Economic inequality and its negative effects on society (Part 1)

By : DR. PEDRO ROSSELLÓ / caribbeanbusiness

Edition: July 7, 2011
(This is the first of a three-part series)

"We can have a democratic society, or we can have wealth concentrated in the hands of a few; but we cannot have both." -Louis Brandeis

Recently, CARIBBEAN BUSINESS presented a plan for the economic development of Puerto Rico (June 9). In considering any general plan for economic development, let me suggest a fundamental element that should be included as a pillar of any plan: the issue of inequality.

In our public discourse, we have thoroughly argued the problems that political inequality can generate. At times, we have touched upon the hardships created when social inequality arbitrarily limits citizens' mobility within a society. But we have yet to fully ascertain the threats and challenges that economic inequality could pose for our contemporary society in Puerto Rico.

Economic disparity can be considered one of the greatest impediments to achieving a fair and prosperous society. There is ample empirical evidence and two basic premises driving this theory, the first being that a more equitable society is a better society. Implicit herein is the philosophy that a market economy should be driven not only by crude economic principles, but also by considerations of fairness, justice and care for the social environment.

The second premise is that increasing material economic standards does not always translate into a better quality of life for citizens. Historically, we have equated an increase in economic standards with a "better" life, presupposing that economic growth was the engine of prosperity. But recent studies point to the reality that prosperity through economic growth has all but stopped in the richest countries, and only continues to be an important factor in poor developing countries.

There is extreme economic inequality in our world today. The 400 richest people on the planet possess as much wealth as do the 3 billion in the world with the lowest incomes, who survive on less than $2 per day, per individual. Between 1987 and 1993, the population with an income of less than $1 a day grew by 100 million, reaching a total of 1.3 billion. By the beginning of this 21st century, the concentration of wealth was so unequal that 85% of the world's population represented only 7% of the world's markets.

The most structured index to measure inequality is the Gini coefficient, employed by the United Nations, which ranks countries on a scale from zero (0) [denoting the country with the most equality] to one (1) [denoting the greatest level of inequality].

Using this system, Namibia (0.707) ranks as the country with the highest inequality, while Japan (0.249) shows the greatest level of equality. Latin American and Caribbean nations rank among those with greater inequality: Bolivia, 0.601; Paraguay, 0.589; Colombia, 0.586; Brazil, 0.590; Panama, 0.561; Haiti, 0.592; and the Dominican Republic, 0.516. There is no official metric for Cuba. On the European front, Spain (0.347) and France (0.327) run close to Canada (0.376) and Australia (0.352) in terms of equality, while the Northern European nations of Sweden (0.250), Finland (0.269) and Denmark (0.257) follow right behind Japan as the world's most egalitarian societies.

In the United States we see a significant level of inequality, with a worrisome growth trend. After 1929, when the Gini coefficient was first reported at 0.450, the nation reached its highest level of equality in 1968 (0.386). Since the 1970s, the lowest level of equality was recorded in 2006 (0.470), stabilizing in 2009 (0.468). By 1995, 1% of the U.S. population controlled 47% of the wealth. After that, the government deregulation and free-market policies that existed between 1995 and 1999 allowed 86% of market gains to go to the richest 10%. At the time, just 1% of the population (2.7 million) owned as much wealth as the 100 million Americans with the lowest incomes.

In addition, over the three decades prior to 2000, the average income of American taxpayers went down 7%, while the income of the richest 1% rose by 148%...and the top 0.1% saw their income grow by 343%!

Regarding Puerto Rico, we could be forgiven for thinking that, as the territory with the lowest income per capita and greatest level of unemployment, it would have the greatest level of equality. Not so. In 2006 and 2007, our island had the highest level of inequality under the U.S. flag, with a Gini of 0.536 and 0.544, respectively. By municipality, Mayagüez (0.599) and San Juan (0.582) showed greater inequality; while Bayamón (0.462) and Toa Baja (0.479) showed less.
What effect might these inequities have on the quality of life of our people?
There is a proven correlation between levels of illness and social problems and levels of inequality. For a given level of income, it is better to live in a more egalitarian place. Egalitarian societies tend to be healthier—there is less infant mortality, longer life expectancy and less mental illness. They also report less usage of illicit substances, less incidence of violence, fewer teenage pregnancies, and higher levels of academic achievement. On this last point, it has already been established that academic achievement depends on the equality gradient of a society—the greater the equality, the higher the general level of education.

Conversely, inequality tends to render countries and jurisdictions socially dysfunctional across an entire spectrum of indicators. A quick glance over recent local headlines reveals serious signs of social dysfunction: escalating crime and violence, decreasing academic performance and education levels, and unremitting examples of public- and private-sector corruption.
All these realities point to an undeniable fact: The optimal development of a society is achieved as its citizens become ever more equal. So equality becomes far more than a moral question regarding how to behave as a society; it becomes a practical matter of allowing the most favorable advancement of our people.

What can we do to mitigate this alarming inequality? Which public policies could drive us to achieve greater equality, and therefore greater justice and progress?
We shall address these important questions in our next column.