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Globalization needs Robin Hood!
Saturday, 15 November 2008 10:11

We live in increasingly fractured societies and in an increasingly fractured world.  The rich are getting richer and many of the poor are getting poorer.  This is occurring inside our countries and between countries.  The countries that are home to the world's bottom billion are going backwards.


Robin Hood had an answer for this.  Rob from the rich and give to the poor.  This is the basis of redistributive policies which have long been aknowledged as important for social justice and social cohesion, and even economic growth.  Such policies can also help bolster support for globalisation policies, something which is critically important right now in a time of global financial crisis.

So what does the evidence show?  Are the rich paying proportionately higher taxes (are taxes progressive)?  Do the poor receive adequate transfers (pensions, unemployment benefits, social assistance and sickness benefits) from the public purse to improve their lot?  Are governments investing sufficiently in education or health and infrastructure in areas like water and sanitation, to alleviate the deep-rooted aspects of inequality.  Once again, we turn to the ILO's World of Work Report 2008 which comes up with disturbing findings.

First, developed countries are better placed to redistribute income, both within their countries and even to poorer countries, as they collect more taxes than developing countries and they also rely less on indirect taxes than developing countries.  But, the ILO finds that redistributiive policies have not been used effectively for addressing income inequality.  Around the world taxation has become less progressive, not more so.  Indirect taxes, which are typically regressive, have become a more important source of government revenue.  And what's more between 1993 and 2007, the average corporate tax rate was cut from 37.5 to 27.1 per cent (to attract business and create jobs), while the average top personal income tax rate was cut from 37 to 34 per cent.   

At the same time, we have not seen increased recourse to social transfers for redistribution -- even though social transfers generally have a greater impact on redistribution than taxes.  Already, inequality is highest in countries like the US where spending on social transfers is limited, and much lower in countries which spend the most on social transfers (countries like Austria, Belgium, Denmark, France, Germany and Sweden).   

Over the past 15 years, social transfers have declined as a proportion of GDP in developed countries and in Africa, and increased slightly in the rest of the developing world (as a general rule, social transfers are much greater in the advanced countries than in developing countries).  In addition, social insurance programmes (like pensions and unemployment insurance) usually exclude workers in the informal economy, who are most often the poorest (the informal economy ioften dominates developing countries). 

Regarding social investments, countries that spent more in the early 1990s tended to have lower inequality in the 2000s.  Indeed, education and health spending has increased as a share of GDP in all regions except for the former Eastern bloc where it has declined.  But the weakest increase was in Africa, the region that needs it perhaps most.  In designing these social investments, you must remember that public spending on primary and secondary education, and primary health care mainly benefits poor households, while public spending on tertiary education and hospital services usually benefits most the rich.

In short, governments need to redirect tax policy and social expenditures to reducing inequalities instead of increasing inequalities.  As we see in the socialist countries, such policies can have adverse incentives on work and investment, and thus economic growth and employment.  But countries as diverse as Malaysia, Mauritius, the Nordic countries and to a certain extent Brazil have managed to square this circle.

The bottom line is that we need a return of Robin Hood.  Social fractures invariably lead to political fractures and extremist politics.


World of Work Report 2008.  International Labour Organisation.  International Institute for Labour Studies.

Policies for redistribution: The use of taxes and social transfers, by Naren Prasad.  International Institute for Labour Studies.



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