Economic growth and income inequality

Economic growth, besides being a very important goal of economic policy, is conceived by some theorists as economic development. However, as suggested by Amartya Sen, growth is a means to achieve development, which has to do with the welfare of people and therefore should incorporate not only economic variables, but also social, cultural, political and environmental variables, among others. In other words, economic development is multidimensional.

Those who see development as growth, argue that the benefits of growth are spread to all social strata, and thus benefit the entire population. They also assert that it is feasible that capitalists get richer and the poor reduce, or at least maintain, consumption levels, so that the first look for incentives to innovate and save, which will ultimately benefit the poor. In the early works on growth, especially those by the most influential authors, such as Simon Kuznets, with his famous curve, they show support for the accumulation of capital. According to Kuznets, the existence of inequality in the early stages of growth is possible, to the extent that labor shifts from agriculture to industry; later inequality would reach its maximum level and, ultimately, would again be reduced because labor is more concentrated in industry.

In recent years, inequality has been one of the topics most studied by scholars, and certainly, worldwide protests since 2010, above all the Occupy movement, have been oriented towards demanding prompt action to combat it. However, with the publication of the book by Thomas Piketty, Capital in the 21st Century (published in French last year and in English in March of this year), commented on by Nobel laureates Robert Solow, Paul Krugman, Robert Shiller, Joseph Stiglitz, among others, and whose author having  been received not only in the White House but also in multilateral organizations like the World Bank and the International Monetary Fund, the issue has become the subject of discussion and controversy at the highest levels.

The main aspect that Piketty examines is the dynamics of the distribution of income and wealth, based on the change in economic growth in a span of over 200 years, particularly in developed economies. To address this issue, Piketty uses a different methodology to that used in other studies on income inequality, which involves using tax returns rather than household income and expenditure surveys, which is very positive in that the data is more accurate and representative. In using such statements, he could estimate with greater certainty the level of income of the richest people in different countries. As Paul Krugman puts it "despite its usefulness, the survey data has significant limitations: it tends to omit completely income corresponding to the handful of people at the top of the income scale ... Conversely, fiscal data tells us much about the elite, and estimations based on taxes can now reach much farther back in history: the United States has had an income tax since 1913, the United Kingdom since 1909, France retained data on wealth, dating back to the late eighteenth century.”

Using the methodology described above, Piketty argues that in both the nineteenth century as well as the end of the last century, and on to the present day, the rate of return on capital has been higher than the growth rate of the economy, which explains the persistence of inequality. For the French economist, this situation was reversed in the period 1910-1950, given the disruptions and high taxes imposed during the two wars, as well as the depression of the thirties, concluding: "when the rate of return on capital consistently exceeds the growth rate of production and income -which happened to the nineteenth century and threatens to become the norm in the twenty-first century- capitalism produces mechanically unsustainable arbitrary inequalities, questioning radically the meritocratic values on which our democratic societies are founded".

According to Piketty, to reduce inequality it is necessary to increase taxes on high net worth, and proposes for those of less than 1 million Euros a tax of 0.1 % or 0.5 %. For those between 1 and 5 million Euros, 1 %. For cases between 5 and 10 million Euros, 2 % and for those exceeding 10 million Euros, between 5 % and 10 %. In order to redistribute income, he suggests that income must be taxed: for those over US$ 200,000 per year, 50 %, and for amounts above US$ 500,000 per year, 80 %.

If we apply Piketty's analysis to the Colombian case, surely we will find that inequality in our country is greater than what we know, not forgetting that this is one of the highest levels in the world. Currently, the Gini coefficient is 0.54, calculated based on household income and expenditure surveys of the DANE. If the calculations were based on income statements, inequality would increase, especially as of economic opening, because, as Piketty showed, the market does not contribute to income redistribution but rather to the accentuation of inequality. In Colombia the situation is foreseeable, if we consider that in recent years the margins of the financial intermediation of banks, in some cases exceeded 15 %, the profits of big companies amounted to 10 %, stocks valued in excess of 15 %, while wages grow in real terms by 2 %.



Editor of Apuntes del Cenes Journal