Davos 2016: Experts Say Inequality Is Key Threat To Global Economy

Inequality is one of the key threats facing the global economy, and overcoming economic challenges will require governments to work in tandem with the private sector, a panel of experts told an audience at the World Economic Forum in Davos, Switzerland, on Thursday. The discussion, titled “Rebooting the Global Economy,” featured Brazilian Finance Minister Nelson Barbosa, Irish Prime Minister Enda Kenny, Nobel prize-winning economist Joseph Siglitz and Chinese entrepreneur Zhang Zin.

“One of the [primary factors contributing to the weak global economy] is growing inequality,” Stiglitz told the audience. “Those at the top don't have to spend as much of their income as those at the bottom, who have to spend 100 percent, sometimes even more. When you have this growth of inequality, you're going to have a weak economy.”

Some members of the panel argued a level of government intervention in the economy was necessary to correct these imbalances.

“The market economy is the best engine for growth,” Barbosa said. “The market can produce a lot of productivity gains, the market can produce progress. But the market also produces too much inequality and too much volatility, and we have to find ways for the government to cope with that.”

Kenny cited the example of his country, which required an EU bailout in the wake of the financial crisis, but has returned to growth after years of austerity, saying prudent management of public finances is key to combating inequality.

“An economy is not an end in itself. It's about the people,” Kenny said. “For me, inequality is a priority. But, we have problems in many sectors, and yet I'm very optimistic that if you manage your public finances well, if you manage your growth pattern well, it provides the resources for governments to make decisions in respect of services that people need.”

Barbosa agreed, saying government has a role to play in both emerging and advanced economies in ensuring macroeconomic stability and keeping inequality to a reasonable level.

Taxation is also a key issue in managing economic growth, the panel said, with Stiglitz returning the theme to lament that top earners in the United States paid on average around 15 percent of their incomes in taxes, significantly less than those further down the economic ladder.

When the issue of taxation was raised, Kenny took the opportunity to address one of the most persistent criticisms of his country's tax regime, the so-called “double Irish” tax avoidance strategy used by many multinationals with operations in the country. He said the “reputational damage” being done to the country prompted the government to abolish the system and replace it with a 12.5 percent corporate tax rate. He also denied Ireland's corporate tax rate, which remains a bone of contention with many of its EU partners, is the primary reason multinationals invested in the country, instead saying the “talent pool” of potential employees was the primary draw.

The panel also agreed with a question from an audience member that raised the issue of whether gross domestic product was a suitable measure of the success of a country's economy.

“Absolutely right,” Stiglitz said. “GDP is not a good measure of economic performance or well-being. It's important that we recognize that because what we measure is what we do,” he added, raising the example of the Asian nation of Bhutan, which measures gross domestic happiness rather than GDP.

“GDP in the U.S has gone up every year except 2009, but most Americans are worse off than they were a third of a century ago,” Stiglitz said. “The benefits have gone to the very top. At the bottom, real wages adjusted for today are lower than they were 60 years ago. So this is an economic system that is not working for most people.”