From crisis to resilience: why inequality matters | Anuradha Seth

17 Aug 2012

Women grow rice in Kanchipuram, a small rural town about 75 km from Chennai in India Kanchipuram is a small rural town about 75 km from Chennai in India. Its economy is heavily dependent on tourism, but a cooperation of women to grow their own food is helping the community to move forward. Photo: UNDP IPC-IG/Isa Ebrahim Ali

Global financial and economic crises now occur so often they appear to have become a systemic feature of the international economy.

We need now to rethink what’s behind these crises, recognize their unique impact on developing countries, and find ways to make these emerging economies more resilient in the face of serious shocks.

One approach views currency, debt, or banking crises as driven mainly by fragile, imbalanced financial systems in developing economies. But this assumes markets are self-regulating and inherently efficient, which is open to question in many instances.

Another focuses on identifying structural causes and the channels through which economies are exposed to crises. This approach regards the growing export-dependence of many developing countries as increasing their vulnerability to economic and financial shocks, although experts disagree on the specifics.

But rising income inequality also poses major risks.

The world’s richest five percent now earn in 48 hours what the poorest earn in a year. This staggering escalation in inequality fosters inefficiency, instability, risky investment behavior, and lower overall productivity.

Understanding the links between income surging inequalities and worsening financial and economic crises is central to crafting policies that build resilience and promote less volatile growth.

Income inequality reduces the purchasing power of middle- and low-income households, reducing total demand, while the search for high-return investments by those who benefit from inequality leads to the emergence of asset bubbles. Poor regulation and loose monetary policy further fuel financial instability and lower economic growth.

Coping with crises only after they erupt limits options for concerted action to tackle inequality and craft the longer-term policies needed to build systemic resilience.

The recent and lasting economic and financial crisis offers a chance to comprehensively assess macroeconomic vulnerability in developing countries. We must find new ways of shoring up capacity to withstand shocks, while advocating global coordination aimed at minimizing the frequency and severity of global crises. And we need to do it now.

How can we ensure sustainable economic growth and minimize crisis risk?