Working for the few: private power over democracy

Posted by Ricardo Fuentes Nieva Head of Research

21st Jan 2014

Women's rally in Uttar Pradesh, India. Credit: Rajendra Shaw/Oxfam

Seven out of ten people live in countries where economic inequality has increased in the last 30 years. Our new briefing calls for the world leaders meeting in Davos this week to counter the tide. Here Ricardo Fuentes-Nieva explains why extreme wealth is a threat to the freedom and fairness of political systems.

On April 29 1938, Franklin Delano Roosevelt sent a message to the US Congress about the increasing concentration of economic power. In it FDR said:

"Unhappy events abroad have retaught us two simple truths about the liberty of a democratic people.

The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself.

The second truth is that the liberty of a democracy is not safe if its business system does not provide employment and produce and distribute goods in such a way as to sustain an acceptable standard of living."

At the time the share of income going to the richest 1 percent in America was 15 percent. Today it is 19 percent.

In a paper released this week Nick Galasso, from Oxfam America, and I explore the current growing concentration of income and political capture that so worried Roosevelt. Firstly: the rich are getting richer, faster.

The rich are getting richer

Inequality growth over the last 30 years.The poorest half of the world's adults, 3.5 billion people, own a total of $1.7tn worth of assets (less than $4,000 per adult). That is similar to the wealth owned by the world's richest 85 people. In the US, the wealthiest one percent captured 95 percent of post-financial crisis growth between 2009 and 2012, while the bottom 90 percent became ever poorer.

In 24 out of 26 countries (for which we have data), the share of income going to the richest one percent has consistently increased since the 1980s - in some countries in dramatic fashion. The richest one percent of people in China, Portugal, and the US have more than doubled their share. Even in more egalitarian countries, such as Sweden and Norway, the rich are taking a larger slice of the pie than three decades ago.

Wealth and political power

Secondly: this growing concentration of income and wealth is closely associated with political power and influence. It sounds obvious but it's very easily forgotten. Either through lobbying, campaign finance, or avoiding regulation, the rich exert their power over how the rest of society is governed. In Working for the Few we explore the mechanism by which wealth brings political influence, which in turn breeds greater wealth for a select few.

Every day there is a transfer of money (a redistribution of sorts) from ordinary Mexicans to the richest man in the world.The lopsided influence of the wealthy occurs through different channels. Take the example of Mexico and Carlos Slim. Slim is the CEO and Chairman of América Móvil, which controls nearly 80 percent of fixed line telephone services and 70 percent of mobile phone services in the country. The OECD has argued that, América Móvil's "incessant monopolistic behavior" is supported by a "dysfunctional legal system", which has replaced the government's right and responsibility to develop economic policy and execute regulation of markets.

This near monopoly has had a significant and sustained cost for the Mexican economy and Mexican people who pay inflated prices for telecommunications. In other words, every day there is a transfer of money (a redistribution of sorts) from ordinary Mexicans to the richest man in the world.

The cycle of wealth and political influence

Thirdly, a more subtle point: once both wealth and political influence are exclusively in the hands of the privileged minority, they will reap all the benefits from education and the labour market . Social mobility disappears and groups become excluded from society. There is nothing just when success is the result of a system that only benefits those with power and wealth.

I'll conclude with a warning. The large and rising concentrations of income and wealth represent a threat to stable, inclusive societies - unbalanced distribution of wealth skews institutions and erodes the social contract between citizens and the state. The checks and balances in place to ensure that the majority of the population are heard weaken, equal rights are not upheld, and opportunities for all but the privileged few diminish. It has happened before and unless we pay close attention to this worrying trend, it can happen again.

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Blog post written by Ricardo Fuentes Nieva

Head of Research

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Ricardo Fuentes