Elite agree that widening inequality dampens profits

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br davos2a Reuters World Economic Forum attendees say growing inequality must be reversed for economic as well as moral reasons. Photo: Reuters

Davos - Reducing inequality is usually the business of protesters at the World Economic Forum in Davos. This year, it was the buzzword for the business elite worried about their bottom lines.

As widening income disparity becomes a dominant theme at the annual meetings in the Swiss ski resort, business and financial leaders are making the case that a reversal of that multidecade trend is needed as much for business and economic interests as for social and moral reasons.

Failure to narrow the gap risks robbing economies of demand and threatens banks and big businesses with political and regulatory backlashes if voters rebel at squeezed wages.

A poll of Bloomberg subscribers released last week found 58 percent viewed income disparity as a brake on economic growth, with 68 percent urging governments to confront the problem.

“There’s a growing recognition that it isn’t just an issue you care about because it’s an issue you should care about,” John Veihmeyer, the chairman and chief executive officer of accounting firm KPMG, said in Davos. “It has a very big impact on economic recovery around the world.”

Others aren’t persuaded that the talk of Davos Man and Woman amounts to more than that.

“I don’t sense yet a deep transformation on their part,” said Jeffrey Sachs, an economist at Columbia University. “They should be worried,” he said. “Unequal societies perform worse on many measures.”

Eroding demand

Failure to mitigate the income gap risked undermining economic demand and brewing more populist pressures on governments to protect voters, said Tim Adams, the president of the Institute of International Finance, which represents more than 400 financial firms.

“The more wages become stagnant, the more pressure there is to find solutions to growth,” Adams said. “If workers don’t have sufficient income they cannot be consumers.”

Inequality emerged as a key topic of debate in Davos as signs that advanced economies are accelerating helped to ease the concerns of past meetings. The discussion refocused on who may be left behind in the recovery as globalisation raises competition and technology makes some jobs obsolete.

“There’s been a sigh of relief on the economy, which is looking a little better, but one now needs to watch the politics,” said David Rhodes, a senior partner at The Boston Consulting Group. “With wages not keeping up with inflation, there’s a politicisation of the economic recovery, which is leading to business unfriendly policies.”

Income share

The richest 10 percent of Americans earned a larger share of income in 2012 than at any time since 1917, according to Emmanuel Saez, an economist at the University of California at Berkeley. Those in the top one-tenth of income distribution earned at least $146 000 (R1.6 million) in 2012, almost 12 times what those in the bottom tenth made, Census Bureau data show.

The US is not alone among rich nations. A study by UBS, Switzerland’s biggest bank, found last month that Gini coefficients, a popular measure of inequality, had also increased in the UK, Japan and France since 2005.

Speaking at a panel sponsored by HSBC Holdings, John Lipsky, a former first deputy managing director of the International Monetary Fund, noted labour’s share of gross domestic product was now at historic lows while the share of corporations was at the highest.

“It’s not a business issue,” Morgan Stanley chief executive James Gorman said.

“This is a moral and society issue. Businesses work on behalf of their shareholders with proper governance, regulated by a regulator. This is a broader society issue.” - Bloomberg


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