The wealth and skills gap widens

As the disparity between the rich and the poor widens globally it is interesting that everyone’s hot favourite new book is Capital: in the Twenty-First Century by French economist Thomas Piketty. Numerous mainstream Indian dailies, not known for caring about boring books on economics, reviewed it this weekend. By analysing data on returns to wealth (capital) and labour for the last 300 years, primarily in the U.S. and Europe, Piketty tries to show that since returns on wealth have usually been higher over the very long run, than the rate of growth of the economy, compared with income from labour which tends to stagnate or even fall during economic downturns, a concentration of wealth among fewer and fewer individuals over time is inevitable.

If Piketty is right then his work would help to explain the growing gap between the rich and the poor, especially in India which at our low per capita income of $1,150 already has a Gini coefficient of 36.8%, about which I had written in my article The new inequality debate in February for Gateway House. However, the importance of Piketty’s findings goes beyond understanding a widening gap between different classes in a country. They may also help to explain the continuing growth and income gaps between the wealthy developed western countries and developing countries, most of which have experienced varying lengths and degrees of colonisation by the rich west European countries. Thus, some 60 years after decolonisation, former colonies in Asia and Africa struggle to overcome the de-industrialisation forced on some, such as India through the 18^th and 19^th centuries. Others such as Nigeria are still facing the consequences of the distortion of their economies by colonisers who wanted to extract and supply cheap raw materials to the “mother” countries.

There are several other phenomenons on which Piketty’s work may have a bearing.

The first is the persistent dominance of wealthy powerful elites regardless of changes in the economic and political systems. It may be recalled that most communist revolutions including the first – the Russian revolution – were led by the educated children of the wealthy and the powerful in the feudal structures of imperial Russia. Equally, when the Soviet Union was dissolved, many members of the old nomenclature (the grandchildren of the feudal nobility) became the new oligarchs, who cornered national assets privatised under the misrule of the then president, Boris Yeltsin.

The other phenomenon, at this moment most prominent in the U.S., is that of the entrenchment of wealth among the families of the presently wealthy who pass it on to the next generation. Along with the real and financial assets, they also ensure them access to the best education and wealth-management skills which guarantee high returns from that capital.

Also, seamlessly passing on their good fortune to their children are the well-educated professionals, many of whom are continuing to work beyond the traditional retirement age. They have the skills that command a high value in sophisticated economies and the high-tech sectors of developing economies, which their children also acquire. On the other hand, the children of the underprivileged find it harder to gain employment, especially of the well-paying sort.

Negative legacy issues have had a bearing on the inability of successive generations of African Americans to pull themselves out of persistent poverty. The deep entrenchment of racial discrimination in law and practice in the U.S., combined with the lack of access to new and high-value skills keeps nearly 14% of African Americans perennially out of the job market. A similar malaise is visible in the continuing misfortune of the so-called backward castes in India underlining the need for more creative affirmative action programmes with an emphasis on up gradation of skill-sets.

The new information and communication technologies also work in favour of the presently well-endowed by curtailing the use of labour in production processes, thereby constricting employment-creation processes and enhancing the income-generating potential of those who are better placed to acquire these skills. This has been true of innovations in telephony and the use of robots in production; and will worsen with 3G manufacturing and further progress in Artificial Intelligence.

Unless governments – whether those of wealthy developed countries like the UK or former colonies like India – work to improve access to relevant education, retraining in higher skills for better paying jobs, welfare nets for the unemployed and higher taxes on inheritance and incomes generated by wealth, all that will be left for the unemployed and those in poorly-paying service jobs is social disorder.

Neelam Deo is Co-founder and Director, Gateway House: Indian Council on Global Relations; She has been the Indian Ambassador to Denmark and Ivory Coast; and former Consul General in New York.

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