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February 8, 2015



The problem is predation

Either you were under the intoxicating influence of the communist philosophy of Karl Marx or you did not understand the very basics of economics. This was the reaction until a few years back if a ‘sane’ person talked about the corrosive effects of inequality.
Mainstream economics literature, in particular, thought of inequality as the handmaiden of progress. It was an indispensable, not necessarily negative, side-effect to the development process, and it would automatically recede once the country’s income level had increased.
This opinion has, however, now come under serious scrutiny. Now Nobel Laureates (like Joseph Stiglitz), heads of institutions once considered citadels of capitalism (Christine Lagarde of the IMF), and even some of those who are dubbed as one-percenters are now convinced of the negative effects extreme inequality can have on the economic growth and social solidarity of a country. Last year, IMF researchers created a stir when they concluded that high inequality reduces economic growth and that redistribution in itself is not harmful for growth. And more recently Professor Piketty has come up with a detailed account showing that inequality has risen with the growth of riches in the world.
Inequality is being debated here and there, at platforms like the IMF, World Bank, and the World Economic Forum. At the WEF’s recently concluded annual meeting at Davos, the BBC sponsored debate ‘A richer world, but for whom?’ – where Christine Lagarde of the IMF, Winnie Byanyima of Oxfam and Nobel Laureate (in Economics) participated – raised certain interesting points about inequality. However, one important point – also the subject of this article – was raised by those considered to be part of the ‘one percent’. Their point was that society should not demonise the rich. They create wealth which makes the lives of the rest of the people in society better. And a society that does not respect wealth creation is bound to

have serious negative consequences in the shape of reduced investment and leakage of talent etc, and consequently will affect the welfare of the people at large.
The point is well taken. No rational person can and should castigate the hardworking and the entrepreneurial who through their efforts or brains have become rich and have also made the lives of the others in society better. If they had not invented the internet or for that matter life saving drugs, we would have been living in the dark ages. The problem is not with people like Steve Jobs. The problem in fact lies with people like Carlos Slim, Suharto, Hosni Mubarak, Obiang Nguema, and many of the rulers of our own country.
An entrepreneur who starts a business, pays his due taxes, does not create a monopoly, and does not grow out of rent-seeking should undoubtedly be rewarded by society. When somebody talks of inequality, it does not mean that he or she is castigating those who are generating wealth for the society and providing employment to the people. And also keep in mind that it is proved that high inequality dampens economic growth but the reverse – that equality leads to growth – is not yet empirically proved.
It is predation that is bad. It is a fact that the majority of the top one-percenters have made their fortune not out of hard work but by accident – a lottery, or through monopolies or by bending the rules. In case of our society, we can find several channels of fortune-making that are not linked at all with either effort or intellect and where the wealth of such predators has not benefitted society but has rather been instrumental in lowering the welfare of the majority.
For example, big land tracts owned by the big landlords are not the fruit of their sweat or intellect. In most of the cases they inherited these from their forefathers as reward of loyalty to the colonial power. Today’s landlords have inherited large tracts of land from their forefathers and hardly can we find anything in such inheritance that helped helped the lives of others in this country. If such land is divided through land reforms, it can bring more dividends to society and can make the lives of the people better.
The second source or channel is outright rent-seeking. There are various forms of rent-seeking in our case. The most common is outright corruption by virtue of your position. Employment in the public sector gives some type of monopoly to the ministers or the bureaucracy. The wealth acquired by politicians and bureaucrats through rent-seeking and corruption has made society worse off. Such money – the result of force, guile, or political position – in most cases might not even be in the country and is instead lying in Swiss banks or in Dubai. Is this wealth improving the lives of others? Not at all. It was just sucked out of the soil of Pakistan, transmitted to the top through corruption for onward transportation to safe havens in Switzerland and Dubai.
The third area that comes to mind is the wealth accumulated by way of political connections. If you have some politicians in your pocket, it becomes easy for you to get favours, licences, tax holidays, and information about the future projects of the government. For example, if a government intends to build a certain infrastructural project of gigantic magnitude and information is passed on to near and dear ones, they may purchase the nearby land whose value then appreciates and they seek rent out of such information.
There are empirical studies on record pointing to the fact that political connections pay. In this regard, studies with reference to companies where former Indonesian president Suharto’s family had shares have been studied. When Suharto fell from power, there was an appreciable dip in the shares of such companies on the stock market.
There are instances where people got rich just by being close to power corridors and being given a licence to steal through rent-seeking. In developed countries, people got rich by getting the rules changed through political lobbying. Thus through a toxic mix of money and politics, you bend the rules in your favour. Monopolies, tax evasion, and issuance of concessionary SROs are some other modes of making fortunes. So the distinction whether a rich person is a ‘net contributor’ to society or a ‘net extractor’ from society is highly important in the debate on inequality.
If the wealth of the entrepreneurs is benefitting society at large, nothing is wrong with it. The problem is with the wealth that is accumulated by extractors through depriving those at the bottom and transporting it to the top just for their benefit. Here comes the demand and the need for redesigning the system that lets such people prosper at the expense of the majority.
The writer is a graduate of Columbia University.
Email: [email protected] Twitter: @Jamilnasir1