December 23, 2013 8:25 pm

Capitalism: In search of balance

While the income gap in industrialised societies grows inexorably wider, global inequality is shrinking

Pope Francis and President Obama©AP

When Pope Francis issued his first apostolic exhortation in November, he took aim at modern capitalism for encouragingidolatry of money” and growing inequality in the world.

While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by the happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation,” the Pope wrote in Evangelii Gaudium (The Joy of the Gospel).

His words resonated with many people who face the seemingly inexorable rise of the richest 1 per cent and income stagnation among the middle class in advanced economies. For the world as a whole, however, the Pope was wrong on both counts. Not only has income distribution become more equal but capitalism can take the credit.

The same forces that have hollowed out manufacturing and clerical jobs in the US and Europe have lifted hundreds of millions of people out of poverty in China and India. They have made western economies far more unequal, while tilting the global balance towards equality. The winners are factory workers in China and India; the losers the western middle class.


To enlarge graph click here

The pressures of inequality have been building in industrialised societies for two or more decades but the combination of the 2008-09 financial crisis and the inflated fortunes of the elite have reinforced them. The economic democracy of the mid-20th century is giving way to a distribution of wealth more like Edwardian or Victorian times.

Straightforwardly, it’s about capital and labour,” says Tony Atkinson, centenary professor at the London School of Economics. “We are seeing all sorts of change that have benefited capital. That tends to equalise global wages, which means reducing them in rich countries.”

The tensions are exacerbated by inequality between generations. Postwar baby boomers enjoyed greater prosperity than their parentssteadily rising incomes, strong welfare states and defined benefit pensions.

Those born in the 1970s and 1980s have fewer benefits, face stagnating incomes in mid-career and must borrow more to buy expensive houses.

President Barack Obama noted in a recent speech: “As good manufacturing jobs automated or headed offshore, workers lost their leverage, and jobs paid less ... The top 10 per cent no longer takes one-third of our income – it now takes half. Whereas in the past, the average chief executive made about 20 to 30 times the income of the average workers, today’s CEO makes 273 times more.”

. . .

Yet the rise of China and Indiatwo poor but populous countries – has made global inequality (measured by the disparity in individual incomes, regardless of where people live) less pronounced. The world’s Gini index of inequality fell between 2002 and 2008perhaps for the first time since the Industrial Revolution – and the growth of Indonesia and Brazil is pushing in the same direction.

China is like a sumo wrestler who is fighting against global inequality,” says Branko Milanovic, lead economist at the World Bank. “He is standing up against all the rest of the forces, but he is a big guy. Now, India has become a second sumo wrestler.”

Those changes are seen in Chart 1 (see pop-up chart), which shows that two groups in the world did well between 1988 and 2008, achieving the highest real increases in their income.

The first was the rich – the top 10 per cent of earners and, within that, the 1 per cent. The other gainers were in the mid-tier – workers in emerging economies who were moving out of poverty.

The two groups that did worst were the very poorthose in the bottom 5 per cent, in sub-Saharan Africa and elsewhere, and the western middle classes, both in the US and western Europe and former Eastern Bloc countries. Their income rises did not match the luckier groups and, at the 75th percentile including the US middle classstagnated and even fell.

The rise in inequality in western nations is evident in Chart 2, which shows nations where the Gini index rose meaning greater inequality – between 2007 and 2010. That group includes the US and UK but also a range of European countries such as Italy, France and Spain.

The third chart shows the growing share of income taken by the upper US echelon. Work by Emmanuel Saez and Thomas Piketty, two economists, shows that the top 10 per cent of earners took about 45 per cent of income between the 1920s and 1940 but the share fell to about a third until the 1970s. Since then, aided by trade liberalisation and deregulation, it has risen sharply. The top 1 per cent have done best of all.

. . .

As Prof Saez notes, the top earners in the US are mostly not rentiers, living off income from wealth and property. Instead, they are the working richsuch as bankers and lawyers – and entrepreneurs who have not yet accumulated fortunes comparable to those accumulated during the Golden Age”. But he argues that this distinctionmight not last very long”.

That is also suggested by Charts 4 and 5, from the UK Institute for Fiscal Studies, analysing inequality between age cohorts. Chart 4 shows that adults born in the 1960s and 1970s – the post baby-boomers – are starting to undershoot the income of former generations at the same age. The pattern for today’s 40-year-olds is bleak, since their earning power peaked 10 years ago.

These 40-year-olds are likely to depend increasingly on inheriting wealth for a comfortable retirement. But Chart 5 shows that the well-off expect to inherit the most, while those on lower incomes expect little help. “Inequality that starts out as being between generations may end up within generations,” says Andrew Hood, an IFS research economist.

The tensions created by these trends are evident – from the Occupy protests against the “1 per cent” to trade and currency disputes between the US and China, and political pressure on global companies to pay more tax. President Obama has declared it “the defining challenge of our times”.

If so, it is a complex one. The forces producing the dispersion of income and wealth in western countries are hard to reverse. They are also the forces that have helped the emerging middle class of China, India or Brazil.

“The Pope loves everyone, rich and poor alike, but he is obliged in the name of Christ to remind all that the rich must help, respect and promote the poor,” wrote Pope Francis. “I exhort you to generous solidarity and a return of economics and finance to an ethical approach which favours human beings.” The question is: which ones?

Copyright The Financial Times Limited 2013.


All in play in the New Great Game

By Pepe Escobar

The big story of 2014 will be Iran. Of course, the big story of the early 21st century will never stop being US-China, but it's in 2014 that we will know whether a comprehensive accord transcending the Iranian nuclear program is attainable; and in this case the myriad ramifications will affect all that's in play in the New Great Game in Eurasia, including US-China.

As it stands, we have an interim deal of the P5+1 (the UN Security Council's five permanent members plus Germany) with Iran, and no deal between the US and Afghanistan. So, once again, we have Afghanistan configured as a battleground between Iran and the House of Saud, part of a geopolitical game played out in overdrive since the US invasion of Iraq in 2003 along the northern rim of the Middle East all the way to Khorasan and South Asia.

Then there's the element of Saudi paranoia, extrapolating from the future of Afghanistan to the prospect of a fully "rehabilitated" Iran becoming accepted by Western political/financial elites. This, by the way, has nothing to do with that fiction, the "international community"; after all, Iran was never banished by the BRICS, (ie Brazil, Russia, India, China and South Africa), the Non-Aligned Movement and the bulk of the developing world.

Those damned jihadis

Every major player in the Barack Obama administration has warned Afghan President Hamid Karzai that either he signs a bilateral "security agreement" authorizing some ersatz of the US occupation or Washington will withdraw all of its troops by the end of 2014.

Wily puppet Karzai will milk this for all it's worth - as in extracting hardcore concessions. Yet, whatever happens, Iran will maintain if not enlarge its sphere of influence in Afghanistan. This intersection of Central and South Asia is geopolitically crucial for Iranian to project power, second only to Southwest Asia (what we call the "Middle East").

We should certainly expect the House of Saud to keep using every nasty trick available to the imagination of Saudi Arabia's Bandar bin Sultan, aka Bandar Bush, to manipulate Sunnis all across AfPak with a target of, essentially, preventing Iran from projecting power.

But Iran can count on a key ally, India. As Delhi accelerates its security cooperation with Kabul, we reach the icing on the Hindu Kush; India, Iran and Afghanistan developing their southern branch of the New Silk Road, with a special niche for the highway connecting Afghanistan to the Iranian port of Chabahar (Afghanistan meets the Indian Ocean).

So watch out for all sorts of interpolations of an Iran-India alliance pitted against a Saudi-Pakistani axis. This axis has been supporting assorted Islamists in Syria - with nefarious results; but because Pakistan has also been engulfed in appalling violence against Shi'ites, Islamabad won't be too keen to be too closely aligned with the House of Saud in AfPak.

Washington and Tehran for their part happen to be once more aligned (remember 2001?) in Afghanistan; neither one wants hardcore jihadis roaming around. Even Islamabad - which for all practical purposes has lost all its leverage with the Taliban in AfPak - would like jihadis to go up in smoke.

All these players know that any number of remaining US forces and swarms of contractors will not fill the power vacuum in Kabul. The whole thing is bound to remain murky, but essentially the scenario points to the Central-South Asia crossroads as the second-largest geopolitical - and sectarian - battleground in Eurasia after the Levantine-Mesopotamian combo.

Zero energy from our neighbor?

As much as India, Iraq is also in favor of a comprehensive deal with Iran. And to think that Iran and Iraq might have been engaged in a silent nuclear arms race with one another at the end of the last century, just for Baghdad now to fiercely defend Tehran's right to enrich uranium. Not to mention that Baghdad depends on Iran for trade, electricity and material help in that no-holds-barred war against Islamists/Salafi-jihadis.

Turkey also welcomes a comprehensive agreement with Iran. Turkey's trade with Iran has nowhere to go but up. The target is US$30 billion by 2015. More than 2,500 Iranian companies have invested in Turkey. Ankara cannot possibly support Western sanctions; it makes no business sense. Sanctions go against its policy of expanding trade. Moreover, Turkey depends on inexpensive natural gas imported from Iran.

After deviating wildly from its previous policy of "zero problems with our neighbors", Ankara is now waking up to the business prospect of Syrian reconstruction. Iraq may help, drawing from its oil wealth. Energy-deprived Turkey can't afford to be marginalized. A re-stabilized Syria will mean the go-ahead for the $10 billion Iran-Iraq-Syria pipeline. If Ankara plays the game, an extension could be in the cards - fitting its self-proclaimed positioning as a privileged Pipelineistan crossroads from East to West.

The bottom line is that the Turkish-Iranian conflict over the future of Syria pales when compared with the energy game and booming trade. This points to Ankara and Tehran increasingly converging into finding a peaceful solution in Syria.

But there's a huge problem. The Geneva II conference on January 22 may represent the nail in the coffin of the House of Saud's push to inflict regime change on Bashar al-Assad. Once again, this implies that Bandar Bush is ready to go absolutely medieval - plowing the whole spectrum of summary executions, beheadings, suicide and car bombings and all-out sectarianism all along the Iraqi-Syrian-Lebanese front.

At least there will be a serious counterpunch; as Sharmine Narwani outlines here, the former "Shi'ite crescent" - or "axis of resistance" - is now reconstituting itself as a "security arc" against Salafi-jihadis. Pentagon conceptualizers of the "arc of instability" kind never thought about that.

Missile nonsense, anyone?

Adults in Washington - not exactly a majority - may have already visualized the fabulous derivatives of a Western deal with Iran by examining China's approval and the possibility of future Iranian help to stabilize Afghanistan.

For China, Iran is a matter of national security - as a top source of energy (plus all those myriad cultural affinities between Persians and Chinese since Silk Road times). Threatening a country to which the US owes over $1 trillion with third-party, Department of the Treasury sanctions for buying Iranian oil seems to be off the cards, at least for now.

As for Moscow, by coming with a diplomatic resolution to the chemical weapons crisis in Syria, Vladimir Putin no less than saved the Obama administration from itself, as it was about to plunge into a new Middle Eastern war of potentially cataclysmic consequences. Immediately afterwards, the door was opened for the first breach since 1979 of the US-Iran Wall of Mistrust.

Crucially, after the Iranian nuclear interim deal was signed, Russian Foreign Minister Sergei Lavrov went for the jugular; the deal cancels the need for NATO's ballistic missile defense in Central Europe - with interceptor bases in Romania and Poland set to become operational in 2015 and 2018, respectively. Washington has always insisted on the fiction that this was designed to counter missile "threats" from Iran.
Without the Iranian pretext, the justification for ballistic missile defense is unsustainable.

The real negotiation starts more-or-less now, in early 2014. Logically the endgame by mid-2014 would be no more sanctions in exchange for close supervision of Iran's nuclear program. Yet this is a game of superimposed obfuscations. Washington sells itself the myth that this is about somewhat controlling the Iranian nuclear program, an alternative plan to an ultra high-risk Shock and Awe strike to annihilate vast swathes of Iranian infrastructure.

No one is talking, but it's easy to picture BRICS heavyweights Russia and China casually informing Washington what kind of weaponry and material support they would offer Iran in case of an American attack.

Tehran, for its part, would like to interpret the tentative rapprochement as the US renouncing regime change, with Supreme Leader Ayatollah Khamenei paying the price of trading elements of a nuclear program for the end of sanctions.

Assuming Tehran and Washington are able to isolate their respective confrontational lobbies - a titanic task - the benefits are self-evident. Tehran wants - and badly needs - investment in its energy industry (at least $200 billion) and other sectors of the economy. Western Big Oil is dying to invest in Iran. The economic opening will inevitably be part of the final agreement - and for Western turbo-capitalism this is a must; a market of 80 million largely well-educated people, with fabulous location, and swimming in oil and gas. [1] What's not to like?

Peacemaker or just a trickster?

Tehran supports Assad in large part to combat the jihadi virus - incubated by wealthy sponsors in Saudi Arabia and the Gulf. So whatever the spin in Washington, there's no possibility of a serious solution for Syria without involving Iran. The Obama administration now seems to realize that Assad is the least bad among unanimously bad options. Who would have bet on it only three months ago?

The interim deal with Iran is the first tangible evidence that Barack Obama is actually considering leaving his foreign policy mark in Southwest Asia/Middle East. It helps that the 0.00001% who run the show may have realized that a US president globally perceived as a dancing fool engenders massive instability in the Empire and all its satrapies.

The bottom line is that Obama needs to respect his partner Hassan Rouhani - who has made clear to the Americans he must secure non-stop political backing by Khamenei; that's the only way to sideline the very powerful religious/ideological lobby in Tehran/Qom against any deal with the former "Great Satan". So "Great Satan" needs to negotiate in good faith.

A realpolitik old hand (with a soft heart) would say that the Obama administration is aiming at a balance of power between Iran, Saudi Arabia and Israel.

A more Machiavellian realpolitik old hand would say this is about pitting Sunni versus Shi'ite, Arabs versus Persians, to keep them paralyzed.

Perhaps a more prosaic reading is that the US as a mob protector is no more. As much as everyone is aware of a powerful Israel lobby and an almost as powerful Wahhabi petrodollar lobby in Washington, it's never discussed that neither Israel nor the House of Saud have a "protector" other than the US.

So from now on, if the House of Saud sees Iran as a threat, it will have to come up with its own strategy. And if Israel insists on seeing Iran as an "existential threat" - which is a joke - it will have to deal with it as a strategic problem. If a real consequence of the current shift is that Washington will not fight wars for Saudi or Israeli sake anymore, that's already a monumental game changer.

Xi Jinping and Vladimir Putin see it is in their interest to "protect" peacemaker Obama. And yet everyone remains on slippery territory; Obama as peacemaker - this time really honoring his Nobel Prize - may be just a mirror image. And Washington could always march towards regime change in Tehran led by the next White House tenant after 2016.

For 2014 though, plenty of signs point to a tectonic shift in the geopolitical map of Eurasia, with Iran finally emerging as the real superpower in Southwest Asia over the designs of both Israel and the House of Saud. Now that's (geopolitical) entertainment

Happy New Year.


1. Iran Deal Opens Door for Businesses, Wall Street Journal, December 1, 2013.

Pepe Escobar is the author of Globalistan: How the Globalized World is Dissolving into Liquid War (Nimble Books, 2007), Red Zone Blues: a snapshot of Baghdad during the surge (Nimble Books, 2007), and Obama does Globalistan (Nimble Books, 2009).

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