New billionaires and the rest

As the richest and most powerful people in the world gather at Davos, Switzerland, one topic has come to dominate the meeting – inequality. Ahead of the yearly forum, a report on the world’s income levels have shown that the growing wealth gap is reaching tipping point that could see worsening unrest in vulnerable regions. 

Oxfam International has warned in a new report that a new billionaire was created every two days last year, just as the poorest half of the world’s population saw their wealth decline by 11%. The report, said governments are increasingly underfunding public services and failing to clamp down on tax dodging. 

Billionaire fortunes increased by a staggering 12% last year, or $2.5 billion a day, while the 3.8 billion poorest people saw their wealth drop $ 500 million every day. The charity said tax rates for the rich and corporations had been cut in recent decades. And when governments fail to tax the wealthy, they pass the tax burden on to poor people through consumer levies like value added tax.

Sri Lanka is not immune to this issue. Despite constant complaints, Sri Lanka still collects about 83% of its taxes indirectly, which puts a disproportionate amount of pressure on the poor. Even though poverty rates have declined, inequality, especially when it comes to household incomes have increased over time. The solution is not to reduce taxes as investment in public services is important but the quota of direct taxes need to be implemented competently and connected to growth strategies that will increase the overall GDP as well.   

This is not an easy task, as income inequality in Sri Lanka is high and has remained more or less unchanged, for more than three decades. While the share of household income of the poorest percentile has remained less than 2%, the corresponding share of the richest group has remained around 38% throughout the period from 1990/91 to 2012/13. 

The Gini coefficient for household income, which is one of the key measures of inequality, increased from 0.43 in 1990/91 to 0.49 in 2006/07 and remained unchanged at around 0.48, thereafter. The increase in income inequality does not necessarily mean that the poor are getting poorer and rich are getting richer. It is rather, the rich getting richer, at a faster rate. This is also because a large percentage of Sri Lanka’s vulnerable community rely on agriculture for their livelihoods while the richer are engaged in services, which are better paid and provide a more sustainable income. 

In Sri Lanka agriculture provides only 7% of GDP but it employs as much as 27% of the population. This means when weather is erratic and harvests fail there is an immediate and severe impact on the public. As there are fewer employment options for this segment the spillover effects are marked. This is also the reason why successive governments drift towards populist policies when elections come around. There is a clear link between agriculture, income inequality and policy making but turning around this trend is extremely difficult. 

Tackling corruption is the other side of the coin and on this the Government has been lackadaisical at best. Reducing corruption and improving tax collection is an important step in reducing income inequality. In fact this could be the definition of development.