Bahamas.

Here is something I wrote for The Tribune in Nassau, Bahamas, about inequality. Let me know what you think.

 

The Bahamas is Becoming Increasingly Unequal

By ALISON LOWE

Nellie Day – remember her? She wrote an article claiming that the majority of Bahamians live in shacks made of straw and wood, while a wealthy elite can afford mansions made of concrete and strong enough to withstand a hurricane. Her clearly poorly-researched and shoddy article appalled The Bahamas at large and soon after it was removed from the US-based travel website where it had been posted, and the author was forced to issue an apology.

While Nellie Day’s claims were clearly enormously exaggerated, there is an aspect of our development experience which her controversial article touched upon which may in fact hit somewhat close to home The factual accuracy of her article notwithstanding, Day did what something our politicians might do well to do more of: talk about inequality. Inequality is an often-cited aspect of development, but it is scarcely mentioned in The Bahamas. What actual evidence is there for what inequality looks like in The Bahamas, and should we care either way?

Data is scarce (The Bahamas and the Caribbean as a whole is what has come to be termed a “data poor region”, which severely impedes progress in policy-making) but I did find something to answer my question – and the findings are troubling. A country’s Gini coefficient measures inequality, on a scale of 0 to 1, with 1 representing total inequality. The Bahamas has the highest inequality in the entire Caribbean, according to a recent study by the United Nations Economic Commission for Latin America and the Caribbean, with a Gini coefficient of 0.57. Secondly, inequality is only increasing.

In the Department of Statistics’ most recent Labour Force Survey, a graph showing trends in income distribution from 1973 to 2011 shows a laudable closing of the income inequality gap from one of quite severe income inequality in the Bahamas in 1973 to a vastly improved position by 1989. However, the next point at which data is available – 1999 – shows that the 1990s were a turning point for income inequality trends. From 1999 onwards, income inequality has been increasing in The Bahamas. That is to say the rich hold a higher proportion of overall income in comparison to the less well off. To be clear, the increase is not massive, but it is a negative trend. Meanwhile, data also shows that the share of the overall wealth of The Bahamas held by the poorest 20 per cent of the population has not changed at all in percentage terms in at least 38 years. While their absolute household income has increased the bottom 20 per cent’s share of total household income has remained in the vicinity of 4 – 5 per cent. .

My intention in writing this article is both to bring these facts to the fore, and to suggest that inequality is something we should be talking about as a society. Firstly, I believe it would be beneficial to consider what took place in the 1990s that may have contributed to this negative trend emerging. At first glance, the growing gap seems counterintuitive, considering that the ‘90s saw the Atlantis resort come on stream, in what has been talked about by many as a moment which contributed to the emergence of a substantial middle class in the Bahamas. Secondly, what does high and growing inequality say about the health of our nation and its future development? There are many well-respected academics and policy makers who tell us that a society with high levels of inequality is more likely to suffer from lower growth, higher crime and poor health and to be generally less happy. Thirdly, how can we stop, slow or reverse this trend? And should we?

As we consider these questions, it is worth noting that the economic crisis is likely to have significantly worsened this inequality. Indeed, the evidence is already being seen. In a shocking report in January 2012 which received far less attention than the seriousness of its contents warranted, Tribune business editor Neil Hartnell pointed out that Department of Statistics figures show that the number of Bahamian households surviving on less than $5,000 per year has increased by an “alarming” 83 per cent in the past four years. Additionally, between the years 2007 to 2011 there has been a 33 per cent or one third increase in the number of households earning a total of $20,000 or less, with the number of such households increasing from 24,780 to 33,015. It is possible that the wealthy have also lost out to an extent, but with a greater safety net, more secure jobs and income-yielding assets their fall in income will not have been nearly so great. This has been the trend worldwide – it is the less well-off, those who are already more vulnerable, who have fallen the furthest due to the economic downturn.

But why should we care? There are several very good reasons which are commonly advanced. While I will not attempt to definitively link these issues to inequality, I think it is certainly worth considering them, given that academic and public policy reports worldwide have found that there are strong reasons to believe that the interconnections are very real.

The first is crime. In one of the most comprehensive reports to ever have been produced on crime in the Caribbean, a 2007 joint report of the UN and the World Bank, “Crime, Violence and Development: Trends, Costs and Policy Options in the Caribbean”, the authors describe the disastrously high levels of crime in the region and find evidence to suggest that countries with higher levels of inequality have higher rates of both murder and robbery, no matter their overall level of wealth. This is not to say that other factors do not come into play – indeed, it is likely that crime grows through some of the same channels that contribute to inequality (such as structural unemployment and poor education outcomes) , but it is also possible that the mere fact of inequality becomes an independent source of crime.

The second reason to care about inequality is its possible long term economic implications. Some argue that efforts to make a society more egalitarian will come at the expense of economic efficiency and growth; that it is through being able to reap large rewards that the wealthy will go on to spur further growth through investment and innovation and, if not, the economy will be stifled. Others suggest this is a fallacy. In his own article trumpeting the need to redress America’s income imbalances, Nobel Laureate economist and former chief economist for the World Bank, Professor Joseph Stiglitz of Colombia University, points to countries such as Sweden which are both economically healthy and the most “equal” of all modern economies. In one of his own recent articles on the topic of inequality, Stiglitz states that overall it is “well documented that countries that are more unequal don’t do as well, don’t grow as well and are less stable.” For one possible reason why this might be, we only have to link this back to the UNODC report’s connection of inequality with crime, factoring in the impact of crime on private business activity, on human capital, and crime’s ability to encourage brain drain – the urge for those with the intellectual and material capital to leave the country and perhaps never come back – to see how inequality could cut growth. Add in the impact on health and education of a large group of people getting stuck at the bottom of the ladder and how this would affect their ability to contribute to economic activity and there is further intuitive evidence of why inequality may hurt growth and stability.

You might also consider how higher levels of inequality can signify less “equality of opportunity”, such that children born of poor parents are less able to live up to their potential, or as Stiglitz puts it, how “lack of opportunity means that a country’s most valuable asset – its people – are not being fully used”. Here he was referring to the situation in the United States of America, where inequality is the highest in the developed world, and, according to Stiglitz, is now at such an “intolerable” level that the country will “pay the price”. But in a country with as few people as The Bahamas it is arguably even more important that we ensure that each person  can live up to his or her full potential to contribute to our society.

Reinforcing Stiglitz’s observation, with regard to why high inequality in the US is indeed a problem, the Organisation for Economic Development and Cooperation (OECD) warned the US in June that it must fix its inequality level, noting impacts on health, education, innovation, and economic wellbeing. Meanwhile, the extent of inequality in the U.S. is one of the main messages of the “Occupy” movement, which has managed to play a major part in bringing the issue into the mainstream agenda and political debates. “Occupy” complains, and Stiglitz also contends, that inequality distorts political outcomes as those at the top gain a disproportionate voice in the political process. When this occurs, both democracy and economic growth are undermined, as “rent-seeking” behaviour causes those who already have wealth to bend political outcomes to their own benefit rather than that of the economy as a whole.

As for what the data may tell us so far, it is hard to decipher exactly what role, if any, inequality may have played in stymying economic activity in The Bahamas. Between 1980 and 1990, GDP growth averaged 3.5 per cent in The Bahamas, while between 1990 and 2000, as inequality stopped narrowing and began to grow, it averaged 1.85 per cent. From 2000 to 2010, as already high levels of inequality trended higher, there was an average of only 0.84 per cent growth, but this period also saw both the effect of the slowdown in tourism following 9/11 and the global downturn post-2008 financial crisis. Overall, from 1980 to 2011, growth averaged a low 2.11 per cent. Given that the increase in inequality beginning in the 1990s was only a minor one, I would suggest that it would have been unlikely to have had any major effect on economic growth over and above these other global factors to date, but this is not to say that in the long run, and with a continued worsening of inequality levels, it could not have an impact. 

Potential social and psychological implications of inequality should also factor into the debate. We must consider how high inequality could lead to a deterioration of social cohesion within a society, which is the foundation upon which “democracy – or, indeed, any type of peaceful, contented society – ultimately rests.”, as recently stated by Robert Skidlesky, famed biographer of John Maynard Keynes, and Professor Emeritus of Political Economy at Warwick University, U.K. Skidelsky is one of many eminent social scientists who have raised red flags in recent years about the effects of inequality.

As for why inequality in the Bahamas may be on the rise, there are several potential causes which spring to mind. Firstly, our economic model as a whole. We have traditionally sought to attract high net worth individuals to The Bahamas to set up residence. As “usual residents”, some of them and their particularly large household incomes will have factored into the Department of Statistics report of November 2011 in which the trends in inequality are perceptible. We may want to consider to what extent the inequality which causes us to be ranked the most unequal in the Caribbean is due to this fact alone, or due to other more systemic issues.

A systemic issue affecting income inequality is long-term structural unemployment. Structural unemployment is joblessness that comes about due to a lack of fit between the skills individuals have and the jobs being created. Between 1995 and 2011 the average unemployment rate in The Bahamas, notwithstanding the rise of Atlantis and the relative boom period of the mid-2000s, remained at a stubborn 10 per cent. Hence although in economically good times, jobs were being created, there remains a core group of individuals who are not suited to benefit from them. In this regard, if we care about inequality, this is yet another reason to focus on education and to what extent our inadequate education system is growing this proportion of the population, as business leaders commonly complain, and therefore contributing to further inequality today, and into the future.

Taxation surely must bear some of the blame, too. Just this week we have seen the announcement of a forum to discuss future taxation options for the Bahamas, with one of the recognized reasons why this is needed being the question of “equity”. As it stands, the Bahamian taxation system which relies most heavily on tariffs on imports for revenue creation, is regressive. The poor pay relatively more of their salaries in tax than the rich. When you take more money out of the pockets of the less-well-off, you not only limit their disposable income, but you reduce their pool of resources which they can save towards options like college for their children, or investment in property and other income-generating assets, for example. By allowing the wealthy to pocket a greater share of their incomes, you leave them with yet more options for investment in activities that will increase their incomes further. Additionally, by continuing the use of a taxation system that in general sees this nation collect a lower-than-average amount of revenue as a proportion of GDP than other countries, as the tariff-based system does, you limit the ability of the government to potentially engage in meaningful public investment that will benefit the most vulnerable. All of this has a knock-on effect on social mobility and inequality in the long run. Similarly, the lack of an inheritance tax allows the wealthy to pass on money and property to their heirs without paying any tax on these assets, as would be the case in many jurisdictions worldwide. This too will perpetuate and even have a “snowball” effect on inequality in The Bahamas. Children of the wealthy can receive property and money that they in most cases played no part in producing/obtaining, increasing their options and life chances with no input of their own, without making any contribution to the state which might wish to take redistributive steps to assist those whose initial life chances are not so rosy.

The Bahamas has taken significant steps on its development path, but high and rising inequality has been a largely un-discussed side effect of our progress over the past several decades. If unaddressed, some experts would say it will derail our progress and turn back the clock on the advancements that we have made. Or it could be that inequality has little to do with our most serious problems. But as the country with the highest inequality in the Caribbean that continues to rise, isn’t it time we talk about it?

 

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Posted on September 20, 2012, in Uncategorized and tagged , , , , . Bookmark the permalink. Leave a comment.

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