Inequality And The Decline Of Labor Submitted by Tyler Durden on 03/08/2013 10:41 -0500 Central Banks Corruption ETC Guest Post Money Velocity Reality Submitted by Charles Hugh-Smith of OfTwoMinds blog , Inequality has many sources, but political and technological dynamics are key factors. You may have seen this video on Wealth Inequality in America , which has gone viral. I have shown the same data for years in charts and discussed it at great length: Made in U.S.A.: Wealth Inequality (July 15, 2011). The bottom 80% of American households held a mere 7% of these financial assets, while the top 1% held 42.7%, the top 5% holds 72% and the top 10% held fully 83%. Here is a snapshot of total assets by category: "Other assets" include Treasury and corporate bonds, favored holdings of pension funds and the wealthy due to their relative safety and guaranteed yield. Here is a snapshot of stock ownership: No surprise there: the top 1% owns roughly 40% of all stocks, and the top 10% own 81%. Wealth comes from earned and unearned (rent, dividends, etc.) income and capital appreciation, so it's no surprise that the income of the wealthiest segment has also far outpaced the lower 95%: I have long held that the greatest source of wealth inequality is political: those with great wealth have captured the for-sale machinery of governance, and "persuaded" the Central State to carve out quasi-monopolies and cartels that enable artificially high premiums. They also buy subsidies, exceptions and tax breaks for their income streams. This is the result of a dominant Central State and an electoral process that lives and breathes cash and lobbying. In other words, the primary source of wealth inequality is political corruption and an overly powerful centralized State that can grant monopolies and enforce cartels. For example, Attorney General Holder admits megabanks are ‘too big to jail’ . Setting aside the fact that the financial and political Elites are two sides of the same Aristocratic coin, we find an erosion of middle class jobs and wages.
(byEmmanuel Frot, Anders Olofsgård, Maria Perrotta) The new consensus in development cooperation, first launched in the 2005 Paris Declaration and known as the ‘Aid Effectiveness Agenda’, stresses the importance of ownership, alignment, harmonisation, and result focus. This is not the first time donors have commited to improved practices or an increase in funds, though, and the past track record is mixed at best. Even when intentions are good, priorities may shift, as domestic or international events such as financial crises, terrorism, and regional transitions occur. One recent shock to the system is represented by the events in the Arab world, commonly referred to as the ‘Arab Spring’ 1 . This political transition has motivated Western governments to quickly launch new foreign aid initiatives. Given the strategic, and in some cases commercial (read: oil and gas), importance of the region, temptations to bypass the Aid Effectiveness Agenda in favour of other foreign policy objectives are real. Whether this will happen or not is a speculative question at this point. However, we may be able to learn something from past events of regional transitions and regime change 2 . Aid during the Eastern transition In our recent working paper (Frot et al. 2012), we analyse the early years of transition in Central and Eastern Europe (CEEC) and the Commonwealth of Independent States (CIS). The Eastern European transition was of course unique in many ways, but the foreign policy dilemmas and trade-offs facing western donor countries looked a lot like the current ones. An important part of the effort for harmonisation deals with a reduction in aid fragmentation. Figure 1 shows the number of recipient countries for the average DAC member from 1980 to 2007. As can be seen, fragmentation started to increase quite substantially after the fall of the Berlin Wall, reaching a peak in 1995. From the recipients side, Figure 2 shows how the number of donors that each of the new countries established partnerships with caught up rapidly to the standards of previous aid recipients. By 1999, all of the major donors had entered the 27 new countries. Figure 3 reveals that the same pattern of fragmentation holds true also across sectors. Figure 1 Figure 2 Notes: Group 1 indicates the CEEC-CIS recipients; Group 0 is all other recipients. Figure 3 Notes : Group 1 indicates the CEEC-CIS recipients; Group 0 is all other recipients. Figure 4 Regression analysis on the early period 1990-95 shows that the difference between actual aid to CEEC-CIS countries and that predicted by their need-related (income per capita, population, exposure to disasters) and policy-related (Polity index) characteristics, illustrated graphically in Figure 4 above, can largely be explained by geographical proximity to Western Europe, nuclear status, and trade volume. Lower income also meant more aid once controlling for these other factors, but the poorer countries (mainly Central Asia and the Caucasus) still received little aid due to their lack of strategic importance and commercial potential (Central Asian nations are often part of lists of “aid orphans” even today). We also find that the fraction of tied aid was higher in CEEC-CIS compared to other recipients at the time and that aid to the region was more volatile and unpredictable (the latter measured as the fraction of aid disbursed relative to the commitments). Finally, Figure 5 shows that non-significant relationships 3 , the type that donors are especially encouraged to reduce, were far more common in this region than in the rest of the world during the first half of the 1990s. Figure 5 Number of non-significant aid partnerships according to the OECD definition, 1990-1995 That the purpose of development aid goes far beyond the warm glow effect from giving to people in need is hardly any news. Strategic importance, as proxied by arms imports (Hess 1989, Maizels and Nissanke 1984), arms expenditures (Schraeder et al. 1998), and membership in the UN Security Council (Kuziemko and Werker 2006; Dreher et al. 2009), has been found to be significant for aid disbursements in previous papers, as has commercial interests, in particular trade or exports (e.g. Fleck and Kilby 2010 and Neumayer 2003). The most interesting aspect of our results, though, which is to our knowledge unexplored in the literature, is that the relative importance of strategic, commercial and development motives has changed substantially over time, as relationships have matured. The overall effect of trade was positive in the first part of the 1990s, as mentioned above, but then it was basically zero in the latter part of the 1990s and insignificant or negative between 2002 and 2007. Geographic proximity shows a similar pattern, with countries closer to Western Europe getting more aid in the early 1990s and less aid after that. On the other hand, aid becomes over time more targeted towards democratic countries, and is reduced as countries are growing richer suggesting a gradual increase in the focus on poor countries and good institutions. As an additional test we looked at which countries donors are entering first. The results suggest that donors have entered earlier into countries with greater commercial potential as captured by income levels and trade flows. It is this particular time profile of donors’ motives – with the associated consequences in terms of aid quality – that make our results especially relevant for new partnerships, such as the ones that are being created as we speak with the Arab Spring countries. Avoiding past mistakes The experience of western aid during the eastern transition suggests that the guidelines of the Paris Declaration may come under pressure. There is a strong tendency among donors to want to be part of the action when new regimes come to power. Together with the reluctance to leave other partner countries this is likely to increase aid fragmentation. Our results also imply that commercial and strategic interests may be particularly important early on in a new partnership, something that may come in conflict with the focus on development results and ownership. Trade relationships, natural resource extraction contracts and strategic alliances typically involve competition, with a clear ‘first mover advantage'. It follows that we expect to see aid initially flowing predominantly to countries with a bigger commercial potential, like Libya and Egypt. Yemen, the poorest country in the region, should expect to see less aid flows, except for the strategic interest in containing the local affiliates of Al Qaeda. Tunisia, despite having the best political and economic institutions, would have the hardest time attracting aid flows. Being aware of past mistakes might help donor countries avoid repeating them. Things for donors to jointly consider include: To avoid increased fragmentation, agree on a division of labour and responsibility across countries and sectors. To honour ownership, respect the development of domestic institutions even if the outcome of more open and competitive decision making processes may seem contrary to other foreign policy priorities. Support the development of the private sector, but not by helping own multinationals win contracts or by tying aid. If the priorities are measurable development results and transparent processes, then support reforms that strengthen the overall investment climate such as regulatory reforms, financial sector reforms, anti-corruption efforts and labour-market reforms.
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