Economics and Wealth

Global Challenges excerpt from the 2010 State of the Future report

The Rich-Poor Gap

How can ethical economies be encouraged to help reduce the gap between rich and poor? [Challenge 7]


The Rich-Poor Gap

How can ethical economies be encouraged to help reduce the gap between rich and poor? [Challenge 7]

 -- Brief Overview --

According to the IMF the world economy shrunk by 0.6% during 2009, per capita income fell about 2% to $10,500, and global unemployment reached 9%. Nevertheless, the world still appears to be on track to halve the 1990 poverty rate (except in sub-Saharan Africa) by 2015. If the crisis and recession had not occurred, the world economy might have been 7% larger and 90 million people might not have fallen into extreme poverty by the end of 2010. The IMF estimates a 4.2% growth in 2010. Much of this recovery is led by the developing world, with expected growth of 6.3% in 2010 and 6.6% in 2011–13, compared with growth in advanced economies at 2.3% and 2.4% in those years. The contribution of BRIC to world GDP in 2009 was over 23.5%, while a growing middle-class in developing countries opens new markets.

By 2015, the IMF expects unemployment to be 6.2% in advanced economies and 5.4% in emerging and developing economies. The World Bank estimates that the number of people living on less than $1.25 a day might be about 1 billion in 2015 and 826 million in 2020, while those living on less than $2 a day might be 2.06 billion and 1.92 billion respectively.

The 2009 net ODA from DAC countries was $120 billion and is expected to grow to $126 billion in 2010. Remittances account for 20% of GDP in some countries. These fell by an estimated 6% in 2009, to about $317 billion, and are expected to grow by 2% in 2010. UNCTAD forecasts FDI inflows to recover and grow from $1 trillion in 2009 to $1.8 trillion in 2011. While FDI flows to developed countries continue to decline (falling 41% in 2009), FDI between developing countries (South-South) is growing rapidly.

The WTO forecasts world trade to grow 9.5% in 2010, after a 12.2% drop in 2009. In 2011, the trade balance of emerging and developing economies might reach $663.5 billion, while that of advanced economies could further deteriorate to –$423.9 billion. By 2015, the account balance of emerging and developing economies is expected to grow to $769 billion. The high tech–low wage conditions of China and India make it very difficult for other developing countries to compete; hence, developing countries should rethink their export-led growth strategies.

Structural imbalances in world trade have to be corrected to assure fair competition, respect of human rights, labor and environmental standards, as well as efficient management of the global commons and prevention of monopolies. China's monetary policy adjustments could help other countries' economic development and access to world markets.

Although agriculture employs 37.5% of the labor force, its contribution to GDP is barely 6%. If the WTO eliminated agricultural export subsidies, developing countries would gain $72 billion per year according to UNDP. Since 1976, microfinance institutions provided loans to over 113 million clients worldwide. Financing to the private sector by the MDBs increased from less than $4 billion 20 years ago to $40 billion in 2009, while the IFC mobilized $14.5 billion in new investments in private companies in developing countries. However, strengthening of anti-trust agencies, easy regulations, and favorable taxation system are fundamental for small- and medium-sized businesses development.

Direction from central government with relatively free markets is competing with the decentralized, individualized private enterprise for lifting masses out of poverty. New indicators for measuring progress and economic development are being developed to help managers move from short-term profit-based strategies to long-term viability. The world needs a long-term strategic plan for a global partnership between rich and poor to improve economic security and create 50 million jobs per year over the next 10 years in developing countries. Such a plan should use the strength of free markets and rules based on global ethics. Ethical market economies require improved fair trade, increased economic freedom, a "level playing field" guaranteed by an honest judicial system and by governments that provide political stability, a chance to participate in local development decisions, business incentives to comply with social and environmental goals, a healthy investment climate, and access to land, capital, and information. An alternative to trying to beat the brain drain is to connect people overseas to the development process back home by a variety of Internet systems. Technical assistance to leapfrog into new activities via tele-education and tele-work should be coupled with microcredit mechanisms for people to seek markets rather than non-existent jobs.

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 years.

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