Informal influence has secured preferential treatment for elite through govt contracts, tax breaks, privatization of public services

richBy Alice Krozer*

The emerging economies Brazil, China, India, Indonesia, Mexico, Russia, South Africa and Turkey – in short, the BRICSAMIT – are endowed with exceptional wealth and natural resources, large domestic markets and thriving international trade, making them occupy the top ranks in the list of richest countries in the world. This could in principle ensure considerable wellbeing for their entire population. Yet instead of an overall process of catching up with the more advanced countries, we seem to be witnessing two different, simultaneous development paths within BRICSAMIT countries – where large parts of the population are consistently losing out under the current economic and political set-up, while a small elite enjoy a life of privilege and luxury.

World Bank (2015) data shows that in India and China alone, almost one billion people still live on less than $2 per day. Together, over 2.3 billion people (or over 65% of their population) live on less than $5 a day in the BRICSAMIT.

‘Pro-poor’ or ‘inclusive growth’ are terms which are widely used now, and indeed some of the BRICSAMIT countries are often considered examples to follow in terms of how successful they have been in ensuring that economic growth has benefitted the poorest. However, even where the incomes of the poorest are growing faster than those of the rich, the absolute gap between them is increasing.

In Brazil, for instance, growth for the poorest 40% was more than two times that of the richest 5% between 2002 and 2011, yet the absolute difference between the average incomes of the poorest and richest in that same period more than doubled. At current growth rates, it would still take more than 35 years for the gap between the average incomes of the poorest 40% and richest 5% to start closing in China, while in Brazil it would not start shrinking until 2080. In all of the countries except India, the richest 5% alone earn a larger share than the poorest 40% of the population; in some countries they earn more than double.

Important distributional differences mark the individual countries: while the richest 10% together account for about a third of total income in Russia, China, Indonesia, Turkey and India, the share rises for Brazil and Mexico, and in South Africa the top 10% earn more than half of the total income.

Closer scrutiny of the share of the top income earners reveals this to be the most unequal income group of the entire distribution. Figures for South Africa show that the richest 1% now enjoy almost 17% of total income, up from around 8% in the early 1980s. Similar trends hold in India and Indonesia, while recent numbers for Mexico suggest it is now one of the most unequal countries according to this measure, with 21% of total income enjoyed by the richest 1%.

Wealth distribution is not only even more unequal than income distribution; it is also becoming more unequal at a faster rate. Wealth, defined as the value of financial assets plus real assets (principally housing) owned by households, less their debts, has grown rapidly in the BRICSAMIT since 2000. It tripled in Brazil, India, South Africa and Turkey, more than tripled in China, increased four-fold in Indonesia and increased by a startling eight times in Russia.

In all of the countries both the number of millionaires and their respective wealth has risen over the past two decades, and Credite Suisse estimates their number to further rise significantly over the next five years, in some countries almost doubling. In Mexico and China, the top 10% now hold more than 60% of total wealth; in Brazil, India, Indonesia, South Africa and Turkey this proportion rises to above 70%. In the most extreme case of wealth inequality in the world, Russia, the richest 10% hold 85% of total household wealth.

The difference in wealth between the richest individuals and the rest of the population is astronomical. In Mexico, just one man owns wealth equivalent to almost 6% of the production value of the entire country with its 122 million people, while India’s wealthiest man has a fortune which amounts to almost 1.5 million times the average person’s income. It is impossible to justify such vast gulfs between the top and average income earners on account of productivity, let alone fairness. Even in South Africa, where the gap is smallest, to earn what the richest man made in just one year – in terms of income generated by his existing wealth – the average worker would have to toil 15,737 years.

So how did we get here? The concentration of wealth in the hands of a small elite stems largely from four distinct features of an inherently unequalizing economic model employed by the BRICSAMIT: the extractives industry; agri-business; mega-infrastructure projects (such as the FIFA World Cups and related building works, road and airport development, mega-dam projects); and large-scale privatization of both natural resource companies, such as oil and even water, and services such as the media and telecommunications sector. Informal influence has secured preferential treatment for this elite by successive governments – for example, through the awarding of large government contracts, tax breaks and obscure deals in the privatization of public services.

Other popular areas of investment for the rich include construction, real estate, and banking – all of which depend heavily on government permissions and regulations. The dramatic shifts in wealth distribution in the BRICSAMIT have often accompanied massive institutional changes during times of crisis, revolt or structural (economic and political) change. In particular, the economic structural adjustment beginning in the 1980s or early 1990s, which all of the countries underwent, pushed inequality up significantly.

rich1This was the case during the collapse of the Soviet system and the ensuing rise of the oligarchs in Russia, but also the move towards a more market- oriented economy in China since the reforms in 1978. While the objective of the banking reforms of the 1990s and market liberalization was to bring growth to the countries, a small elite was able to reap disproportionate benefits by purchasing formerly state-owned enterprise, allowing for monopoly rent- extraction; for example, the sale of Russian oil giant Yukos to Mikhail Khodorkovsky in 1995, or of the Mexican phone company Telmex to Carlos Slim in 1990.

Wealth inequality accelerated again in the BRICSAMIT in the aftermath of the 2008 global financial crisis; surviving companies grew stronger as weaker ones collapsed or were taken over, while many workers were dismissed on ‘efficiency’ grounds. Richer individuals continued to accumulate wealth by consuming less, while the less well-off spent more of their incomes on making ends meet, and were hit harder by austerity measures, particularly cuts in social spending and further privatization of public services.

The capture of politics by the economic elite

In this context, billionaires are thriving through their proximity to politics. Running the biggest raw-material, media and infrastructure companies of the country requires political influence; and contracts over former public assets are made available exclusively through government permissions. A number of strategies are applied by the respective elites: generating private profits from public goods by taking advantage of personal connections; entering and exiting through the ‘revolving door’ between business and politics; and sponsoring massive public infrastructure projects. The list can be extended to include channeling of illicit financial flows and stashing wealth in offshore havens; buying political influence by funding election campaigns; but also corruption and bribery.

Not all of the diverse strategies employed are illegal. But all of them – whether legitimate or not – lead to a situation where the economic and political elite become increasingly intertwined in their mutual dependence on, and support for, each other. Such mutual back-scratching makes both the investor and the politician richer in the process. It is also incredibly difficult to curb in a context where the public sector collects low revenues via the tax system and instead relies on exploitation of natural resources and privatization of formerly public infrastructure to generate revenue.

While the gains of growth are unevenly spread, so are the related threats. The poorest people are particularly at risk from the privatization of natural assets; for example, in Jakarta, Indonesia, the price for water increased from about $0.13 to $0.54 per cubic meter after privatization. In Brazil and Mexico, indigenous peoples are disproportionately affected by the destruction of their living space when forests are eroded for mining or intensive large-scale farming. Massive dam projects in China and palm oil plantations in Indonesia see poor farmers and villagers pay the price, while private corporations reap the profit.

Economic affluence buys not only the power to influence the outcome – but also to rig the rules. In the BRICSAMIT, an economic system organized predominantly around increasing growth (rather than focused on citizen wellbeing as its prime goal) works alongside a political system in which aspiring politicians require vast resources in order to be successful when running in elections. Consequently, donors can exert significant influence over politicians and candidates, ensuring a favourable environment to pursue their interests after the elections.

At the same time, elite ownership and dominance of mass communication channels fosters a vicious cycle of political-cum-economic power, where public opinion can be dramatically swayed through the use of the media, and rules and laws can be bent according to the specific interest of influential sponsors. The monopolization of the media – and consequently the ability to influence public opinions and make or break political careers – is epitomized by the cases of Globo, which provides preferential airtime to conservative candidates in Brazil, and Televisa, which controls 70% of the Mexican television market and played an important role in the rise to presidency of Enrique Peña Nieto. In India, Mukesh Ambani holds majority shares of the country’s largest news broadcaster, Network18 Group.

The high cost of inequality

While powerful individuals and corporations continually bend the rules to their own advantage, the majority of the population that does not have direct links to executive power is largely excluded from the decision-making process – with devastating consequences on both individuals and society. Inequality permeates all areas of life and shapes every aspect of a society – effectively resulting in two-tier development that prevents the less well-off majority from ever catching up. While the rich can afford expensive private schools and hospitals, the poor have to rely on under-equipped public services – increasing their vulnerability and limiting their life chances.

High crime rates and elevated levels of impunity are intrinsically linked to socio-economic inequality, and create additional risks for everyone. Whilst the prison systems of BRICSAMIT countries are overflowing, those involved in high levels of corruption are rarely brought to justice. The vast informal sectors in most of the BRICSAMIT signify a lack of job and hence income security, as well as any possibility of social security, thus preventing poor people from making longer-term plans.

Disaggregating the UN Human Development Index (HDI) for BRICSAMIT countries according to income groups, we are faced with stark differences in developmental levels. Standards enjoyed by the highest quintile, i.e. the richest 20%, exceed average levels of even the most advanced nations, whereas the levels of the poorest 20% compare to those of the lowest-income countries.

Average levels disguise vast differences in life expectancy, both across our set of countries and compared to other developed nations. Collectively, the BRICSAMIT fare much worse than other rich countries: life expectancy ranges from 56.9 in South Africa to 77.3 in Mexico, compared to 83.6 in top-scoring Japan. In South Africa, the difference between life expectancy for the poorest 20% and the richest amounted to 19 years, in India 21, and in Brazil almost 26 years.

Vast differences between the top and bottom income groups also appear in education. Differences in quality of education, particularly between rural and urban areas, perpetuate the divides between the social strata. Turkey is one of three OECD countries that spends more on the education of its rich children than on its poor, while in Mexico, a worker on the minimum wage would need to work every day for 3.5 years just to cover the annual fees for private kindergarten.

Although in BRICSAMIT countries there have been advances towards greater gender equality in terms of health and to a lesser degree education, vast disparities continue to exist between women and men in the realms of income, labour-market participation and positions of political and economic power. In India and Turkey, the percentage of women’s income to men’s reaches 29% and 31% respectively (followed by Mexico with 46%).

rich2This accumulation of social inequalities in vulnerable groups is stifling social mobility. Poor parents cannot afford a good education or healthcare for their children, and rich people do not want to contribute more in tax to pay for public services, as they themselves don’t use these. In a context where close to 30% of the population is under 15 years old neglecting the prospects of youth thwarts the hopes, ambitions and potential of millions of people, depriving them of a better future and undermining development. A vicious cycle of inequality is created, where the drivers of disadvantage simultaneously become its consequences.

The way forward

A strong, autonomous and democratic citizenry is needed in order to hold BRICSAMIT governments and private sector accountable – and this role should be valued and strengthened by these governments. The international community has recognized that civil society organizations play a very important independent role as advocates of human rights, social justice and environmental sustainability, as well as in shaping development policies and in overseeing their implementation. The governments of BRICSAMIT countries now hold important positions as rising global powers, but civil society in our countries has not been able to emerge in the same way, and in some cases is increasingly restricted.

As such, we call on the governments of Brazil, China, India, Indonesia, Mexico, Russia and South Africa to:

  • Recognize civil society as an important stakeholder in the debate on curbing extreme inequality and progressing towards more inclusive and sustainable societies. Civil society brings the vital firsthand perspectives of people who experience poverty and marginalisation, as well as analysis of policy responses, and knowledge of what works and what does not work in terms of reducing inequality.
  • Re-frame the economic development model, and ensure that public interest, protection of human rights and reducing inequality forms the core of the developmental agenda. This applies both within our own countries but also in terms of the investment and cooperation model our countries are increasingly engaged in overseas, particularly in low-income countries.
  • Reform the regulatory environment, particularly around transparency in government. We need measures that restrict conflict of interest; to decouple business from campaign financing; cooling periods to close revolving doors between big business and government; and binding disclosure of personal gains and contributors – as well as the proper enforcement of these regulations.
  • Strengthen tax systems by filling loopholes for tax evasion and aggressive tax planning; increasing top income tax levels; and revising tax incentives for large corporations.
  • Recognize the problem of rapidly increasing wealth inequality, and thus apply a high-threshold wealth tax, in the form of inheritance tax, or a tax on capital gains. Such a tax would have considerable redistributive impacts, as well as fill the public accounts, which in turn provide resources for more effective social policies and provision of public services.
  • In order to enhance well-being across society and to reduce inequality, ensure there are more concerted efforts to provide public health care, education and social protection, allowing acrich3cess for everybody, particularly those who have been excluded in the past.

*Excerpts from the book “For Richer… Or Poorer: The Capture of Growth and Politics in Emerging Economies”, prepared with the assistance of Oxfam and European Union; edited by Thomas Dunmore Rodriguez and Jane Garton. Click HERE to download the book

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