Why inequality looks the way it does

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Disclaimer: In case it needed to be said, we do not trivialise or rationalise the suffering caused by inequality. Rather, this article aims to add context to the inequality you have been observing. We hope you find it useful.

What can explain the inequality in the world today? 

Recently, we polled our community and received all sorts of answers.

Some people said it was greedy corporations, broken systems and corrupt politicians creating systems that were inherently unjust.

Others put the blame on ‘mindset’, ‘grit’ and ‘education’. Or the lack thereof.

All these answers are possibly valid in many scenarios and have received quite a lot of coverage. But today, we’d like to steer your attention toward factors we think are equally worth your attention.

They are: Shareholder capitalism, Globalisation and technology.

Here’s what you should know about them.

Shareholder capitalism

It can be a little hard to imagine this today, but in the past, many businesses didn’t work to maximise profit. Instead, they incorporated the interests of the different stakeholders working with them. These included:

●      Customers

●      Government

●      Vendors and suppliers

●      Employees

●      Broader society

●      + Shareholders

Sometime in the 1970s, the mindset shifted to prioritising just the Shareholder.

Two things happened as a result that would set in motion the wheels of inequality as developed nations know it today.

CEOs had their performances tied heavily to share price, which meant short-term profitability became important. Businesses were no longer looking for win-win scenarios with their stakeholders. They aimed to win at all costs. If you want to read up more about this, check out Jack Welch and the story of General Electric, as well as Milton Friedman.

In turn, businesses looked to cut costs to increase profitability, including manpower costs. How did they do so? After all, shareholder capitalism is only an idea, useless with action.

To get the answer, we need to look at two enablers that allowed shareholder capitalism to prosper: Globalisation and technology.

Globalisation giveth, taketh away jobs

A short history lesson: In the early days of Singapore, MNCs brought their manufacturing jobs here because we were cheaper.  

Many of our parents raised us on these jobs, sent us to school, bought homes and contributed to the GDP. All in all, lots of Singaporean boomers have seen a meteoric change in fortunes over the past 50 years.

But where did these jobs come from? Europe and the US.

That’s right. When US politicians beat their chest about the ‘hollowing out of the middle class, I think it is important to realise that Singaporeans had a part to play in it.

Of course, Singapore is hardly the only culprit – Japan was probably a forerunner.

Taiwan, Hongkong, and South Korea are likely contemporaries. And in recent years, China. The documentary American Factory is particularly poignant.

What is also worth mentioning is that in some ways, the world has become more equal to what it was 50 years ago.

The popular narrative about inequality is that the 1% has prospered at the expense of the middle class. Inequality within countries has increased.

Yet at the same time, the last 50 years have seen many poor countries claw their way out of extreme poverty. Singapore, Taiwan, and South Korea were the first wave. But many others have since followed. Inequality among countries has actually decreased over the last two decades.

So should we feel guilty about ‘stealing’ American jobs? In our opinion, these jobs were not ‘stolen.’

Business owners made the conscious decision to bring jobs overseas after weighing the pros and cons. Consumers got cheaper products, due to cheaper labour. The only losers? The people who lost their jobs.

But here’s the kicker.

Globalisation is a double-edged sword.

In the same way, that American jobs flowed outwards in the 20th century, Singaporean jobs can also flow out to other countries where labour is more affordable.

Live by the sword, die by the sword, no?

Globalisation makes eating the rich challenging

“Tax the rich!” is the warcry of the disenfranchised. Many of us believe, mistakenly, that governments are able to tax their richest citizens to spend on the poorest. 

In reality, the mobility of the rich makes it challenging for governments to play Robin Hood. Two words. Capital flight. Even seemingly all-powerful governments such as the Chinese Communist Party struggle to do so.

Consider this scenario:

Assuming all other things equal, would you choose to pay 17% tax to Singapore, or 40% tax elsewhere?

Most people would pick 17%. And if you were a multi-millionaire, you’d probably have the resources to follow through with it.

As the world becomes more connected, assets and money can also easily flow out of a country. This isn’t good news for governments, which need tax dollars to fund welfare and education programmes, amongst other things.

Because of globalisation, they are forced to compete with each other to attract wealthy citizens and corporations.

This leads to a Catch-22 situation: To get the funds needed to reduce inequality, you have to tax the rich.

…But if you make the country too inhospitable to them, they’d leave for other countries– which will leave the remaining population poorer for it.

There are two implications here:

1)    This means that governments increasingly need to deliver value to the wealthy who are paying more taxes. Value in the form of safety, infrastructure, education for children – and most importantly… protection of their interests.

2)    Instead of taxing a moderate number of the wealthy heavily, governments will seek to need to tax a large number of the wealthy moderately.

That said, bringing in a large number of wealthy folks into your country quickly also has its ramifications. This brings us to…

Globalisation, immigration and gentrification

Not too long time ago, Tiong Bahru was one of the most affordable neighbourhoods in Singapore. Its buildings were old-fashioned. The shops there catered to its inhabitants – mainly elderly folk.

That changed sometime in the 2010s. Tiong Bahru was ‘rediscovered’ by hipsters and became made desirable. Hipster cafes and trendy restaurants set up shop. Parking lots became harder to find; taken up by BMWs and other continental cars.

And before long, Tiong Bahru became unaffordable to its more senior inhabitants.

This process is known as gentrification. It happens worldwide; other famous examples include SoHo (America), Brunswick (Australia), and Tower Hamlets(UK).

But it also happens to cities and countries on a larger scale.

Imagine this:

Let’s say you earn $4,500 a month in Singapore.

Suddenly, multimillionaires arrive in droves in your city. Expats earning $30,000 a month start pushing up rental prices. Some of them are competing with you for dream jobs. They drive cars you can never dream of affording.

All of a sudden, you’re priced out of your favourite neighbourhood. Your favourite brunch place prices eggs benedicts at a whopping $48 – and gets away with it!

Even if you get a $500 increment, you’d certainly still feel poorer. And you’d feel resentful.

Technology exacerbates the problems caused by globalisation

Finally, exponential technological leaps have magnified many of the issues mentioned above. They make both wins and losses larger, further widening the gap.

The internet has made it even easier for cheaper labour in developing countries to compete. The classic example: Employers can hire a graphic designer in the Philippines via Fivver or UpWork. They’ll be more affordable than a Singaporean, European, Japanese or American.

Software and automation have replaced numerous jobs, or at least depressed wage growth. My mom’s job as a bookkeeper in the 1990s and 2000s saw her being paid $2,500 a month. Today, 20 years later, $2,500 is still the median benchmark for the role.

Meanwhile, those who wield technology can use it to scale their efforts to achieve high incomes and profits. Tech allows companies like Google to be run with extremely lean teams, compared to traditional staffing numbers. But this means there are fewer jobs available. Same with factories and assembly lines. Or solopreneurs using software to reduce labour costs.

Here’s a popular thought: Technology is supposed to make our lives easier, allowing us to do things more quickly and efficiently. It indeed has, for quite a large proportion of society.

However, an equally large proportion of society has had their livelihoods disrupted.

What to do with this information?

Inequality is without a doubt, one of the hottest topics of our generation.

Many conversations about it are emotionally charged and tend to make caricatures of people at both extremes of the wealth spectrum:

The poor are lazy, good-for-nothing-bums.

The rich are greedy sociopathic hoarders.

The uncomfortable truth is that the world is a lot more complex. And it’s likely that by merely existing in the developed world, you have contributed to inequality, in some way and form.

Here’s our take: If you want to make the world a more equal place, you have to do several things first.

Firstly, you have to understand what causes it to avoid a wild goose chase. This will give your actions some direction.

Secondly, difficult things are seldom done alone. One individual is not enough. Many hands make light work. You’ll need to recruit people to work on your causes.

Finally, the people who can change things for the better are often those who have either wealth or talent. Ironically, you might need to amass both to create a more equal world on your own terms.

Is it possible to succeed? Maybe.

But you might also live long enough to become the villain.

Stay woke, salaryman.

Further reading:

GDP of countries 1970-2020:

https://www.visualcapitalist.com/cp/the-worlds-largest-economies-1970-2020/

Robert Reich: Inequality for all