Business
  1. Home
  2. Business
  3. Economy

Governments are bystanders as inequality festers

It is ironic that just as governments around the world are coming to the realisation that large portions of their populous have been left behind as a result of rising income and wealth inequality, the political capital needed to do anything about it has been depleted.

Voters worldwide are increasingly turning to non-mainstream parties that promote a more nationalistic agenda. With so many disparate parties winning support, the formation of a stable, effective government has become more difficult.

Up Next

Taliban's Australian hostage pleads for release

null
Video duration
01:47

More World News Videos

null
Video duration
01:21

Merkel vows tough line on migration
null
Video duration
01:47

Taliban's Australian hostage pleads for ...
null
Video duration
01:29

Scorchers turn up the Heat
Taiwan scrambles jets over Chinese warships.
Video duration
01:06

Taiwan scrambles jets over Chinese ...
null
Video duration
00:49

Trump hands over business empire to sons
null
Video duration
02:10

Trump pick Rex Tillerson grilled over ...
null
Video duration
00:59

Rolf Harris's second indecent assault ...
More videos

Merkel vows tough line on migration

Angela Merkel has presented her case for a fourth term as German chancellor, promising a tougher stance on immigration and saying the Muslim full-face veil doesn't "belong" in Germany.

Globalisation, free trade, large-scale immigration programs, and free-market ideologies in general have produced the most rapid progress in living standards that the world has ever seen. Millions have been raised out of poverty.

Life expectancy has increased as new technologies are shared. Wealth has been created at a scale that our ancestors could not have imagined. And yet, a growing number of citizens in Europe, North America, and the Middle East blame globalisation for unemployment, rising inequality and terrorism.

There is little disagreement that globalisation in general has been a benefit for countries. The share of the global population defined as "poor" – those making less than $2 a day – has fallen since 2001 by nearly half, to 15 per cent.

Overall, the world has become "wealthier" in the 10 years between 2001 and 2011. Notably, those in the middle-income bracket making between $10 and $20 a day have nearly doubled their global presence, from 7 to 13 per cent. Indeed, according to IMF data, global inequality has declined consistently since 1990.

Advertisement

So why the discontent?

Growing inequality

While inequality has fallen across countries, within countries it has increased.

In particular, income inequality has risen dramatically since the 2008 financial crisis. The top 1 per cent of earners in the US, for example, have received 95 per cent of the growth in income since the crisis. This is compared with an average of 54 per cent for 1979-2007. In 34 of the 83 countries monitored by the IMF, income gaps have widened since 2008, with incomes of the richest 60 per cent rising more quickly than those of the poorest 40 per cent.

This trend highlights two important risks that come with globalisation.

The first relates to spill-over effects of a globalised world onto other countries that can be positive as well as negative. The second is the risk that certain industries get left behind by globalisation. Since 2008, these two risks have come to the fore in accentuating the widening in income and wealth inequality within economies.

The over-reliance on monetary policy as a result of global deflation trends has boosted the wealth levels of asset owners (physical and financial) but has done little to boost aggregate demand in the real economy.

Government policy to address the hollowing out of industries as a result of globalisation has been notably absent.

Meanwhile, government policy to address the hollowing out of industries as a result of globalisation has been notably absent. In the post-financial crisis world, governments have been more focused on reducing debt levels than on providing investment in retraining, education and industry vocational programs.

Rising right

As a result, income and wealth inequality within countries has increased as has support for anti-establishment political parties whose policies are based more on nationalism, populism, and demagogy. The antithesis of what globalisation represents. Support for these non-mainstream parties has meant coalition and minority governments are on the rise around the world.

 

In some countries, elections have failed to produce a result at all. A national election in Spain in December  2015 failed to give any party a majority. A second election held last June produced the same result. An agreement to form a coalition government was resolved in only October, some 10 months after the first election.

In May 2016, Europe came within 31,000 votes of electing its first far-right head of state since 1945 when the Freedom Party of Austria, founded in the 1950s by ex-Nazis, lost the election by the smallest of margins. 

The far-right Sweden Democrats took 13 per cent of the vote in elections in 2014. The resulting minority government under the Social Democrats collapsed after just two months. Formal coalitions between the two biggest parties now rule in Germany, the Netherlands, Finland, and Ireland, among other countries.

The same trends are evident in Australia. In 1975, 95 per cent of the vote went to the Coalition or to Labor. In 2013, a quarter of the electorate voted for minority parties.

The issue is that coalition governments are increasingly reliant on the support of a number of minor parties that at times can sit at opposite ends of the political spectrum. This makes such a government unstable, fragile, and ineffective.

European risks

Europe is by far where the greatest amount of political risk lies next year. Since the UK vote to exit the European Union in June, anti-establishment parties in France, Germany, the Netherlands, Italy and Austria have called for referendums on EU membership.

National elections are coming up in France (May-June), Germany (September), the Netherlands and Hungary. In all four, far-right, non-mainstream political parties are growing in popularity.

In France, President Hollande suffers from the worst approval rating of any president in modern French history. Marine Le Pen's National Front Party is polling 27 per cent of the vote.

In Germany, the Alternative for Germany Party won 25 per cent of the vote in state elections in March.

This year will be a defining one for global politics. The concerns of electorates in many countries who feel left behind by the solutions put forward to address weakened post-crisis economic growth are reflected in the rapidly growing support for political parties that advocate increased trade barriers, reductions in immigration, and greater national control over the marketplace. 

Tracey McNaughton is head of investment strategy at UBS Asset Management