Dickson Igwe. Photo: VINO/File

The following story begins with a review of an economics article by Philippe Aghion, Eve Caroli, and Celicia Garcia-Penalosa: “Inequality and economic Growth-the perspective of the new growth theories.”

Aghion, Caroli, and Penalosa use the Asian Pacific nations of the Philippines and South Korea as models of their theory: that inequality is bad for economic growth. In the early 1960s both countries shared similar GDP metrics. In terms of economic output, they were equals. However, in the Philippines, wealth inequality was 100% more than it was in South Korea.

Between the early 1960s and the early 1990s, over a thirty year period, South Korea grew at twice the rate of the Philippines. The Philippines with greater wealth inequality grew much more slowly economically. Today South Korea is a fully developed economy. The Philippines remains a developing nation.

Wealth inequality has always been a feature of developing economies. The Caribbean and Latin America are among the least equal regions of the planet. However, there is clear evidence that wealth inequality has increased steadily since the early 1970s in developed countries as well.

1% of the world’s population owns half of global wealth; 5% owns 90%. That 1%, especially in the USA controls access into the super wealthy club through control of the political and financial process.

Economists view wealth inequality from 2 perspectives. There is capital inequality. There is income inequality.

Wealth inequality researchers state that capital inequality is a crucial factor in the global wealth inequality paradigm. Capital wealth consists of assets that have the propensity to appreciate over time such as land and company stock. This wealth is frequently held by a minority of a country’s population. Capital wealth mainly takes the form of capital gains and land appreciation. It is wealth that is passed down from generation to generation.

Wealth in the form of capital gains is the main way to build up a family dynasty. In the Virgin Islands, land ownership is the most common form of capital wealth. In countries with a developed capitalist culture, corporate stock is the main form of wealth.

Income inequality on the other hand is the difference in income between different subsets of the working population. That income variable can be the difference in wages and salaries, or the income from assets such as rent, dividends and corporate profits. Income inequality is not as potent as capital inequality in creating wealth inequality.

In 1993, two economists, William Easterly and Sergio Rebelo presented research that showed that higher taxes on the wealthy, and social spending that impacted positively the middle class, had a positive effect on economic growth. On the other hand, economic policy that benefitted the wealthy alone, and that promoted wealth and income inequality, was bad for economic growth. That study has been widely accepted as accurate by economists. Paul Krugman, Joseph Stiglitz, and Thomas Piketty are three world famous economists who frequently write on the wealth inequality issue.

Of course there are counter arguments. Mainly, that inequality is necessary for wealth accumulation, in that it acts as an incentive to accumulate wealth, and that wealth redistribution through taxation limits economic growth by hampering productive effort. That argument is at the root of Supply Side Economic Theory.

Supply Side Economic Theory is producer oriented. It is contrasted with Demand Side Economic Theory that is consumer oriented, and that increasingly views the middle class as the main engine of economic growth. The poor and the middle class are the mass of a country’s population.

Contemporary economic thought appears to be winning the argument that wealth inequality is a limit on economic growth. Why: because middle class spending is hampered by too much concentration of wealth in the hands of a tiny fraction of a country’s population. The Opportunity Cost of the concentration of wealth in the hands of the 1% is the decline in consumer demand of the poor and middle class. This in turn leads to slow economic growth as demand for products and services in the economy declines.

Now, one feature of inequality that is clearly a feature of the British Virgin Islands is the inadequacy of capital markets in the country. There is also an inadequacy of credit markets. Access to share capital, local and international, is limited to a tiny minority of highly skilled knowledge workers who understand the nature and nuances of stock, currency, and commodity markets. Credit markets are limited by the number of banks in the country. These banks are controlled by policy that emanates from their head offices in foreign capitals.

Another factor in wealth and income inequality in the British Virgin Islands is the fact that for the vast majority of residents, labour income, or income from the job, is the main source of personal and household income. Income from labour is not as potent in creating wealth inequality as income from capital.

Globalization and technology is another factor in wealth and income inequality. Trade flowing into the country brings new technologies and new ideas. However, the educated and skilled benefit most from these inward flows of technology and knowledge. In other words, the educated and skilled are always at a greater advantage to increase their wealth from the global economy. This is another factor in wealth inequality. Technology allows the skilled to increase income and wealth over and above workers that are unskilled and uneducated.

One way of correcting this imperfection is through the education process. Education is a powerful platform that lifts the working and middle class. Possessing relevant skills and education increases career and job mobility. Education also increases transference of skills across career lines.

Another is the establishment of capital markets that are equitable and transparent. That entails independent regulation of stock exchanges and various wealth funds. It also means that businesses that want to trade on a national stock exchange open their books to scrutiny, and accept greater probity into their affairs.

One reason for the skepticism in the British Virgin Islands over various wealth creation schemes is the absence of an effective and accessible capital market. The absence of a local stock exchange, widely accessible national wealth fund, and a stock exchange regulator, hampers investment opportunity by the large mass of the population.

The presence of a stock market that is well regulated, that allows for transparency, accessibility, and probity, would end the cynicism over certain investment schemes. Companies trading in a stock market would have to open up their books and allow greater intrusion into their affairs. A rigorous regime of that type could well see the introduction of a much more widespread culture of share and capital ownership in the Virgin Islands.

To be continued

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