The debate over whether capitalism is the root cause of global inequality is not new. French economist Thomas Piketty reignited this conversation with his influential book “Capital in the Twenty-First Century,” where he argued that capitalism inherently drives income inequality.
However, this perspective oversimplifies the complex dynamics of global inequality, especially in the context of developing nations. Instead of an intrinsic flaw of capitalism, the real issue lies in geopolitical tensions, trade restrictions, and the lack of a truly global perspective on economic justice.
This article will unpack the nuances of capitalism, examine the factors contributing to inequality both within and between countries, and highlight what needs to be done to build a fairer world.
The Realities Of Global Inequality
When we talk about inequality, there are two main types: inequality within a country (intra-country inequality) and inequality between countries (inter-country inequality). Historically, the wealth gap between countries was enormous, with advanced economies such as the United States and Western Europe being significantly wealthier than countries in Asia, Africa, and Latin America. However, the past four decades have witnessed a significant shift, primarily driven by the economic rise of Asia and parts of Central and Eastern Europe.
In countries like China and Vietnam, capitalism and integration into global trade networks have helped lift millions out of poverty. According to World Bank data, China alone has lifted more than 800 million people out of poverty since the early 1980s.
Vietnam, another notable example, saw its poverty rate fall from over 70% in the 1980s to below 6% by 2021. This rapid economic growth has resulted in one of the most significant reductions in cross-country disparities in human history, challenging Piketty’s notion that capitalism inherently leads to worsening inequality.
While global inequality between countries has declined, inequality within many wealthy nations has increased. The rise of the billionaire class, stagnating middle-class wages, and the weakening of traditional labour unions have fueled social unrest in countries like the United States.
The infamous “1%” now holds an increasingly large share of national wealth, with Oxfam’s 2023 report revealing that 62% of all new wealth created between 2020 and 2022 went to the top 1% of earners globally.
However, focusing solely on the income disparity within advanced economies, as Piketty did, means ignoring the broader global picture. Western observers often forget that the standard of living enjoyed by even the poorest individuals in advanced economies is vastly different from the extreme poverty faced by farmers in South Asia or sub-Saharan Africa.
For instance, a person living below the poverty line in the United States still has access to public healthcare and infrastructure that are often absent in the world’s poorest nations.
Global Fragmentation And Protectionism
The decline in global inequality between countries is now under threat due to growing geopolitical tensions and the increasing fragmentation of the global economy. This fragmentation is partly fueled by trade restrictions and populist policies that have led to reduced economic cooperation. Such measures pose a serious risk to the world’s poorest countries, which depend heavily on access to international markets.
The COVID-19 pandemic and subsequent disruptions in supply chains highlighted the vulnerabilities of an interconnected global economy. Rich countries responded by turning inward, focusing on securing their domestic economies rather than continuing to support global trade.
The World Trade Organization (WTO) noted that the volume of world merchandise trade shrank by 5.3% in 2020, with the effects felt most acutely in low-income countries that rely heavily on exports.
Furthermore, policies like the Inflation Reduction Act in the United States, which offers substantial subsidies for domestic manufacturing, particularly in green industries, could have unintended consequences.
These moves may undermine the competitiveness of developing countries that depend on the very industries the West is now trying to onshore. The resurgence of economic nationalism and protectionism directly threatens the fragile gains made by developing countries over the past few decades.
The Climate Change Dilemma
One area where there appears to be a consensus for global action is climate change. The consequences of climate change are felt disproportionately by countries in the Global South, despite their comparatively minimal contribution to greenhouse gas emissions. Developing countries are more vulnerable to climate-related disasters, food insecurity, and displacement.
Kenneth Rogoff, a former chief economist at the International Monetary Fund (IMF), has advocated for the creation of a World Carbon Bank, which would provide technical assistance and large-scale climate financing to developing countries. The financing would be provided in the form of grants rather than loans, recognizing the limited capacity of low-income nations to take on additional debt burdens.
This proposal is crucial for ensuring that climate action does not inadvertently exacerbate global inequality. Developing countries need the resources to transition to cleaner energy sources without sacrificing economic growth.
To bridge the financing gap, Rogoff has argued for barring private lenders from suing defaulting sovereign debtors in developed-country courts, thus pushing for fairer terms of international finance.
Strengthening Social Safety Nets
The debate around inequality cannot ignore the importance of robust social safety nets. There is a strong case for expanding public services like education and healthcare within developed countries. But focusing exclusively on domestic inequality ignores the 700 million people worldwide still living in extreme poverty.
According to the World Bank, sub-Saharan Africa remains the region with the highest number of people living below the international poverty line, accounting for more than half of the world’s extremely poor population.
Countries like Norway, which has a comprehensive welfare system, demonstrate how capitalism and social safety nets can coexist effectively. Norway’s model provides a balance, where wealth creation through capitalism is paired with strong redistributive mechanisms to ensure broader access to quality public services.
While Norway’s model isn’t directly replicable in countries with different socio-political dynamics, the principle remains applicable: equitable economic growth must involve policies that provide safety nets for the vulnerable.
The Role Of The Global North
Developed countries have a crucial role to play in reducing global inequality. They have three main options: enhancing their capacity to manage migration, increasing support for low-income countries, or sending citizens to assist directly in those regions.
Many wealthy nations have experimented with programs that encourage recent graduates to volunteer in underprivileged communities abroad. For instance, the Peace Corps program in the United States has sent thousands of volunteers to developing countries, offering technical expertise and fostering cultural exchange.
While these efforts can make a difference, they are no substitute for structural changes in international trade and finance. To create meaningful, sustainable growth in the Global South, advanced economies need to support policies that promote access to global markets. Barriers such as agricultural subsidies in rich countries, which make it difficult for farmers in poor countries to compete, need to be dismantled.
Moreover, there needs to be a shift in political attitudes. As Rogoff points out, politicians in the Global North rarely win elections by promising to help the Global South.
However, the risk that economic instability in poorer countries could spill over into wealthier ones—through migration crises or political instability—is very real and growing. Hence, self-interest alone should be enough to push wealthier countries to adopt more inclusive global economic policies.
The most urgent task for Western leaders today is to find the political will to open up their markets, invest in developing countries, and provide the resources needed for a just climate transition.
Inequality within their borders is indeed an issue, but it pales in comparison to the pressing needs of the billions of people still struggling to make ends meet in the Global South. By shifting the focus from domestic to global, and by recognizing the interconnectedness of our challenges, we can create a fairer, more prosperous world for all.