CAPITALISM, as a financial and economic system, has become successful after 1930’s. Its success was further re-enforced after the failure of Communist and Socialist models, particularly after the two World Wars. However, Capitalist system has some inherent flaws too. Some time ago, Frank and Cook, well known Economic and Financial experts, described capitalism as a winner-take-all society where there is a commanding financial advantage for those at the top but nothing like it for those, however good, who are further down in the hierarchy. This means that not only wealth and income distribution follow a power law – as is well known since Pareto’s times – but also that wealth and income growth rates are distributed according to a power law. Once a firm – or an individual – gets some advantage over its competitors the process becomes reinforcing producing the so-called Matthew effect according to which the rich get richer and the poor get poorer. Once the playing field is slightly tilted positive feedbacks tip the system in favour of the initially benefitted. Grave inequalities in the distribution of income are the straightforward result, creating two distinct classes in society- Rich and Poor.
Winner-take-all markets dramatically widen the gap between rich and poor by concentrating all rewards among just a small handful of winners. For the economically active population there are two basic causes of poverty, whatever precise definition one uses for it-(1) Unemployment and (2} Income that cannot meet the basic needs level. Poor people are those who do not earn an income at all or those who earn an income which is insufficient to satisfy their basic needs. So, any research on the causes of poverty should be focused on the causes of unemployment and of low remunerations. Any policy aimed at fighting poverty should be oriented towards the elimination of unemployment and low payment. For instance, in 2012, 10.8% of the workforce in the European Union was unemployed and an estimated 9.5% was affected by in-work poverty, summing up a total of more than 32 million people, (European Anti-Poverty Network, 2013). Of course, it may be discussed how to appropriately measure poverty. Research showed why the usual indicators are not satisfactory remarking that ¨there is a long way to go still to make adequate social sense of economic measures.
Experts highlight four main points: i) inequality hampers poverty reduction, both because of its negative impact on the growth elasticity of poverty and because of its negative impact on the inequality elasticity of poverty; ii) for a given poverty line, the impact of growth on poverty is stronger in richer than in poorer countries, and hence the latter will find it harder than the former to achieve fast poverty reduction; iii) the share of the variance of poverty changes attributable to growth should be generally lower in richer and more unequal countries; this means that in poorer and more equal countries growth should be expected to be the main driver of poverty reduction, while inequality changes tend to play a more prominent role in richer and/or more unequal countries; and iv) given the initial levels of development and inequality, the relative poverty-reduction effectiveness of growth and inequality changes depends on the poverty line – the higher the poverty line, the bigger the role of growth and the smaller the role of distributional change.
The inequality elasticity falls as inequality rises, for a given value of average income relative to the poverty line. However, the relationship is highly nonlinear, and at very low levels of development its sign is reversed. The more equal and the poorer the economy the more effective growth will be relative to redistribution in attacking poverty. As the economy becomes richer and more unequal, distributional change plays a relatively larger role in poverty changes. At very low levels of development the poverty-reducing effects of growth outweigh the poverty-raising effects of a worsening distribution of income. So, the authors pose that when poverty reduction is the overriding policy objective, poorer and relatively equal countries may be willing to tolerate modest increases in income inequality in exchange for faster growth -more so than richer and highly unequal countries.
Renowned writer/author Piketty, in his bestseller, brings distributional issues to the forefront of economic debate, focusing on the link between inequality and economic growth under capitalism. While Piketty argues that inequality is intrinsic to capitalism, experts debate whether reducing inequality or poverty should be the primary concern, as the relationship between them is complex. If poverty is measured in relative terms, it essentially mirrors inequality, with both moving in parallel. Milanovic highlights the growth of the middle class in Asia and stagnation of Western middle-class incomes, fuelled by globalization and technological innovation. This has led to significant discontent in advanced economies, seen in events like Brexit, the election of Donald Trump, and protests in France.
The concept of absolute poverty is key for analyzing conditions in low-income countries, where most of the world’s population lives. Relative poverty becomes an urgent issue only once absolute poverty is addressed. Contrary to popular belief, there is no necessary correlation between income inequality and absolute poverty. In some cases, inequality can rise while poverty declines, or vice versa. For example, a society where everyone is poor may become more equal, while a society with growing inequality may see overall improvements in living standards. Ultimately, capitalism remains strong despite its flaws, driven by the element of personal profit. While the system has its inherent defects, its advantages, particularly in fostering growth and innovation, continue to outweigh the challenges it presents.
—The writer is Former Civil Servant and Consultant (ILO) & International Organisation for Migration and author of seven books.
