Global Challenge 7

Global Challenge 7: How can ethical market economies be encouraged to reduce the gap between rich and poor?

Brief Overview

The Covid pandemic shrunk the global middle class by 150 million, and extreme poverty increased by approximately 100 million; nevertheless, extreme poverty fell (less than $1.90/day) from 51% in 1981 to 13% in 2012 to 8.5% today, mostly due to income growth in China and India. Over half the world will be middle class by 2030. Despite Covid impacts and war in Ukraine, extreme poverty is expected to continue to fall to 6.8% by 2030, but will not achieve the UN SDG of eliminating extreme poverty by that time, even though, official development assistance was the most in history reaching $204 billion in 2022. Covid reduced the global economic growth by 3.3% in 2020, but rebounded to 5.8% in 2021, before falling to 3.1% in 2022, and may average 3% in 2023-24. Inequality in Africa remains a serious threat to future stability, with four of the five most unequal countries in the world being in Africa. UNDP reports that 1.1 billion people in 110 developing countries are living in acute multidimensional poverty. Although the income gaps and concentration of wealth is increasing, poverty has decreased faster than many thought possible. But continued global warming, droughts, internal wars, and food and water shortages that contribute to increasing migrations could reverse this trend, along with future technological unemployment in the absence of government foresight. The average adult earns $23,380/year and owns $102,600 wealth.

The richest 10% owns 86% of the world’s wealth and the top 1% owns nearly 44% the world’s wealth. The annual income of the world’s wealthiest 10% is 52% of global annual income. Income gaps are widening, employment-less economic growth continues, return on investment in capital and technology is usually better than on labor, and future technologies can eventually replace much of human labor; hence, long-term structural unemployment and continued concentration of wealth seems inevitable unless new approaches to economics, investments, and the nature of work are created (See Chapter 4 of Work/Technology 2050: Scenarios and Strategies).

The world needs a long-term str    ategic plan to develop a global partnership between rich and poor. Historically, inequality has been addressed through such mechanisms as war, revolution, debt relief, legal system reforms, tax adjustments, and land redistribution. The G-7 has agreed that countries should establish a 15% minimum corporate tax.

Since artificial intelligence will reproduce and learn faster than humans, its universal proliferation seems inevitable. Algorithms are already out-performing humans in driving cars, face recognition, complex games, and even some forms of medical diagnosis. AI and other next technologies should lower costs of education, transportation, and medical care and should provide new tax income from taxing robots and other next technologies, making universal basic income financially sustainable possibly by 2030 (see scenarios in Chapter 4). Finland, Canada, and others are conducting pilot UBI experiments.

Although income gaps between rich and poor individuals are widening, the gap between nations is expected to continue to narrow. Emerging market and developing economies are growing around 4% annually, while more advanced countries are growing closer to 2.8%. GDP may be a more useful measure for industrial economies than information economies; for example, the millions of people searching billions of computer pages totaling more than a trillion searches per year are not counted in GDP. Given population growth at 1.11%, global income per capita grew at 12.13% in 2021 after shrinking 4.13% in 2020. The percentage of adults in developing economies with formal financial accounts grew from 42% ten years ago to 71% now.

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. 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.

Actions to Address Global Challenge 7:

  • Implement the G-7’s agreement for a global corporate 15% minimum tax.
  • Poorer regions should be assisted in investing more in developing finished products and “leapfrogging” to more advanced technology for export and extending local value chains instead of relying on income from exporting mineral and other natural resources, commodities.
  • onduct training programs on how to use mobile phones and Internet access to find and develop markets worldwide instead of looking for non-existent local jobs.
  • Raise minimum wages and address executive wages.
  • Consider new progressively equalizing instruments; e.g., wealth tax and revising inheritance laws.
  • Outlaw tax havens, that collectively cost governments $500 billion to $600 billion a year in lost tax revenue.
  • Conduct research for options to counter entrenched privilege.
  • Promote Decentralized Autonomous Organizations for an unlimited number of peer-to-peer ad hoc “workers.”
  • Explore guaranteed income programs, as next technologies may lead to long-term structural unemployment.
  • Create cash flow projections to explore financial sustainability of universal basic income.
  • Tax next technologies (e.g., robots, AI, synthetic biology) for new income to social support systems and create tax systems that ensure big business and wealthy individuals pay their fair share.
  • Tax carbon and international financial transfers to support global infrastructures and institutions.
  • Invest in Kickstarter-like crowd sourcing to reduce the concentration of wealth.
  • Business schools should teach synergetic analysis as well as completive analysis.
  • Explore alternative transaction systems like blockchain and cryptocurrencies (as of March, 2023 there were 22,904 cryptocurrencies with $1.08 trillion market capitalization).
  • Explore global workforce sourcing solutions that overcome immigration and migration barriers to allow qualified workers to move to locations where they can meet the vacant skilled labor requirements.
  • Expand micro-credit and small business credit systems and business training.
  • Establish community centers for self-employed to access advanced technologies like 3D printing, AI/robotics, AI apps, and receive training in their use.
  • Increase emphasis on science, technology, engineering, and mathematics in education, lifelong learning, and retraining.
  • Make higher education more easily available to all.
  • Create mechanisms to help people invest in automations that replace their job; e.g., truck drivers manage and invest into ownership of driverless trucks.
  • Create personal AI/Avatars to support self-employment.
  • Give greater attention to the frontiers for work related to the forthcoming biological revolution, which may be as large as, or larger than, the industrial or information revolutions.
  • Establish Labor/Business/Government Next Technologies databases.

Regional Considerations

Sub-Saharan Africa: Sub-Saharan Africa is the world’s second-fastest growing region, with the majority of the world’s fastest growing economies. If these trends continue, there could be one billion people in the middle class by 2060, up from 313 million people (34% of the region’s population) as of 2022. Sovereign Wealth Funds in Africa grew 76%, from 2015 to 2020, to reach $300 billion in 2020. Africa has over 40% of global reserves of cobalt, manganese and platinum and about 60% of the world’s best solar energy potential. Yet, current per capita income levels remain low due to population growth, dependency on commodities with fluctuating prices, lack of infrastructure, rampant corruption, and high-income disparities – 100,000 people hold 80% of the wealth, according to AfDB. The region’s middle class is expected to increase from 114 million in 2015 to 212 million in 2030. Half of the current middle class is significantly dependent on African diaspora; although remittances to the region dropped by 8.1% in 2020, they rose by 14.1% to $49 billion in 2021 – the largest increase since 2018 – and are highly facilitated by the adoption of mobile money transfer services.

The COVID-19 pandemic has compounded the enormous development challenges facing Africa. COVID-19 has pushed 40 million people in sub-Saharan Africa into extreme poverty, according to the World Bank, eroding many of the recent development gains. In addition, another 43 million people could be pushed below the poverty line by 2030 because of climate change. Reversing these trends will require unprecedented levels of investment to accelerate economic development and job creation.

Sovereign Wealth Funds in Africa grew 76%, from 2015 to 2020 to reach $300 billion in 2020. By 2030 sovereign wealth funds, plus strategic investment funds, pensions, and life insurance assets are estimated to total $2.3 trillion. The African Development Bank estimates it will cost $100 billion to provide universal Internet access by 2030, but could return $180 billion by 2025 and $712 billion by 2050. China is Africa’s largest trading partner, financier of infrastructure, and lender to its governments. Approximately 56.2 million hectares (4.8% of Africa’s agricultural land) is subject to land-grabbing, threatening the livelihoods of the already poor.

Middle East and North Africa:  The MENA region has extraordinary potential for development given its young workforce, oil-rich countries, and economically-strategic position — between booming Asia, fast-developing Africa, and advanced Europe. However, geo-politics across the region, volatility of oil prices, and slow pace of reforms impede a sustainable social and economic development. The Arab Spring created momentum for building a more open economy and democratic society, but economic reforms are slow or non-existent across the region. Structural reforms and change of mentality to develop opportunities and the entrepreneurial spirit of the youth, and to create a climate favorable to SMEs are imperative. Israel’s strong economic development continues thanks to a favorable entrepreneurship climate and great support to innovation. In some Arab countries, 50-80% of the workforce is employed by the public sector. Youth unemployment is about 25%; the Arab Labor Organization estimates that a 1% increase of unemployment rate reduces GDP by 2.5%. Egypt, Libya, Djibouti, Yemen, Lebanon, and Tunisia depend on Ukraine and Russia for at least 30% of wheat imports.

Asia and Oceania: The region accounts for about 70% of global GDP growth and only 3% of the world’s extreme poverty (less than $2.15/day) down from 22% in 2000, yet South Asia has 43% of the world’s higher poverty of $3.65/day in 2023. The gap appears widest in Malaysia and the Philippines, while the smallest is in Kazakhstan and Timor-Leste. More than half the region’s labor force works in the informal economy. Asia’s economy surpassed that of the EU or NAFTA and although the historic speed and volume of Asia’s economic growth has begun to slow, it remains a major factor in the geoeconomic transformation. Asia’s middle class is expected to grow from the 1.38 billion to 3.49 billion by 2030. The Regional Comprehensive Economic Partnership. (RCEP) trade agreement could draw up to 27 million people into the middle class by 2035. The largest increases in the middle class as a percentage of population in 2035 will be seen in Laos (1.72 %), Vietnam (1.59%), Indonesia (1.35%) and China (1.31%).

The informal economy remains widespread across Asia, with rates in some countries of South and South-East Asia up to 90% of total employment. ILO notes that over 90% of workers in China and India are without permanent contract. Four of the world’s largest remittance receivers are in Asia: India $111billion, China $51 billion, Philippines $38 billion, and Pakistan $30 billion. Increasing geopolitical tensions in the Asian region, plus corruption, organized crime, pollution, growing rich-poor divides, potentials for increasing shortages of water, energy, and food make continued poverty reduction difficult.

Although China brought more people (800 million) out of extreme poverty than any country in history, its youth unemployment rate has been increasing to at least 20% today. Its GPD growth rates have fallen over the past ten years, and the rich-poor gap has expended with a Gini coefficient 0.46 and more there are more than one million millionaires. India has reduced multidimensional poverty by 415 million people in the last 15 years. Since only 2% file tax returns in India, income gaps are estimates, such as that the top 10% earns 32.52% of total income, and extreme poverty decreased by 12.3% between 2011 and 2019. The middle class in India is about 30% and is expected to grow to 38% by 2031, and 60% by 2047.A new development actor in Inda is the Adani Foundation which is administering $7.7 billion for social development.

Europe: The top 20% of the EU makes five times as much as the bottom 20% in 2021. Its unemployment rate is 5.9% and “at risk of poverty” increased from 17.5% to 19.7%. Russia’s invasion of Ukraine is expected to reduce the region’s economy while increasing income gaps, inflation, and human insecurity. The EU is one of the richest regions in the world with a GDP expected to reach $16.8 trillion beginning in 2024, but concerns remain about eurozone countries’ debt and direction of fiscal policy. EU youth unemployment rate in June 2023 was 14.1%. The EU’s “Youth Guarantee” offered 24 million young people employment, continued education, apprenticeships or traineeships, and is credited with lowering youth unemployment.

With only 9.32% of the world’s population, the EU accounts for about 15% of the world economy (purchasing-power-parity), and the top 10% of the EU earning ten times more than the bottom 10%. Russia is one of the most unequal countries in the world: to top 1% has 23.8% of the pre-tax income; the top 10% has 46.2%; and the bottom 10% has 16.9% of the income. Low commodity prices, falling foreign investments, sanctions imposed since 2014, and restricted access to foreign loans and new technology make the prognosis worse.

Latin America: The region’s GDP fell -7.7% during 2020 due to the Covid pandemic,  and now growing at 2.5% in 2022, and forecast to 1.9% in 2023. Even though the region’s middle class has grown 50% over the past decade, it remains a highly unequal society, with the richest 10% receiving about 48% of total income versus the poorest 10% that is only getting some 1.8%, and with continued social segregation based on income, geographical area or indigenous status. Nevertheless, during the 2000s, inequality declined considerably, including between rural and urban incomes. About 32% of the region lives in poverty today. Over half the labor force works in the informal economy (1.4 billion of the 2.1 billion labor force). The share of people living below $1.25/day dropped from approximately 12% for the last two decades of the 20th century to 6% now. About $145 billion remittances flowed into the region in 2022 helping to reduce poverty, which is 32.1% in 2022 and 13.1% (82 million people) in extreme poverty.

North America: As of the first quarter of 2023, the top 10% of earners owned 69% of the wealth in the US, while only 2.4% of the wealth was owned by bottom 50% of the earners. Poorer and richer geographic areas increased their inequality by 40% between 1980 and 2021; the inequality is less when adjusted for cost of living. The infrastructure initiatives to get high speed internet to all is intended to reduce the geographic disparities and manufacturing growth is expected the keep unemployment low. Increasing minimum wages, tight labor markets, and increasing power of Labor Unions is expect the help reduce income inequalities. However, increased use of artificial narrow intelligence (ANI) is expected to reduce some jobs, while future artificial general intelligence (AGI) is expected to eliminate many or jobs. This may lead to more self-employment connecting to markets worldwide rather than local jobs, and increase the need for a universal basic income. Increasing profits at the expense of lower wages is not sustainable and undermines markets at home, as well as people’s confidence in the system.

Canadian income inequality has increased of the past 20 years. The wealthiest 20% in Canada own 67.8% of the wealth, while the poorest 20% accounted for just 2.7%. This gap increased 1.1% during the first quarter of 2023. Meanwhile poverty has been cut in half since 2015.

Other factors to consider:
Agriculture: is the second-largest source of employment in the world, with almost 35% of the workforce (over 1 billion people worldwide), but only 6% of global GDP.
Employment opportunities: While unemployment persists, many businesses lack qualified workers. Hence, a better collaboration is needed among the private sector, civil society, government agencies, and education institutions to create the human capital with the qualifications needed by today’s and tomorrow’s job markets.
Trade is an important instrument to reduce the economic gap among countries: Presently, a third of goods cross national borders, and over a third of financial investments are international transactions.
New measures of progress: New indicators that look beyond GDP are being developed, which measure progress and prosperity form multiple aspects, including social and economic inclusion, governance, and the environment. They help understand the interplay among various factors and assist policymakers with setting priorities, reshape economic policies, and improve governance. Some of the most popular new indicators considered are: Human Development Index, the Better Life Index, the Sustainable Governance Indicators, the State of the Future Index.