Rising inequality threatens world economy, says WEF

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Rising income inequality and the polarisation of societies pose a risk to the global economy in 2017 and could result in the rolling back of globalisation unless urgent action is taken, according to the World Economic Forum.

Before its annual meeting in Davos next week, the WEF said the gap between rich and poor had been behind the UK’s Brexit vote and Donald Trump’s election victory in the US.

And it warned that there were new threats to social cohesion from the robotics and artificial intelligence revolution. The organisation said fundamental reform of capitalism may be needed to tackle public anger.

The WEF’s annual global risks report – culled from 700 experts – found that rising income and wealth disparity, and increasing polarisation of sectors of society, were ranked first and third among the underlying trends that will determine the shape of the world in the next decade.

Climate change was considered the second most important underlying trend, with the WEF noting that environmental concerns were more prominent in the report than ever before.

Trump’s inauguration on 20 January coincides with next week’s Davos meeting and the founder of the WEF, Klaus Schwab, said 2017 would be a pivotal moment for the global community.

“The threat of a less cooperative, more inward-looking world also creates the opportunity to address global risks and the trends that drive them,” he said.

The WEF said the growing mood of anti-establishment populism meant economic growth was no longer enough to mend fractured societies and that “fundamental reforms of market capitalism” would now be needed.

The global risks report said Brexit, the US presidential election result and the referendum defeat suffered by former Italian prime minister Matteo Renzi last month meant some people were now questioning whether “the west has reached a tipping point and might now embark on a period of deglobalisation”.

The US economist Dani Rodrik has coined the phrase “the globalisation trilemma” to capture the idea that countries cannot have democracy, national sovereignty and globalisation; they can only ever have two out of the three.

The WEF said recent events in Europe and the US suggested an “appetite for rebalancing towards democracy and national sovereignty”.

The WEF said it had been pointing out the dangers of rising inequality and political polarisation for more than a decade, but that the slow pace of recovery from the deep recession of 2008 had intensified income gaps within countries.

Emergency measures such as quantitative easing – the creation of money by central banks – had become permanent features of economic policy, and had exacerbated inequality by boosting the returns of those holding financial assets.

It added that the trends of recent years had come into sharp focus in 2016 with rising discontent and disaffection evident in the UK referendum and in the US with Trump’s victory over Hillary Clinton.

“Urgent action is needed … to overcome political or ideological differences and work together to solve critical challenges,” said Margareta Drzeniek-Hanouz, head of global competitiveness and risks at the WEF.

“The momentum of 2016 towards addressing climate change shows this is possible and offers hope that collective action at the international level aimed at resetting other risks could also be achieved.”

The report warned that society was not keeping pace with technological change. It found that of 12 emerging technologies, artificial intelligence and robotics had the greatest potential benefits but also contained the greatest negative threats.

“Technology has always created jobs as well as destroying them, but there is evidence that the engine of technological job creation is sputtering,” the report said, citing evidence that only 0.5% of the current US workforce was employed in sectors created since 2000 compared with approximately 8% in industries created in the 1980s.

“Technological change is shifting the distribution of income from labour to capital: according to the Organisation for Economic Cooperation and Development, up to 80% of the decline in labour’s share of national income between 1980 and 2007 was the result of the impact of technology.”

The WEF’s top five risks to the global economy for 2017:

1 Rising income and wealth disparity

Since the 1980s, the share of income going to the top 1% wealthiest citizens has increased in the UK, the US, Canada, Ireland and Australia – though not Germany, France, Japan or Sweden – says the WEF.

This group has shielded itself from austerity and the worst of the post-financial crash recession. Investments in new technology put a premium on workers with higher education and better skills, leaving the unskilled to languish on low pay, while globalisation has raised the incomes of the world’s poorer workers at the expense of those in the west.

The discontent this brings about “has now become an election-winning proposition” that demands action, says the WEF.

2 Changing climate

Climate change is ranked as the second biggest risk for this year, due in part to the increasingly frequent extreme weather that it heralds. While the end of the cyclical global weather phenomenon El Niño means 2017 is unlikely to top 2016 as the hottest on record, the Met Office forecasts it will still globally be one of the warmest ever.

The heat is also likely to be cooler in political circles after last year, which saw the Paris climate agreement ratified at breakneck speed and several other climate deals agreed.

This year governments must get on with actually delivering the carbon curbs they promised at Paris – as the WEF points out, the pace at which emissions are being cut is not yet fast enough to avoid dangerous global warming.

3 Increasing polarisation in societies

The WEF is concerned that democracy itself is in crisis. Policymakers and managers of public and private institutions have become divorced from their electorates both in terms of their cultural backgrounds and their pay and benefits.

Post-truth news media is undermining trust in pillars of the constitution, such as the judiciary. Austerity is hacking back at welfare provision for the vulnerable in society. And multiculturalism is under pressure from nationalism.

“This could be a pivotal moment in political history,” the WEF said, “and it requires courageous new thinking about how best to manage the relationship between citizens and their elected representatives.”

4 Rising cyber dependency

Amazon Echo’s virtual assistant Alexa adding unwanted items including doll’s houses to shopping lists is just one example of the problems arising from an ever more interconnected world.

An increasing amount of critical infrastructure relies, not just on information technology in general, but on the open internet in particular. This has brought great benefits but it also provides more opportunity for anyone hoping to wreak havoc through hacking attacks.

Beyond critical infrastructure, the developed world relies on the open net for a large proportion of economic activity. An estimated 10% of British GDP comes from the “internet economy”.

5 Ageing population

A quarter of Japan’s population is aged over 65, and the proportion is on track to reach 40%. Japanese people younger than 19 comprised 40% of the population in 1960, but are projected to make up just 13% of the population in 2060. The rest of the developed world, and much of the developing world, is heading in the same direction.

To fund welfare programmes, including a long-term care insurance begun in 2000 that ranks as one of the most generous in the world, Tokyo has run up a budget deficit of 240%.

This culminated in a plea for the fit elderly to look after the unfit, the disabled and ill. It could be argued that Britain’s current healthcare crisis is largely due to successive governments ignoring the lessons from Japan.

China is getting old at the point it gets rich, forcing it to address care and healthcare issues decades before western countries at a similar stage of development.

https://www.theguardian.com/business/2017/jan/11/inequality-world-economy-wef-brexit-donald-trump-world-economic-forum-risk-report

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