Global Challenges Facing Humanity

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7. How can ethical market economies be encouraged to help reduce the gap between rich and poor?

According to the World Bank, extreme poverty ($1.25/day) has fallen from 52% in 1981 to about 20% in 2010, while the world population increased from 4.5 billion to nearly 7 billion. The world has achieved the Millennium Development Goal of halving the rate of extreme poverty of 1990 before 2015. At this rate, however, about 1 billion people might be still living in extreme poverty in 2015, 50% of them being in fragile states. There were 1.94 billion people in extreme poverty in 1981. This fell to 1.29 billion in 2008. Those living at or below $2/day declined from 2.59 billion in 1981 to 2.47 billion in 2008. According to UNDP’s 2011 Multidimensional Poverty Index, about 1.65 billion people are living in poverty. OECD notes that despite development successes over the past 20 years, inequality is increasing in all countries and 1.4 billion people still live in absolute poverty.

World GDP grew at an estimated 3.2% in 2012 (considerably slower than the 4.6% IMF average forecast for 2011-2015), passing $83 trillion (PPP). The IMF notes that growth average was 5.1% for emerging market and developing economies and 1.2% for the advanced economies. The IMP projects a 3.3% world GDP growth for 2013, and 4% for 2014. The UN's mid-year revised World Economic Situation and Prospects 2013 is projecting world GDP growth at 2.3% 2013, and 3.1% in 2014. It notes that "several key risks and uncertainties remain, and, if not mitigated, could derail global growth again, as in the past few years."

Per capita income grew from $12,200 in 2011 to $12,400 in 2012 (CIA estimates.) The number of low-income countries has fallen from 63 in 2000 to 35 at the end of 2011. IMF projects a global growth of 3.5% in 2013, although significant risks remain, mainly in the euro area and in the U.S.

The G20 represented 87% of the world’s economy in 2011. The World Bank notes that the international capital flows to developing countries in 2010 rose to $1.1 trillion, out of which 73% went to 10 middle-income countries that represent 73% of developing countries’ gross national income. UNDP projects that by 2020, the combined GDP of Brazil, China and India will exceed the combined output of Canada, France, Germany, Italy, Great Britain and the U.S. Meanwhile, by 2011 the total external debt owed by developing countries increased to $4 trillion, of which 40% belonged to the BRIC group.
Over 50% of global GDP is generated in 600 urban centers, 400 of which are in emerging markets (200 in China alone). By 2030, the global middle class is expected to grow by 66%--about 3 billion more consumers with increased purchase power and expectations. Yet, the economic slowdown rose global unemployment to 9% of the 3.27 billion global workforce. The ILO estimates that some 75 million of the unemployed are young people aged 15-24, and 400 million new jobs would need to be created over the next 10 years to avoid a further rise in unemployment. OECD estimates that unemployment will remain close to 8% by the end of 2014, meaning that about 48 million people will still be out of work in the 34 OECD countries. The rates will vary from under 5% in Germany, to close to 28% in Spain and Greece, with young people continuing to be the most affected, with rates exceeding 60% in Greece, and around 52% in South Africa.
About 1.8 billion people find their livelihoods in the informal economy, generally lacking basic legal and social rights. Informal employment accounts for around 50% of employment in North Africa and in Latin America, 65% of employment in Asia, and 72% in Sub-Saharan Africa.

Agriculture still employs 36% of the world workforce, while its contribution to global GDP is only 6%, compared with 31% for industry and 63% for the service sector. The gap between rich and poor within countries continues to widen around the world as the ratio between wages and profit become dangerously imbalanced. The 1% versus 99% movement along with protests and strikes around the world question the integrity of financial leaders and the fairness of the current economic system, and they call for changes toward more sustainable prosperity. New indicators are being developed for measuring progress and prosperity and to redress financial stability by enhancing welfare.
Exports in 2011 increased to $18 trillion, led by China with $1.9 trillion. The developing economies’ share reached 47% for exports and 42% for imports, the highest ever on record. Major donors’ foreign aid to developing countries fell in 2011 by 2.7% from its peak in 2010, for a total of $133.5 billion. This was 0.31% of DAC’s combined GNP (less than half of the suggested 0.7%). Meanwhile, the South-South cooperation increased to 10-15% of total official aid, although in real terms it is estimated to be much higher, as the valuation of their services tends to be lower than that of western contractors. Global remittance flows, including those to high-income countries, were $483 billion in 2011, and the World Bank expects this will exceed $593 billion by 2014, of which $441 billion will go to developing countries.

The 2012 State of the Microcredit reports that the number of very poor families receiving a microloan rose from 7.6 million in 1997 to 137.5 million in 2010, affecting more than 687 million people. This progress contributes to the goal of helping more than 175 million of the world’s poorest families get financial and business services and ensuring that 100 million families rise out of extreme poverty between 1990 and 2015. The UN estimates that a tax on international financial transactions might generate up to $250 billion per year, which could help offset the costs of the continuing economic, financial, fuel, climate, and food crises. The overall assets in the global shadow banking system had seen a rapid increase, rising from €20 trillion in 2002 to €52.5 trillion in 2011. The eurozone has the world's second largest shadow banking system after the United States, with assets worth some €17.2 trillion in 2011, while the US, in comparison, has €18 trillion.

The rapid increase of entrepreneurship, self-employment, SMEs, and global communications and an international division of labor that develop new forms of business governance and relationships all have the potential to raise living standards and reduce income disparities among nations. Goldman Sachs estimates that e-commerce might reach $963 billion by 2013. Approximately 1 billion people in 96 countries now belong to a co-operative, according to the International Co-operative Alliance. Since half of the world major economies are multinationals, these businesses play a crucial role in poverty alleviation and building a sustainable economic system.

The world needs a long-term strategic plan for a global partnership between rich and poor. Such a plan should use the strength of free markets and rules based on global ethics. Conventional approaches to poverty reduction (technical assistance and credit) that work in low- and middle-income stable countries do not work in fragile countries, which need stability first.
Ethical market economies require improved fair trade, increased economic freedom, a "level playing field" guaranteed by an honest judicial system with adherence to the rule of law and by governments that provide political stability, a chance to participate in local development decisions, reduced corruption, insured property rights, business incentives to comply with social and environmental goals, a healthy investment climate, and access to land, capital, and information. Direction from central government with relatively free markets is competing with the decentralized, individualized private enterprise for lifting people out of poverty.

The landscape of the geoeconomical power is changing rapidly as the influence of the BRICS and other emerging economies, as well as of multinational enterprises is rising. New geopolitical economic alliances are growing: the G20 is already G35+, while the Group of 77 now includes more than 130 countries encompassing over 60% of the world’s population. India launched the South-South Bank initiative in an attempt for the BRICS to create a new world financial system.
Challenge 7 will be addressed seriously when market economy abuses and corruption by companies and governments are intensively prosecuted and when the inequality gap—by all definitions—declines in 8 out of 10 consecutive years.

Regional Considerations

Africa: The African Development Bank notes that 313 million people (34% of the region’s population) are now middle-class, potentially rising to 1.1 billion by 2060. For the first time since 1981, less than half of sub-Saharan Africa’s population is living below $1.25/day. The rate decreased from 59.4% in 1993 to 47% in 2008. Sub-Saharan Africa has the highest Multidimensional Poverty Index and has about one-third of the world’s poor (473 million). Since by 2050, one in every three births will be African, and almost one in three children under the age of 18 will also be African, unless jobs creation increases considerably, poverty might be rampant. Since the late 1990s, much of Africa experienced 4-6% economic growth, yet per capita income levels remain low due to population growth and high income disparities--100,000 people hold 80% of the wealth, according to AfDB. Increasing commodity prices worldwide helped African oil exporters while having adverse effects on oil-importing countries. Foreign direct investment in Africa rose sixfold over the past 10 years and is forecast to reach $150 billion by 2015. China is Africa's biggest trading partner, with bilateral trade growing from $10.6 billion in 2000 to $160 billion in 2011 and expected to further expand. Intra-African trade continues to account for only 10% of exports on the continent and is too weak to be an incentive for changing trade patterns. This might change with the Continental Free Trade Area expected to be set in 2017. Remittances to sub-Saharan African were $23 billion in 2011. In recent years, there was an increase in the promotion of small and micro enterprises through policies and funds, but township and local innovation systems are also needed to help reduce the rich-poor gap. Approximately 56.2 million hectares (5% of Africa’s agricultural land) is subject to land-grabbing, further threatening the livelihoods of the already poor. Urban farming in the Democratic Republic of Congo is converting many unemployed people into small farmer entrepreneurs. The region's development continues to be impeded by high birth rates, increasing food prices, gender inequality, income and location biases, weak infrastructure, high indirect costs, corruption, armed conflicts, poor governance, environmental degradation and climate change, poor health conditions, and lack of education. There is a need to promote township innovation systems and local innovation systems to close the gap between the rich and the poor.

Asia and Oceania: China, Japan, and South Korea began negotiations for a Free Trade Agreement. This will be one of the biggest free trade areas, accounting for 20% of the world’s GDP and 19% of exports. A larger Asian economic integration with ASEAN, an Asian Monetary Union, and an Asian Union are also in discussion. In 2011, China and India continued their spectacular growth at 9.2% and 7.8% respectively, and are now the world’s second and third most powerful national economies. China reduced its poverty rate from 84% of population below $1.25/day in 1981 to 13% in 2008. Chinese economy is estimated to overtake the US and EU by 2030. In developing Asia outside China, although the rate dropped to 25% in 2008 from 41% in 1981, the number of people living in extreme poverty in 2008 remained around 1.1 billion. Chinese manufacturers are starting to outsource manufacturing to East Africa. South Asia has half of the world’s Multidimensional Poverty Index poor (827 million). World Bank forecasts remittances to Asia to grow from $191 billion in 2011 to over $240 billion in 2014. In the aftermath of the Fukushima nuclear disaster, Japan’s economy contracted 0.5%. Increasing pollution, water and energy problems, and the rich-poor gap threaten the future economic growth of developing Asia. Corruption, organized crime, and conflict continue to impede Central Asia’s development. Natural disasters and the effects of climate change are threatening the development and the very existence of entire Pacific communities. In the Middle East-North Africa region, youth unemployment is about 25% and nearly 5 million people are added to the workforce annually. The Arab Labor Organization estimates that a 1% increase of unemployment rate reduces GDP by 2.5%. The Arab Spring created momentum for building a more open economy and democratic society. Speculation is growing that the Asian economy might not realize the potential most have forecast and could stabilize at middle-income level, affecting the plans of many industrial nations to export products and services into the region.

Europe: The EU has the world’s highest GDP—$15,821 billion (PPP)—but growth was less than 2% in 2011, and concerns increase about eurozone countries’ debt and direction of fiscal policy. OECD is projecting that the euro area will remain in recession until early 2013, with a GDP contraction of 0.1% , before growth picks up to 1.3% in 2014. Discontent grows among the population as austerity measures increase inequality. Unemployed across the EU reached 10%, with 11% in the eurozone, where a total of 17.6 million people are out of work. The divide between the creditor countries in the north and the debtor nations in the south continues to widen. By November 2012, the euro area has fallen back into recession, but while Germany will manage to grow by 0.8% a year in 2012 and 2013, Spanish GDP is expected to fall by 1.4% in each year, and Greece GDP collapsing by over 4% in 2013. German unemployment will be less than 6% of the workforce in 2013; Spain’s will be nearly 27%. Some cite a lack of entrepreneurial attitudes combined with structural shortcomings of post-communist states that resulted in state-dependency attitudes among some social groups and young people in poorer areas. The eurozone leaders adopted a set of short- and long-term measures to save the euro and stimulate economic growth and are discussing several proposals, including a financial transaction tax across the eurozone, more centralized supervision of banks, and emission of eurobonds. The crisis also triggered negotiations over structural reforms, which might include a tighter political integration with more solidarity and concessions on fiscal sovereignty. As the financial crises threatens to get the block back into recession, 72% of the population believes that creating jobs and combating unemployment should be the block's top policy priority. Support for the EU unity also depends on the living standard: professionals and students are more likely to have a positive view of the EU; 65% of 'managers' are regarding their country's EU membership as 'a good thing' compared with 47% among blue-collar workers and 42% of the unemployed. Corruption is estimated at €120 billion a year (close to total EU annual budget), undermining the trust in the EU system as a whole. This is expected to be addressed by the new anti-corruption resolution adopted in September 2011. The EU countries contributed 54% of DAC ODA, and six eastern EU member states increased their foreign aid in 2011. The Stabilization Fund and revenues from oil and gas exports helped Russia recover from the global financial crisis better than expected. Its relations with CIS and the EU are strengthening. Tele-Montenegro is being created to connect Montenegrins outside of the country with the development process back home.

Latin America: Latin America has the most unequal society in the world, and the income share of the bottom 10% of the population remained at 0.9-1% of total income for the past 15 years. Nevertheless, the share of people living below $1.25/day dropped from 14% in 1984 to 6.5% in 2008. According to OECD, less than 4% of state revenue is generated by personal income taxes, compared with 27% in industrialized countries, while VAT is placing an additional burden on poor customers. The “shadow economy” is estimated to about 40% relative to the formal one. Argentina’s 8% was the highest economic growth in the region, while Brazil slowed down to 2.7%. Fiscal and economic reforms are improving stability, although country and regional policies increasingly focused on national interests and ethical behavior might affect future foreign investments.

North America: Despite its economic turmoil and slow GDP growth, the U.S. world economic domination will likely continue, thanks to its entrepreneurial spirit and innovative patent portfolio. However, its rich-poor gaps also continues; unemployment remains around 8%, while the ratio of labor compensation relative to business and national income reached a 50-year low. All growth in income during 2010 went to the wealthiest 10% of households, with 93% of it going to the wealthiest 1%. Increasing profits at the expense of lower wages is not sustainable and undermines markets at home. Canada’s economy is focused on resources, with no clear sustainability strategy. The livelihood of the over 400 remote communities in the boreal and Arctic regions remains problematic and unaddressed.

Graph: Economic Income Inequality (% income share of the richest 1%)

Graph using Trend Impact Analysis; it is part of the 2012 State of the Future Index computation (See Chapter 2, SOFI 2012)


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