Poverty in Russia Does Not Depend on Economic Growth: Theories of Kuznets and Piketty

2024 Author: Seth Attwood | [email protected]. Last modified: 2023-12-16 15:55

Two interpretations of the evolution of inequality are most popular today among modern economists, one of which was presented by Simon Kuznets in 1955, and the other by Thomas Piketty in 2014.

Kuznets believed that inequality decreases when the economy becomes relatively wealthy, and thus economic growth alone is sufficient to both increase the level of income in the economy and reduce the level of income inequality. Piketty shows that inequality is growing over time and that measures are needed to curb the rich. In Russia, in the medium term, there will be neither strong growth rates nor an increase in redistribution from the rich to the poor. This means that we are expected to further increase the already huge inequality.

Simon Smith's theory and why it stopped working

“For a long time, economists believed that economic growth alone was enough to solve the problem of inequality and poverty. For example, Simon Kuznets in 1955 suggested that sustained economic growth would ultimately lead to a decrease in inequality. Similar views on the relationship between inequality and economic growth are long lasting. for a time they also dominated the international financial institutions, the World Bank and the International Monetary Fund, in the latter the acceleration of economic growth was considered sufficient to improve the situation of all groups of the population.

However, more recent research suggests that economic growth alone may not be enough to tackle lower inequality and poverty reduction. The policy of economic growth must be supplemented with redistributive measures so that the results of economic growth are more evenly distributed among different groups of the population.

Piketty's theory: as capitalism develops, inequality rises

Thomas Piketty was able to trace the change in the level of inequality in several developed countries on a time horizon much longer than Kuznets. Piketty got a different picture of the relationship between economic growth and income inequality. In particular, instead of reducing the level of inequality at the high-income stage in the economy, Piketty found the opposite result: an increase in the level of inequality.

In particular, it demonstrates the updated Kuznets curve, in which the period under consideration is one hundred years, from 1910 to 2010. According to this curve, the share of the top income decile in the national income in the United States until 1955 changes in the same way as in the work of Kuznets. This share declined from the 1920s until the end of World War II, after which it stabilized and continued until the early 1980s. However, since the 1980s, when deregulation and privatization policies began, this share has increased significantly.

The period of conservation of a relatively low level of inequality in the distribution of wealth, which developed by the end of World War II and lasted until the end of the 1980s, was, according to the author, primarily due to high taxes on the rich in developed economies.

Thus, Piketty, unlike Kuznets, considers significant inequality to be an integral property of capitalism, and its decline from the beginning of the First World War to the end of the 1970s is the result of tax policy and shock events, and not the evolution of the market economy.

Russia's problem is the inequality of regional development

The publications of Simon Kuznets and Thomas Piketty are related to the richest countries. Russia is not only not a rich country yet, but it is also not a member of the club of comparatively rich countries - the Organization for Economic Cooperation and Development (OECD). Inequality in Russia is indeed higher than in most of the richest economies, although lower than in the overwhelming majority of Latin American countries, including those close to Russia in terms of per capita income, such as Argentina or Chile.

Since Russia has reached an average income level, according to Kuznets' conclusions, further long-term growth of the Russian economy, which will resume after the end of the period of stagnation and recession, should be accompanied by a decrease in inequality over a long time distance. Almost 3/4 of the population of Russia live in cities, and according to Kuznets' conclusions, the drop in inequality occurs at the stage of economic development when the majority of the population moves from village to city. One would expect that in Russia, following the recovery of long-term economic growth, a period of declining income inequality should also begin.

However, the problem is that Russian cities are extremely unequal in terms of living standards: many of them, after the shutdown of Soviet-era production, have not been able to get out of the local economic crisis. In such a situation, it does not really matter where the majority of the population lives - in rural areas or in cities, if neither there nor there there are not enough jobs, and a significant part of those that exist are either ineffective and, therefore, do not provide sufficient income. in general, or they do not bring sufficient income specifically to employees due to their weak bargaining position in bargaining with employers for the amount of wages.

In the context of Kuznets' assumption about the mechanism of the influence of growth on inequality, the current situation can be compared with the interrupted process of migration from the agricultural sector to the industrial crisis, undeveloped regions.

Part of the solution to the problem of inequality may be further migration to cities and regions with high rates of economic growth. However, migration in Russia is difficult due to severe liquidity constraints: moving is associated with relatively large expenses, which a significant part of Russian households cannot afford.

In addition, migration alone is not able to solve the problem of inequality: the current growth rates of the economies of prosperous regions are insufficient for employment of the entire surplus labor force, ready to leave the crisis regions. Sustainable economic growth should be either geographically more uniform, which requires investment in less prosperous regions, or even higher in fast-growing regions in order to receive more migrants from backward regions of Russia.

Stagnation in the Russian economy will increase inequality

The biggest problem, however, is the growth rate of the Russian economy, which is likely to remain negative in the near future. In addition, it is difficult to predict how long the period of decline and stagnation will last. In some countries, these periods last for many years or even decades. If Russia's economy continues to stagnate or even shrink over the long haul, while the rest of the world continues to develop on average, it cannot even be ruled out that Russia will lose its status as a middle-income country. In such a situation, inequality has a chance to decrease, not because yesterday's poor will become rich, but, on the contrary, because the recent rich will lose their status.

In the context of Thomas Piketty's work, the prospects for inequality in Russia are more likely to increase than decrease. The reason for this is also the low expected rates of economic growth. If they were high enough (which is quite likely given the lag of the Russian economy from the global technological frontier), then labor income could increase faster than personal fortunes accumulated. The growth rate of wealth, including income from any assets, would then begin to lag behind the growth rate of labor income. As a consequence, inequality at least would not get higher.

However, in view of the danger of maintaining low average economic growth rates, one should expect that income inequality, on the contrary, will increase: labor income will stagnate, while the profitability from owning various properties, including real estate, financial assets, capital, natural resources, etc., will be at a higher level. A larger amount of capital provides a higher return.

Inequality in the distribution of wealth in Russia is the highest in the world

With regard to capital inequality, which is central to Piketty's work, according to the Global Wealth Inequality Report, which has been published by Credit Suisse over the past several years, in 2013 the level of inequality in the distribution of wealth in Russia became the highest in the world. except for a few small states in the Caribbean region. While in the world the fortune of billionaires is 1–2% of the total capital of households, the 110 billionaires who lived in Russia in 2013 control 35% of the wealth of the national economy. The number of billionaires in Russia is also a record high: while in the world there is one billionaire for every $ 170 billion of wealth, in Russia there is one billionaire for every $ 11 billion. One percent of the richest citizens of Russia own 71% of the capital, and the accumulated wealth of 94% of the country's adult population is less than $ 10,000.

In accordance with Piketty's conclusions, part of the income from wealth belonging to the upper income percentile in Russia will be invested, the incomes and wealth of such individuals will continue to increase, which, given low rates of economic growth, will lead to a further increase in inequality.

If 94 out of 100 adult citizens of Russia have less than $ 10,000 accumulated wealth, and most of this wealth consists of assets that individuals will use to obtain services (such as living in their own apartment, for example) rather than to convert into more liquid forms of wealth, for example, in a bank account, then the bargaining positions with the employer for 94 out of 100 adult citizens of Russia, which are already extremely low, become even worse. The insignificant amount of accumulated wealth, in all likelihood of low liquidity, makes Russian citizens overly dependent on labor income paid by the employer. On the contrary, the bargaining position of the employer becomes comparatively higher: after all, in the event of dismissal, the employee has too little accumulated capital, as well as limited opportunities for a loan due to insufficient development of the financial market. Due to low bargaining power, workers agree to lower wages and worse working conditions.