Tipping the balance: To save democracy, fight inequality

NEW DELHI: In these tumultuous times, it often feels like one shock quickly eclipses another. Before one problem can be solved, another crisis emerges. Just a few weeks ago, the war in Ukraine dominated headlines, but the recent outbreak of violence between Israel and Hamas has since taken center stage.

To be sure, during times of crisis, our instinct is to focus on extinguishing the fire that is closest to us. But it is equally crucial to understand and address the root causes so that we have fewer fires to fight. As populist forces have polarised electorates and deepening social divides worldwide, the global political climate has grown increasingly volatile. While determining the causes of this shift will undoubtedly take some time, one could argue that the rapid advance of digital technologies, unchecked globalisation, and rising inequality have transformed our political and economic systems, fuelling sociopolitical unrest. While the debate over whether economic inequality has increased over the past few decades is still ongoing, the question is moot. We know for certain that global economic inequality increased steadily between 1820 and 1910.

Since then, it has fluctuated, and any estimate depends on the specific methods and metrics researchers use. But the data clearly show that economic disparities have reached intolerable levels, with the world’s richest 1% gaining 38% of the increase in global wealth between 1995 and 2021, compared to just 2% for the bottom 50%.

Moreover, regardless of the overall inequality, it is undeniable that the concentration of wealth continues to increase. Between 1995 and 2021, global wealth grew by 3.2% annually. Over the same period, the richest 0.000001% increased their wealth by 9.3% per year. When future generations look back at today’s world, they will likely be shocked by the extreme levels of inequality and social injustice we have tolerated, just as we are horrified by our ancestors’ acceptance of practices like slavery and feudalism.

But, beyond their inherent immorality, the political implications of today’s economic disparities often go unnoticed. In this age of digital connectivity and globalised commerce, excessive wealth concentrations undermine democracy in two main ways.

First, the globalisation of finance and supply chains has enabled wealthy and powerful countries to affect the well-being of citizens far beyond their borders. But while the citizens of Burkina Faso, for example, cannot vote in US presidential elections, the decisions made by American presidents affect their daily lives as much as those made by their own leaders, if not more so. Imagine a scenario where only the residents of the District of Columbia were allowed to vote in a US presidential election – such a system could hardly be called a democracy.

This dynamic suggests that globalisation erodes global democracy. Yet, there is not much that developing countries can do to challenge American hegemony, given that the United States is not going to allow the whole world to participate in its presidential elections. Second, given that extreme wealth often translates into political power, the concentration of wealth in few hands is anathema to democracy. This is particularly evident in the age of Big Tech, when billionaires can gain an outsize influence on public discourse by taking over critical media platforms or manipulating search results.

One can hope that advances in generative artificial intelligence will level the playing field in the tech sector and thus help curb inequality. As an economist, I recognise the potential damage that poorly designed interventions can cause. History is replete with examples of well-meaning but ill-conceived policies that sought to reduce inequality, only to backfire and inadvertently bolster the right-wing narrative that all government intervention is inherently problematic. Nevertheless, by combining moral intentions with thoughtful design, such policies can yield significant returns.

In a recent paper that I co-authored with my students Fikri Pitsuwan and Pengfei Zhang, we explore the megaprofits generated by Big Pharma and Big Tech companies. While imposing patent waivers might reduce the incentive to innovate, just as placing profit caps can cause production to fall, it is possible to design mechanisms that limit excess profits without sacrificing efficiency. One such strategy is to use a commodity tax to cap the profit of a group of companies, such as all the Big Tech firms. By heightening competition within the group, this intervention can neutralise the incentive to cut production. We must also recognise that beyond a certain threshold, what matters most to people, including the wealthiest, is relative rather than absolute inequality.

Therefore, we can levy significant taxes on the rich without reducing their incentives, provided that they maintain their relative standing. In other words, as long as billionaires like Elon Musk and Jeff Bezos understand that the taxation will not alter their rankings among the world’s wealthiest individuals, they will remain motivated to increase their earnings, and the rest of us will reap the rewards of their efforts. In short, neoliberals got it wrong: pursuing greater equality without reducing incentives is entirely feasible. By mitigating inequality and curbing the outsize influence of a few ultra-wealthy individuals, we can establish a fairer society. If we want to save democracy, we cannot afford to wait.