UN sounds warning on perils of inequality

The world is in danger of a repeating the mistakes of the 1920s and 1930s, a United Nations agency warns today in a report on international trade and investment. Diane Coyle reports on the claim that growing inequality raises the threat of a backlash against the process of globalisation.

The increasing integration of the world economy through trade and investment flows is being accompanied by greater inequality within and between nations, according to the annual report of the United Nations Conference on Trade and Development (Unctad). This could provoke a political backlash in the developed or developing countries which would roll back the benefits of economic integration.

The report, from one of the branches of the UN traditionally least sympathetic to free market policies, recommends slowing the pace at which developing countries are opening up their economies. Rather it favours carefully managed and phased integration into the world economy.

Unctad also criticises the deregulation of financial markets that has allowed capital to flow freely around the globe. Although carefully distancing itself from its earlier history as a vocal opponent of multinationals which invest in developing countries, it claims in the new report that the freedom of the financial markets has undermined long-term investment, echoing a common left-wing sentiment.

Finance has gained an upper hand over industry, and rentiers over investors. Trading in existing assets is often more lucrative than creating wealth through new investment, the report says. In a sharp contrast to the cautious optimism expressed by other international agencies, such as the World Bank in its annual economic outlook published last week, Unctad says the world economy will continue to grow too slowly to make a dent in poverty and unemployment. It is against this subdued background that the new report predicts growing political tensions.

The 1920s and 1930s provide a stark and disturbing reminder of how quickly faith in markets and economic openness can be overwhelmed by political events, it says. Nor should there be any doubt that the burden of such international economic disintegration would be borne by those who can least afford it.

The available figures suggest income distribution has become more unequal in almost all regions of the world during the past 20 years, with the possible exception of South Asia.

The increase in inequality has been particularly pronounced in China and the transition economies of eastern Europe. Inequality also grew in nine of the 16 richest economies in the world.

The report suggests that not only has growth of the world economy slowed, but the growth that takes place has also become more unequalising. During the Eighties, the rich got much richer but the income share of the middle class fell the world over. This phenomenon appears to be closely related to a sudden shift in policies giving a much greater role to market forces.

Unctad does not go so far as to call for a reversal of these forces. But it advises minimising the danger of a political backlash by making sure future trade liberalisation favours the poorest countries.