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Perspectives on Global Development: Shifting Wealth and Social Cohesion

7 Jun 2011

To view the entire presentation, use the links on the right.

Following the most recent financial crisis, emerging and developing economies have experienced faster rates of growth than developed economies. While this has decreased inequality between countries, within most countries wealth remains concentrated in the hands of a few. Profit margins might be on the rise, but wages are not. Nor are people’s perceptions of their well-being, or their satisfaction with their life chances. Such patterns pose serious challenges to social cohesion.

But according to Johannes Jütting, patterns of shifting wealth also open up opportunities for strengthening social cohesion. Jütting, from the OECD Development Centre’s Poverty Reduction and Social Development Unit, participated in the UNRISD Seminar Series on 20 May with a talk based on the organization’s Perspectives on Global Development 2011 report.

The report, titled “Shifting Wealth: An Opportunity for Strengthening Social Cohesion”, has three main messages. First, shifting wealth provides new opportunities as more resources become available and the focus shifts to converging or emerging economies. Second, it also comes with risks—old challenges such as informality and weak state capacity and new challenges as China, for example, witnesses the failures of the trickle down effect. And third, these challenges lead to an ever-increasing demand for strengthening cohesion, which calls for a more holistic approach and shared responsibility. “We strongly believe that all stakeholders of civil society should take their part, the shared responsibility,” Jütting said. For him, social cohesion is not exclusively a project of the state.

James Wolfensohn, former president of the World Bank, introduced the concept of a four-speed world in 2007. The first “tier”, in blue, is composed of affluent countries, which “for the last 50 years have maintained 80 percent of the global income while accounting for only 20 percent of the world’s population” (New York Times, 4 June 2007). The second tier, in green, is converging economies, with growth rates double that of OECD countries, whereas growth rates in the third and fourth tiers—struggling and poor—are far lower.

The maps paint a dramatic picture of change: 11 converging economies in the 1990s became 88 in the 2000s.

“Of course, the growth rate [of the OECD economies] in the 2000s was much lower, which made it easier to double,” Jütting conceded. Still, “It’s not the usual BRICs only, there are many other countries catching up. The change of growth patterns in this world is really amazing. We’re still trying to grapple with this story.”

Though the number of converging economies has skyrocketed, results from the Life Satisfaction Survey show that higher incomes do not translate directly to happiness.

“While income per capita was increasing, people, on average, felt that life wasn’t getting better,” Jütting said. “This is a very important message to drive home—that growth and human development don’t necessarily coincide with people’s assessment of their own situation.”

From 2003 to 2007, Tunisia’s annual 6 to 8 per cent growth benefited the population universally. But in the last four years, growth rates halved and only the elite prospered. This led to a widespread sense of dissatisfaction, of having fewer opportunities and of being worse off relative to others, helping to spark the Jasmine Revolution.

“What we argue in our report is that social cohesion works towards the well being of all members of society,” Jütting said, “because it creates a sense of belonging and trust, and tries to minimize marginalization between and within different groups.”

In a context of shifting wealth, the report puts social cohesion forward as a policy framework that can address the challenges related to labour markets, social protection, fairer taxation and civic participation, among others.

There are three aspects of social cohesion, two of which are well known. The first is social inclusion, which Jütting defined as how people perceive themselves, “Assess yourself, are you poor or not?” he asked. The second is social capital, which is based on trust and participation in society. The third is social mobility. “If a society is concerned about social cohesion, it also has to be concerned about people being mobile, to be able to move up. This can be perceived or real. One way to measure this is by looking at the correlation of parent-child educational differences.”

Fiscal policies with an aspect of social inclusion are one way countries can promote patterns of growth that are more successful, sustainable and equitable.

Tax policies in developing countries are often regressive, inefficient and lacking in transparency. Informal economies do not contribute to tax revenue. Tax funded programmes do not provide uniformly good service. In developing countries such as those in Latin America, there is almost no difference in inequality (as measured by the Gini coefficient) before and after taxation; fiscal policy is not redistributive. “You can see the benefit of the progressive taxes in place in the OECD countries,” Jütting said.

While OECD countries generally pay more taxes, their residents are less likely to defend tax evasion. The opposite is true in non-OECD countries. For example, in Sweden, which has an almost 50 percent tax rate, only 15 percent justify tax evasion, while in El Salvador, whose tax rate is just 15 percent, more than 50 percent justify tax evasion. Jütting argued that higher tax morale correlated with greater social cohesion.

“What needs to change for social cohesion to become a framework for policy making?” Jütting asked. “We need a holistic approach and policy coherence; a broader focus that includes the emerging middle class (and not only the poor); to address discrimination in social institutions; and to take advantage of new learning tools.”