Opinion

Story of a fraying capitalism

It is not an accident, Piketty says, that many will be left behind even as others become richer. The book taps into a collective anxiety, coming as it does amidst the lingering after-effects of the global crisis and slowing global growth.

By: and Date: June 6, 2014 Topic: Global Economics & Governance

This opinion was published by the Indian Express.

French economist Thomas Piketty has written a scholarly tome with the humdrum title, Capital in the 21st Century. The book has become an overnight sensation because Piketty documents an inherent tendency for ever-increasing inequality of income and wealth in capitalist economic systems. It is not an accident, he says, that many will be left behind even as others become richer. The book taps into a collective anxiety, coming as it does amidst the lingering after-effects of the global crisis and slowing global growth.

India’s capitalist dynamic — as in other emerging economies — is different from that in the richer countries that Piketty focuses on. Yet, the lessons Piketty offers should ring a cautionary bell. Indeed, even more so than in the rich countries, India could find itself in a low growth, high inequality and high insecurity trap. These are the real fears that bubble under the theatrics and ugliness of the ongoing political debate.

Piketty is not an anti-capitalist. He sees capitalism as central to the innovation and entrepreneurial risk-taking needed for economic growth. But, using conventional tools of economic analysis, he warns that there is no automatic, ultimately benign, broad sharing of income and wealth over the development process. Rather, greater inequality — which perpetuates itself over generations — is the more likely outcome. And deepening inequality can fray capitalism’s virtues.

Piketty finds that countries are on the path to “patrimonial capitalism”, with inherited wealth increasingly concentrated in few families. As long as the rich earn a return on their wealth that is somewhat greater than the country’s growth rate, inherited wealth will rise relentlessly faster than national income. This process was interrupted, and reversed, in the first half of the 20th century, because the two World Wars destroyed private wealth and then helped create the political basis for the welfare state. But, over the past three decades, the wealth-to-income ratio has steadily recovered much of the lost ground and looks set to keep rising.

The US was historically different from Europe, with a much lower role for inherited wealth. But in recent decades, it has been a leader in rising income inequality, owing to a combination of soaring salaries for “supermanagers” and rising returns on capital for the richest. These large incomes are being turned into inherited wealth, generating entrenched privilege as in Europe at the beginning of the last century. All the while, for those at the bottom of the rung, it is becoming increasingly difficult to climb the economic and social ladder. As wealth and politics reinforce each other, equality of opportunity is a fading myth.

India is at risk of forging a potentially more pernicious form of rentier capitalism. Growth in the past few decades has brought gains to most, including the poor. But there is unmistakable evidence of rising concentration of income and wealth at the very top. Piketty and Abhijit Banerjee of the Massachusetts Institute of Technology find that the share in taxable income of the very-very rich (the top 0.01 per cent) was about 2 per cent in 1999. That brought the concentration of wealth back almost to the levels prevailing in the 1920s, the era when the maharajas cornered income and wealth.

While the Indian calculations do not extend beyond 1999, all indicators point to a stepped-up rise in inequality along the same pattern as in the US and Argentina. The “booming” 2000s witnessed the emergence of Indian billionaires, up from five in the late 1990s to 55 in 2014. The ratio of billionaire-wealth-to-GDP has risen from negligible levels to the 8-10 per cent range, comparable to that in the US and the UK. Add to this soaring land values in urban and peri-urban areas, some of it benefiting lucky farmers, but much of it captured by the wealthy and influential, often in deals between politicians and businesses.

While superficially similar to that in other countries, the rise in Indian inequality reflects more pernicious forces. Government contracts and relationships play a central role in fostering India’s wealth accumulation and concentration. Influence and connectivity create access to land, construction and mining permits and so-called “public-private partnerships”. Piketty is primarily concerned that if wealth mainly passes from one generation to another, the incentives to invest and grow will be undermined. More injurious, however, than such patrimonial capitalism is India’s rentier capitalism. The lure of easy money through investment in political connections draws entrepreneurship away from productive investment and innovation while it breeds corrosive social consequences.

India is in a political crucible. As the few with access are extracting resources from the state, the popular demands for broader social provisioning are rising. The unmet demands rouse ang er and create a perennial hunger for such elusive heroes as Anna Hazare and Arvind Kejriwal.

In the middle of the last century, Europe and America addressed the social and political conflict — to varying degrees — through the rise of the welfare state. But that option is not open to India, where the government lacks the capacity to collect sufficient revenues and is not organised to deliver adequate social services. This impasse, in a theme resonant with Piketty, will not automatically resolve itself. Indeed, precisely because the government cannot provide adequate safety nets, the populist demands become more insistent. This feeds back, at best, into symbolic gestures with little real value. At worst, the symbolic gestures become the grazing ground for more cronyism.

It is possible to imagine technical solutions to pull out of this trap with sound regulation, effective taxation and smarter delivery of social services. But that will require a different politics and a different bureaucracy. None of the major political platforms, caught up in their own pettiness, have the vision to deal with these challenges.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article More on this topic More by this author

Opinion

How could Europe benefit from the US-China trade war?

Under pressure from the US, Beijing is set to be more open to making new allies.

By: Guntram B. Wolff Topic: Global Economics & Governance Date: October 18, 2018
Read about event More on this topic

Past Event

Past Event

Asia-Europe Economic Forum 2018 - Public

This year's Asia-Europe Economic Forum (AEEF) will be held in Brussels on 17-18 October

Speakers: Chung Chul, Xie Fuzhan, Matthias Helble, Jyrki Katainen, Jin Keyu, Jae-Seung Lee, Erik van der Marel, Yoichi Otabe, Jean Pisani-Ferry, Rintaro Tamaki, Amb. Karsten Warnecke and Guntram B. Wolff Topic: Global Economics & Governance Location: Solvay Library, Rue Belliard 137, 1000 Bruxelles Date: October 18, 2018
Read article More on this topic More by this author

Podcast

Podcast

Backstage: The new balance of Asia-EU-US trade relations

Amid the Asia-Europe Economic Forum on the fringes of the 12th ASEM Summit, Bruegel senior fellow hosts a conversation on developing global trade relations, with guests Moonsung Kang, professor as Korea University, and Michael G. Plummer, director at SAIS Europe – Johns Hopkins University, for an episode of the Bruegel Backstage series on ‘The Sound of Economics’.

By: The Sound of Economics Topic: Global Economics & Governance Date: October 17, 2018
Read article More on this topic More by this author

Opinion

Can Eurozone Reform Help Contain Trump?

The Trump administration knows that a key source of US economic leverage is the dollar’s role as the world’s dominant reserve currency. Countering America’s disproportionate power to destabilize the global economy thus requires reducing the share of international trade conducted in dollars.

By: Jochen Andritzky Topic: Global Economics & Governance Date: October 17, 2018
Read about event More on this topic

Past Event

Past Event

Asia-Europe Economic Forum 2018 - Closed-door

This year's Asia-Europe Economic Forum (AEEF) will be held in Brussels on 17-18 October

Speakers: William Becker, Franco Bruni, Zsolt Darvas, Andreas Esche, He Fan, Michael G. Plummer, Thomas Grjebine, Gao Haihong, Kiyoto Ido, Sébastien Jean, MA Jun, Moonsung Kang, Stefan Mair, Yung Chul Park, Choonsung Park, Sayuri Shirai, Guntram B. Wolff and Naoyuki Yoshino Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 17, 2018
Read about event

Upcoming Event

Nov
7-9
09:30

Global Think Tank Summit 2018

The 2018 Global Think Tank Summit is organised by Bruegel and he Think Tanks and Civil Societies Program (TTCSP) of the University of Pennsylvania. It will be held in Brussels on 7-9 November.

Topic: Energy & Climate, Global Economics & Governance Location: Bozar, Rue Ravenstein 23, 1000 Bruxelles
Read article More on this topic More by this author

Opinion

Global markets’ tepid reaction to China’s new opening

China’s accession to the World Trade Organisation in 2001 was greeted with great fanfare. But near silence has greeted the recent removal by the China Banking and Insurance Regulatory Commission of caps on foreign ownership of Chinese financial institutions. For Beijing, the apparent lack of interest might be an issue of too little, too late.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: October 11, 2018
Read article Download PDF More on this topic

External Publication

The EU response to US trade tariffs

The authors contributed to the new issue of 'Intereconomics - Review of European Economic Policy' with a paper on the EU's strategy for managing the trade war. The authors argue that to minimise the economic costs of the trade war and protect multilateralism, the EU's best and only response is to retaliate.

By: Maria Demertzis and Gustav Fredriksson Topic: Global Economics & Governance Date: October 11, 2018
Read article More on this topic More by this author

Blog Post

Are economic and political freedoms interrelated?

Democracy has not always accompanied market economy. But in modern societies, economic and political freedoms are increasingly interconnected. Democracy and market economy can support each other. This is particularly true in post-communist economies of Central and Eastern Europe and the former Soviet Union. Thus, authoritarian tendencies observed in these and other regions can negatively affect quality of economic policy and governance.

By: Marek Dabrowski Topic: Global Economics & Governance Date: October 10, 2018
Read article More on this topic More by this author

Opinion

Ten years after the crisis: The West’s failure pushing China towards state capitalism

When considering China’s renewed state capitalism, we should be mindful of the damage done by the 2008 financial crisis to the world's perception of Western capitalism.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: October 10, 2018
Read article More by this author

Blog Post

Financial panic and the Great Recession

A debate on the roles of financial panic in the Great Recession has been pitting Ben Bernanke against Paul Krugman in what has been characterised as “the battle of the beards”. Other economists have joined the discussion on the new American Economic Association’s discussion forum.

By: Silvia Merler Topic: Finance & Financial Regulation, Global Economics & Governance Date: October 8, 2018
Read article More on this topic More by this author

Podcast

Podcast

Backstage: Implications of the new EU-Japan trade deal

Bruegel senior fellow André Sapir welcomes Tamotsu Nakamura, dean of Kobe University’s Graduate School of Economics, and Maria Åsenius, head of cabinet to European trade commissioner Cecilia Malmström, for a discussion of the EU-Japan economic partnership in the context of heightening global trade tensions.

By: The Sound of Economics Topic: Global Economics & Governance Date: October 4, 2018
Load more posts